Natural gas will assume an increasing share of the U.S. energy mix over the next several decades. That is one of the few certain trends in the energy field today, rightly identified by a recent MIT report on the future of natural gas. Given this, how worried should we be about the potential rise of an international OPEC-like gas cartel?

The answer is less certain. Late last year the Gas Exporting Countries Forum (GECF), an organization commonly referred to as the ‘Gas OPEC’, stated that its focus was on “coordinating investment policies to dissuade countries from further flooding the market” – hardly a good signal for gas consuming nations. This came the same year as Chakib Khelil – Algerian Minister for Energy and Mines – declared that “in the long term, we are moving towards a gas-OPEC”.

Pressure intensified at the April 2010 GECF meeting where, faced with an oversupplied liquefied natural gas (LNG) market, Algeria suggested that exporters should reduce supplies to support prices.

This is particularly worrisome given that GECF countries hold a bigger share of world natural gas reserves than OPEC does for oil. Furthermore, most of OPEC member countries are also members of GECF.

However, a relief signal for concerned observers came from Moscow a couple of weeks ago, when Leonid Bokhanovsky – GECF secretary-general – declared that “Turning the Gas Exporting Countries Forum  into an OPEC-style organization for the gas industry would not benefit members”.

Why should we care? In the end, we have vast newly discovered shale gas reserves here in the United States, right? Not quite. While it is true that the domestic shale gas reserves can satisfy domestic demand to a large extent, U.S. gas prices will increasingly be driven by the developing international LNG market, even if our import requirements fall to zero. In other words, the price we will pay for our gas in the medium term will be partly determined abroad.

To see why, consider the decision faced by an American shale-gas producer: it can either sell its output domestically or export it to the international market. Assuming the price was higher abroad, we should naturally assume the American producer would sell it there. This arbitrage opportunity (which brings prices together) is brought about by the newly created and heavily underutilized LNG terminal capacity. In 2008 the U.S. imported less than 10 billion cubic meters (bcm) of LNG while the terminal capacity stood at around 120 bcm (it has now grown to over 140bcm).

Or as the MIT report notes: “If a more integrated market evolves, with nations pursuing gas production and trade on an economic basis, there will be rising trade among the current regional markets and the U.S. could become a substantial net importer of LNG in future decades.”

Does this mean that we are hopeless when faced with a potential gas OPEC in the making? Not necessarily, as creating a cartel is not easy. The evidence indicates the present economic conditions, mentioned below, are not quite there for an international gas cartel to be successful. However, the changes that are gradually taking place in the international gas market are making (1) prices more transparent; (2) increasing the incentives to reduce output; and (3) enabling producers to do so as they are less and less bound by long-term contracts. In other words, the ongoing and foreseen market developments increase the ease, and thus likeliness of an international gas cartel being successfully created in the future.

Therefore, policy makers should factor in this possibility when implementing otherwise sound recommendations like MIT’s: “For reasons of both economy and global security, the U.S. should pursue policies that encourage an efficient integrated global gas market with transparency and diversity of supply, and governed by economic considerations.” They ought to be aware that a global, transparent gas market (akin to the oil market) is precisely one in which cartels can flourish, which makes the requirement that it be diverse in its supply sources and governed by economic considerations all the more crucial.

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