Why a Gas Cartel Could Be a Bust

A bid by natural gas-producing nations for an OPEC-style alliance could actually undermine prices for exporters. Why? Oversupply and easy alternatives

by Moira Herbst

To anyone who recalls OPEC's rise to global economic importance in the 1970s, the prospect of a similar cartel among natural gas exporters has become a cause for concern. An oil embargo by the Organization of Petroleum Exporting Countries quickly led to price spikes, fuel shortages and hours-long gas lines for motorists. Inflation soared, stifling growth in the U.S. and Europe.

That's partially why a two-day meeting of 14 of the world's biggest gas exporters this week in Doha, Qatar, is putting a nervous edge into energy markets and raising alarm among gas-importing nations.

With all the press attention and discussion since Iran and Russia touched on the idea in February, it would seem another specter is haunting Europe—the specter of the formation of an OPEC-like organization for natural gas among countries like Iran, Algeria, Russia and Venezuela. The worry is that these countries, which together control 42% of the export market and 73% of global reserves, could establish a cartel and fix prices, holding Western nations at their mercy.

Big Hurdles

In reality, however, the April 9-10 meeting of the Gas Exporting Countries Forum (GECF) is likely to produce anxiety far more effectively than it does a functional natural gas cartel. Such a group would confront large obstacles posed by the fragmented, localized nature of the natural gas market as well as the lack of common interest among members like Russia and Qatar. But at a deeper level, the rise of such a cartel would sow the seeds of its own destruction. A gas cartel could both ultimately lower gas prices and push importers to develop alternative power sources. In short, the cartel could ultimately force itself out of the market.

The main reason is that in contrast to crude oil's tight supply, the world has vast, untapped natural gas reserves. So even if a cartel forces prices up artificially in the short term, such an action will only spur innovation in extracting hard-to-reach reserves. New discoveries will give new players power in the market, and prices overall will sink as more supply moves to market. Further, as natural gas is more easily substituted than oil, countries not wanting to pay cartel-inflated prices will develop alternatives, from coal to nuclear to wind power.

Excess Supply Forecast

The first obstacle a gas cartel would face is that there is a lot of gas in the world. And when there's a lot of supply, price manipulation isn't easy. According to the BP Statistical Review of World Energy, natural gas' reserve-to-production ratio is about 60 years' supply vs. 40 years for crude oil. But this count doesn't include nonconventional gas resources such as shales, tight sands and gas locked in ice crystals on the ocean floor, which could stretch gas supplies to thousands of years, says Bernie Picchi, an analyst for Wall Street Access. In other words, a cartel's price inflation would spur the development of these resources, ultimately undermining the cartel's pricing power.

"An OPEC in natural gas could succeed brilliantly, for a year or two, until high prices lead to efficiency gains and more discoveries," says Picchi. "So the tightness in the market will loosen up, and I don't see how you can push a string. It makes wonderful copy and scares the bejesus out of people, but it's not realistic."

Capacity is already showing signs of expanding. While the market for transportable natural gas, called LNG (liquefied natural gas) is tight now, global annual LNG capacity is expected to rise to 476 billion cubic meters by 2010, from 246 billion cubic meters in 2005, says the International Energy Agency.

"There's a lot of supply, and there will be quite a bit coming on in future years," says Saad Rahim, a risk analyst for PFC Energy, an energy strategy firm with U.S. headquarters in Washington, D.C. "There have been huge finds in countries like Brunei and India, and further discoveries will undermine prices." Rahim says PFC Energy analysts consider the cartel "a lot of talk right now."