Introduction
Natural gas and LNG are natural resources traded as commodities and widely used worldwide for various purposes: primarily for energy production. Those are heat generation in cold regions of Earth in winter and natural gas usage at power plants for electricity generation. Natural gas is, basically, methane, a gaseous substance of carbon and hydrogen. By burning, it generates carbon dioxide, water, and a lot of energy. This energy is the main reason for the significant demand for natural gas: cold countries are usually dependent on it for heating their houses. Various industries also use methane extensively for chemical synthesis and transportation. Natural gas prices depend on all those consumers, along with many other factors that are described further.
There is no such thing as a global gas market, similar to the oil market; gas prices are much more volatile. Along with that, the market’s volatility has been lowering in recent decades due to the increased supply in the United States (Newell et al., 2019). There are three major gas markets in the world: North American, Asian, and European (Claes, 2013). The former is presented by the United States, which is a significant gas supplier and has an extensive network of national and international pipelines. The Asian market is presented by Far East countries, which rely on importing liquified natural gas (LNG) from various suppliers, primarily the United States. Iran is another major gas supplier, both to European and Asian markets. Russian Federation is the most active gas supplier in the European market, and its pipelines connect Russian gas sources with most European countries. Norway also started to explore its gas sources, planning to increase its export.
Gas Price Influencers
The relationship between demand and production forms all prices. High demand usually leads to higher prices and vice versa; simultaneously, when a higher quantity is in need, it motivates the producers to lower gas prices. Along with that, other factors condition natural gas prices. Technological advances lead to the growing facilities of gas extraction, such as the utilization of unconventional gas sources, and lower prices (Newell et al., 2019). For example, when the United States started to exploit its shale sources, it managed to release from its dependence on natural gas importation. In that way, technological advances allow for a decrease the natural gas costs along with increasing its supply.
There are two main types of natural gas sources: conventional and unconventional, based on the approach of its mining. Conventional gas is extracted simply by releasing it from natural reservoirs in the Earth’s crust (Conventional Gas, 2021). It is done due to the natural pressure formed when the reservoir is accessed: all that one should do is gather the gas. Thus, its extraction is quite simple, and its producers tend to quickly raise its price when the production grows (Newell et al., 2019). Unlike it, unconventional gas sources are not thus easily accessible, and the extraction requires technological advances: firstly, to reach the reservoirs, and then, to gather the gas. For example, shale gas lies deep in the Earth’s crust, and large pipelines are necessary to extract it from there. Then, the water vapor is pushed via them under great pressure to fracture rocks and release methane (Unconventional Gas, 2021). Thus, while unconventional sources require a technological approach and new methods for their exploitation, along with additional costs connected with them, they give much more profits than spending.
LNG is the liquified natural gas used for transportation and storage. Its production will be described in the next part of the essay and is quite costly but can be justified when transportation overseas is necessary (Focus on LNG, 2013). Transportation prices are an essential part of gas price formation. LNG is usually transported via ocean tankers, while natural gas is transported via pipelines, sometimes thousands of kilometers long. Costs necessary for tanker loading and shipping are essential in current gas prices. As there is no global gas market, those costs are different in different regions, depending on the technologies used and the geopolitical situation.
Storage price is another factor: the cheaper the storage and the quicker the realization, the lower the total gas price. Where it is possible, the gas is quickly transported via pipelines directly to end-users, such as households and industrial plants, where it is realized (The Transportation of Natural Gas, 2013). The gas storage requires additional costs for building and gas liquifying. LNG is the best form of gas storage, as the same amount of the resource takes much less volume (Focus on LNG, 2013). It is used in the case when direct pipeline transport is impossible.
Market shocks lead to drastic changes in gas prices: they usually increase or decrease quickly and then return slowly to the initial number. Examples of such shocks are financial or political crises that directly influence gas prices. Global nature events, such as hurricanes or the recent COVID-19 pandemic, are also reasons for market shocks (Elliott, 2020). When buyers and sellers become uncertain about the future, they are unsure which price to use in each particular trading, leading to considerable fluctuations in prices.
Last but not least, state policies and international politics have a large influence on gas prices. For example, shale gas extraction, while providing access to the large reservoirs of the resource, creates the danger of land devastation and water pollution (Feng et al., 2021). In that way, governments may limit such extraction to prevent calamities, especially under pressure from social activists. Relationships and tensions between countries are the other sides of this influence: gas suppliers can use their resource advantage to push geopolitical decisions in their desired direction. In that way, those are the leading gas price influencers: demand-supply relationships, production, transportation, and storage prices, current market situation, and political decisions and regulations.
