Natural gas is creating a new reality for economies around the world. Two major developments of the past few years have thrust natural gas into the spotlight: the reduction in nuclear power supply following the Fukushima disaster in Japan, and geopolitical tensions between Russia and Ukraine.
Over the last decade, the discovery of massive quantities of unconventional gas resources around the world has transformed global energy markets, and reshaped the geography of global energy trade, IMF reported. Consumption of natural gas now accounts for nearly 25 percent of global primary energy consumption. Meanwhile, the share of oil has declined from 50 percent in 1970 to about 30 percent today.
Natural gas, however, is different from other energy sources. Being lighter than air, it is a commodity that doesn’t travel very easily and is expensive to transport. Hence, natural gas markets tend to be regional, and much less integrated than oil markets. Shipping or transporting natural gas requires either costly pipeline networks or liquefaction infrastructure and equipment, including dedicated vessels, and then re-gasification at the destination. The limited global integration of gas markets has resulted in substantial price differences across regions in recent years due to the US shale gas boom and the Fukushima disaster, in spite of increasing liquefied natural gas trade.
Fukushima Disaster and Aftermath
The Fukushima Daiichi nuclear disaster in March 2011 highlighted the environmental liabilities associated with nuclear power generation, and induced a sharp increase in the use of natural gas.
Before the disaster, about one-quarter of Japan’s energy was generated by means of nuclear reactors. Following the disaster, the Japanese government decided to halt production at all nuclear power plants in the country. To compensate for the resulting loss in electricity generation, Japanese electric power companies increased their use of fossil-fuel power stations and appended natural gas turbines to existing plants.
As a result, Japan’s liquefied natural gas imports have increased dramatically—by about 40 percent—since the disaster, making Japan the world’s largest importer of liquefied natural gas. The sharp increase in natural gas demand has led to higher prices in Asia—and Japan in particular—double that in Europe and four times higher than in United States.
Geopolitical Tensions
The ongoing crisis in Ukraine has highlighted European energy markets’ dependence on natural gas. Ukraine and countries in southeast Europe appear particularly vulnerable to potential disruptions of Russian gas supply. Should the gas cutoffs persist and be extended to other countries, the greatest impact will be on Ukraine and countries in southeast Europe that receive Russian gas transiting through Ukraine. Other countries, however, will be affected through rising spot prices, which may spread from natural gas to other fuels.
Overall, the pattern of global trade in liquefied natural gas, and energy more generally, is expected to evolve further. If the United States gradually becomes a net exporter of liquefied natural gas, we expect domestic natural gas prices to rise but still remain markedly lower than that in Europe and Asia, given liquefaction costs. Natural gas is the cleanest source of energy among other fossil fuels (petroleum products and coal) and does not suffer from the other liabilities potentially associated with nuclear power generation.
The abundance of natural gas could thus provide a “bridge” between where we are now in terms of the global energy mix and a hopeful future that would chiefly involve renewable energy sources.
