Why a Gas Cartel Could Be a Bust

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Alternatives Abound

If supply would expand with a cartel, demand could also dampen as importers develop alternatives, further depressing natural gas prices. The European Union, which relies on Russia alone for 30% of its natural gas, is already developing alternatives, with Germany and Denmark relying heavily on wind power and France still focused on nuclear. Natural gas can be substituted with coal or nuclear power, as well as with wind and solar power.

"The EU, and particularly Germany, are thinking strategically about where gas will come from 10 years from now," says Picchi. "Monopoly prices would more likely reduce demand than generate more revenues for gas exporters."

The availability of alternatives distinguishes natural gas from oil—whose alternatives are not yet cost-competitive—and implies less leverage for a natural gas cartel. "Obviously getting the 14 largest exporters together to talk about working together is a bit scary for consuming nations," says Peter Beutel, an analyst for Cameron Hanover, a New Canaan (Conn.) energy consulting firm. "But there are alternatives to natural gas; utilities can use coal or nuclear. Oil—whether gasoline or heating oil—doesn't have the same alternatives."

"Never Say Never"

While it's true that coal and nuclear energy can substitute for natural gas, gas also burns much cleaner than coal and is less expensive than nuclear power. And if carbon dioxide emissions become more constrained by agreements to address global warming, natural gas remains an attractive option for power on a mass scale. That will become especially true if transporting and processing LNG becomes easier and cheaper. "Never say never," says Fadel Gheit, a senior energy analyst at Oppenheimer & Co. (OPY). "You can create an OPEC in anything—even used tires. The idea is not to control the whole supply but to just tip the balance enough to have enough power." Gheit says that with 22% of global production and the world's largest gas reserves, Russia already has tremendous clout. "For all practical purposes, if Gazprom shuts off its pipeline to Europe, Germany would be a third-world country."

Even if such a cartel fails to materialize in the short term, the threat of one will continue to cause importers to quiver, particularly those in the European Union deeply dependent on imports. Right now, the gas cartel talk appears to be political posturing more than anything. Even if a cartel were to be established, the fundamentals of supply and demand could easily cause its implosion.

Herbst is a reporter for BusinessWeek.com in New York.