Gas Production
Gas and oil prices are interconnected, but those connections have become less influential in recent decades. Natural gas prices have become much less volatile since the 2000s due to increased extraction from shale sources in the United States (Newell et al., 2019). This expansion created a revolution in gas prices, making them much more stable and independent even from the major conflicts (Montgomery, 2020). In that way, the gas production cost is one of the essential factors that formulate the end gas price.
Gas extraction from conventional and unconventional sources differs gradually; in addition, natural gas can be transferred to LNG. All those approaches influence the final cost of natural gas. The usage of conventional sources is easy, and amounts of gas are significant; however, they are quickly depleted. For that reason, gas cost increases quickly with the increase in the supply amount (Newell et al., 2019). Unconventional sources are different, and the future of gas production is probably in them (Unconventional Gas, 2021). For example, as mentioned, the United States has become one of the largest gas suppliers in the world due to the exploitation of unconventional sources. While extracting from them requires additional technologies, it significantly increases the supply and drops prices. In that way, the usage of unconventional gas sources is much more profitable in perspective.
LNG is produced by cooling the natural gas to -260 Fahrenheit grades: it is condensed and liquified under this temperature. In this form, the same amount of gas takes only one-six hundredths of gaseous methane volume; thus, it is much more economical to transport it (Focus on LNG, 2013). Natural gas is usually transported via pipelines, but when their construction is hard or impossible, for example, when transportation overseas and long-term storage is necessary, LNG is the best form. In that way, this form is used in countries with poor natural gas resources to ensure that it will still be the supply in the case of importation problems.
Gas Usage
Heat production is a significant area of natural gas usage: its burning generates a lot of heat, crucial in winter. In the United States, almost half of all households use it for heating (Uses of natural gas: What is natural gas used for? 2020). They also use it for cooking, water boiling, and other routine home activities, making natural gas a critical asset. Most European countries are dependent on the natural gas supply, primarily from Russian Federation. The demand for it, in general, is much higher in the Earth’s colder region, for example, in Northern Europe. The more critical demand allows suppliers, in that case, Russian Federation, to raise prices. It also stimulates the active development of gas-extracting facilities to explore new unconventional sources.
Power production is another everyday use of natural gas, similar to heat production. Energy, obtained from the gas burning, can rotate the power plant’s turbine, producing electricity. The share of natural gas in the U.S. energy production has raised in the last decade due to increased supply (Uses of natural gas: What is natural gas used for? 2020). The share of natural gas in energy production is expected to rise, as new methods of extraction from unconventional sources are constantly developing.
Natural gas is also actively used in various industries, from transport to chemical synthesis. LNG and natural gas are used as a transport fuel; however, it is the tiniest part of the total gas usage. The energy from its burning can be used to move a vehicle, similar to gasoline, but only several percent of the U.S. population, for example, use it (Uses of natural gas: What is natural gas used for? 2020). Methane is used to obtain hydrogen and other industrial synthetic purposes.
All mentioned areas, heat and energy production, and industrial usage define where natural gas assets are crucial. Those fields are dependent on it and, in that way, all changes influence gas prices heavily. For example, if alternative sources for heating and energy production were available, gas demand would drop, and its prices as well. In that way, the development of alternative energy sources, such as solar and wind energy, threatens to decrease the size of the gas market. Consequently, while there are no alternatives, gas-producing countries have a great competitive advantage, as it is required for basic living facilities, such as heating, cooking, and electricity.
Gas Transportation
Natural gas is transported via pipelines built on national and international levels. For example, the United States has a broad system of pipelines across the country, which transfer gas to each part of the country from the sources (Newell et al., 2019). Some of them also export gas to Canada and other American countries. In Europe, gas pipelines connect the major gas supplier in the region, the Russian Federation, and other European countries, spreading through the whole continent (Claes, 2013). While those countries are dependent on the gas supply, Russia itself is dependent on the gas prices, as it is the central part of its income. Gas is especially necessary for Finland and other Northern states with cold weather, where it is used for heating. Russian Federation sometimes uses its unique position as a gas exporter to make political pressure on other European countries, limiting the supply or raising costs (Claes, 2013). In that way, gas transportation can influence gas prices through both construction costs and negotiations between parties.
