Natural Gas: The New Gold

IMF Blog, October 22, 2014

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Over the last decade, discovery of massive quantities of unconventional gas resources has transformed global energy markets and reshaped the geography of global energy trade.
Consumption of natural gas now accounts for nearly 25 percent of global primary energy consumption.
The share of oil has declined from 50 percent in 1970 to about 30 percent today.
Natural gas is lighter than air, expensive to transport, and markets tend to be regional because shipping requires costly pipeline networks or liquefaction infrastructure, dedicated vessels, and re-gasification at destination.
Limited global integration of gas markets has produced substantial price differences across regions despite increasing liquefied natural gas trade.

Advances in shale rock drilling produced a sharp surge in U.S. gas production; the United States is the world’s largest natural gas producer and is expected to become a net exporter of natural gas.
U.S. fossil fuel imports decreased to $225 billion in 2013 from $412 billion in 2008.
Surging supply has driven down U.S. natural gas prices by about 70 percent in recent years.
Regional price comparisons cited:
- $4 per million British thermal units in the United States
- $10 in Europe
- close to $17 in Asia
Cheaper natural gas in the United States has increased U.S. competitiveness in non-energy products:
- Estimates show cheaper natural gas has helped lift manufacturing exports by about 6 percent since the start of the shale gas boom.
- The channels operate at both the intensive (expansion by existing firms) and extensive (new firm entry) margins.
The shale revolution has helped stabilize international energy prices by freeing supply for European and Asian markets, offsetting some shortages from geopolitical disruptions.

The Fukushima Daiichi nuclear disaster in March 2011 induced a sharp increase in the use of natural gas due to environmental liabilities associated with nuclear power generation.
Before the disaster, about one-quarter of Japan’s energy was generated by nuclear reactors.
Following the disaster, Japan halted production at all nuclear power plants; electric power companies increased use of fossil-fuel power stations and appended natural gas turbines to existing plants.
Japan’s liquefied natural gas imports have increased dramatically—by about 40 percent—since the disaster, making Japan the world’s largest importer of liquefied natural gas.
The sharp increase in natural gas demand led to higher prices in Asia—and Japan in particular—double that in Europe and four times higher than in United States.

The crisis in Ukraine highlighted European energy markets’ dependence on natural gas.
Ukraine and countries in southeast Europe appear particularly vulnerable to potential disruptions of Russian gas supply; persistent cutoffs would most impact Ukraine and southeast European countries receiving Russian gas transiting through Ukraine.
Other countries could be affected through rising spot prices, which may spread from natural gas to other fuels.

If the United States gradually becomes a net exporter of liquefied natural gas, domestic natural gas prices are expected to rise but still remain markedly lower than in Europe and Asia, given liquefaction costs.
Natural gas is the cleanest source of energy among other fossil fuels (petroleum products and coal) and avoids liabilities potentially associated with nuclear power generation.
The abundance of natural gas could provide a “bridge” between the current global energy mix and a future with a higher share of renewable energy sources.
Energy policy matters for coal and renewable deployment and will impact global trade in energy; Europe and Japan face trade-offs among environmental concerns, economic efficiency, and energy security.
Getting the balance right between environmental, economic efficiency, and energy security should figure prominently on policy makers’ agendas.

Source: Natural Gas: The New Gold — Rabah Arezki, October 22, 2014.