Gas Cartel Too Soon in the Making

* username: rupertbu

Proponents of an OPEC-style cartel for gas would kill the very market they aim to control.

The Gas Exporting Countries Forum met Monday in Algeria. The latter's energy minister says he wants gas to price at parity to oil. In the U.S., that would mean gas costing as much as $13.50 per million British thermal units, triple today's price and close to previous hurricane-inspired spikes. Gas exporters are hurting because liquefied natural gas, which allows cargoes to be shipped independently of pipelines, now accounts for 10% of global supply. That enables greater competition. Also, America's "shale gas" revolution, coinciding with recession, has left the market oversupplied.

Yet OPEC's experience carries three lessons for any budding gas cartel. First, there is the cost of coordination. OPEC works because Saudi Arabia is prepared to invest in, and carry the opportunity cost of, spare capacity. Who would do this for gas is unclear. Russia's record of investment wouldn't foster much confidence. Qatar, meanwhile, can withstand lower gas prices anyway

Higher prices, meanwhile, encourage competing supplies. The 1970s oil shocks made Alaska, Mexico and the North Sea viable oil provinces. OPEC's market share, then two-thirds, is 40% today. And higher prices earlier this decade made U.S. shale gas viable.

Perhaps the biggest problem, though, is that you can't influence global prices by controlling marginal supply without a truly global gas market. The latter, facilitated by LNG cargoes, remains some way off.

Imposing a cartel now would be a big setback to that trend. It would also undermine gas's role as a "bridge" between fossil fuels and renewable energy. Trying to establish a cartel now would kill the opportunity for forming one in the future, when it might indeed be viable.END