Unlike gaseous methane, LNG is usually transferred by large ocean ships, and its transportation costs are significantly higher. LNG share in the total gas transportation is only 30%, and it is used mainly in Asian markets (Claes, 2013). The reason is that those countries, especially Japan and South Korea, have no home gas production and are unable to build pipelines due to their locations. Thus, they are forced to use LNG technology to import and store large amounts of natural gas in a small volume.
Overall, transportation costs largely influence natural gas prices. When the gas is in the form of LNG, it can be easily transported on a tanker ship, which is the main form of its transportation. Such form is used by small countries dependent on gas importation, such as Japan, which contributes to the most LNG in the world (Claes, 2013). They use LNG to import and store the gas in their reservoirs. On the contrary, countries like the U.S. and Russian Federation, which are much larger and produce a lot of gas by themselves, use gas pipelines across the country. The commodity is transported in gaseous form without additional costs of liquifying. LNG is traded on the Asian gas markets, while pipelines are used on the European and North American ones.
Gas Trading
Trading routes for natural gas and LNG are pipelines and ocean tankers. While their construction, loading, and maintenance influence the end gas costs, negotiations about gas prices are also an important factor. Gas trading is an essential element of international politics: as this commodity is necessary for many areas of life, including day-to-day routines such as heating and electricity production, gas-producing countries have a competitive advantage. They often use their position to push on other countries, to achieve their geopolitical purposes (Claes, 2013). The most prominent examples are Iran and Russia, which both have tensions with another major supplier, the United States and use their advantages to push international politics in the desired direction.
In that way, international politics, especially conflicts between major states, directly influence gas prices. Tensions in international relationships were always the reason for rapid oil and gas price changes. Parties used to manipulate those prices, raising or lowering them depending on the context, to worsen the opposite party’s economy and force them to concede. However, as the United States have currently many facilities to produce natural gas from unconventional sources, and there is no war on the U.S. territory, current gas prices are not thus dependent on international conflicts (Montgomery, 2020). Before that, Iran often used its position as a major gas supplier, raising gas prices to push political decisions beneficial for the country. However, different regions have different social and political situations, heavily influencing natural gas prices.
The already mentioned situation in the European gas market, the tension between Russian Federation and European Union countries is an example of such influence. There is an outgoing conflict between the Russian Federation and its neighboring country, Ukraine, further increasing this tension (Claes, 2013). Russia uses its position as a European gas supplier to push geopolitical decisions beneficial for it, increasing its influence in the world. It influences gas prices on the European market, which become dependent on the current political situation and agreements between Russia and other European countries. On the one side, Europe is dependent on Russian gas and is ready for some concessions in return for lower prices. On the other side, the Russian Federation needs its gas to be sold, and if European countries would find another source or refuse to buy the gas, it would be a failure for Russia. It is an example of a compromise between various countries that formulate the end gas price.
Along with international politics, national state policies are the important influencer, as they can directly regulate gas extraction. State policies are requirements, laws, and other regulatory acts issued by governments and international organizations. They are intended to control natural resources exploitation to prevent pollution or other negative consequences (Cooper et al., 2018). The negative ecological impact of shale gas production is one of the sad consequences of the U.S.’s rise as a gas supplier (Newell et al., 2019). Despite it can slow economic development, regulation is necessary in such cases as ecological issues would be severe otherwise. In that way, the regulation can be the limiting factor for gas supply, reducing it and thus influencing its prices.
Market shocks are significant and drastic rises or fall in supply or demand caused by unpredictable influential events that greatly influence the world. A sizeable international conflict, described in the previous paragraph, is an example of such a conflict. Another current example is the COVID-19 pandemic, which also influences gas prices: global demand fell by 4% in 2019 (Elliott, 2020). As demand is falling, prices become unstable and uncertain: however, the market is expected to recover in several years.
Conclusion
As one can see, natural gas and LNG prices are built to compromise various powers and influences. The main compromise is between supply and demand powers: when demand is more critical, producers and suppliers may raise prices, but when more gas quantity is required, prices tend to fall. Other influences are costs for production, transportation, storage, the market situation, and also international politics and policies. Production costs include the operating costs of gas extracting facilities and liquifying the gas if LNG should be produced. Transportation costs are those necessary for pipeline building and maintenance or tanker loading and shipping in the case of LNG trading. They may also include additional fees in the case of international trading, which are the case of negotiations. Storage costs are necessary in the case of countries that need to store gas in the form of LNG. International politics and national regulation may limit the gas supply, usually increasing prices. The end price is the compromise of those influencers and includes them all together.
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