Global Natural Gas Demand Increasing Prices Well Beyond Europe
February 8, 2022
What do European natural gas prices and retail electricity prices in San Juan, PR have to do with each other? More than you might imagine. San Juan’s retail electricity rates have risen recently because a major LNG (liquid natural gas) supplier opted to ship its natural gas to Europe, where the selling prices for natural gas are approximately 7 times higher, instead of to San Juan. The supplier’s decision to ship to Europe was made despite having to pay a non-delivery penalty to the local San Juan power plant. As a result, the San Juan power plant had to acquire from higher cost alternative fuel sources, more than negating the non-delivery payment it received from the LNG supplier. The global energy market is tightly intertwined and disruptions in far off places can have large consequences locally.
Europe’s high natural gas prices are frequently blamed on Russia’s decision to limit the flow of natural gas in order to keep prices high. Russia, in turn, claims it has met all of its long-term contractual obligations and Europe’s high natural gas prices are a result of the European power plants’ hope of capturing lower prices in the spot market. This year, Asia’s rising natural gas demand absorbed much of Russia’s excess supply, leaving Europe to scramble for available natural gas and having to pay much higher spot prices. The intermittency of alternative power sources (wind and solar) also contributed to Europe’s higher spot prices.
Closer to home, years of political objection have resulted in an insufficient number of gas pipelines throughout the New England states and particularly in Massachusetts. As a result, power generators in Massachusetts use LNG cargoes from Trinidad and Tobago to supplement their needs. A recent cold spell and competing gas needs from Asia and Europe caused the New England spot natural gas price to trade as high as $62/BTU, at a time when other parts of the country were paying as little as $4/BTU for spot gas. Residents of Massachusetts, who frequently pay among the highest electricity rates in the country, are largely unaware of their risk exposure to higher natural gas prices in Asia and Europe or a possible hurricane in the Caribbean that might take out the supply from Trinidad and Tobago.
Confidentiality Notice: This post, and any attachments, contains information that is, or may be confidential or proprietary in nature. If you are not the intended recipient, please be advised that you are legally prohibited from retaining, using, copying, distributing, or otherwise disclosing this information in any manner. Furthermore, this communication is for informational purposes only and nothing herein should be construed as a solicitation, recommendation or an offer to buy or sell securities or any product.
© 2023 Horizon Kinetics LLC ®. All rights reserved.