Joe Biden’s gas exports create new headaches

The law of conservation of energy is ingrained in every high school science student: Energy can’t be created or destroyed, only transformed or transferred.
The global natural gas market represents the political version of that primary tenet of thermodynamics.
Europe’s demand for liquefied natural gas (LNG) to replace Russian imports has now been transferred to the US. Until now, shipping American LNG into Europe has been a policy that’s won accolades for President Joe Biden. Politically, it helped contain Vladimir Putin, and economically, it boosted the US energy industry. It has also helped to rebalance the trade deficit. Now comes the greater test. As the American gas market begins to connect with the European one, the price problems in Europe are crossing the Atlantic.
The price of benchmark US gas surged to a 13-year high, exceeding
$8 per million British thermal unit, more than double the 2010-2020 average Americans paid of about $3.3 per million Btu. Though still a fraction of the more than $30 per million Btu that European consumers are paying, American prices are already feeling the tug of demand in the continent.
Natural gas markets have historically tended to be regional. Until recently, the US market was almost an island, connected only to Mexico and Canada via limited pipelines. But in the past six years, the US gas industry has slowly linked up to the rest of world as liquefaction facilities opened up in Texas, Louisiana, Maryland and Georgia.
Thanks to all those LNG terminals, the US exported 17% of its domestic gas production in January, the last monthly data available. By next winter, the US Energy Information Administration, a government body, forecast that one-in-five molecules of gas produced in America will be sold overseas. Two decades ago, the US barely exported any gas at all.
US gas production has not kept pace with the surge in exports and stronger-than-expected domestic demand. As a result, American gas storage facilities have emerged from winter far emptier than expected. As of last week, inventories stood at roughly 17% below the five-year average for this time of the year.
To be sure, cold weather has kept demand elevated, and freezing temperatures in the key production region of west Texas have hampered output. But there’s a structural element too: US shale companies aren’t responding to high prices as they did in the past, as they prioritise profits-over-volume. The number of rigs drilling for gas in America stood at about 150 last week, far below the nearly 1,000 of 13 years ago, the last time that gas prices were above $7 per million Btu.
Part of the reluctance to drill more is due to fears about a price collapse if the weather cuts gas demand and the economy slows down in late 2022 or early 2023. Another problem is sky-high inflation for steel, a key input into drilling for gas, and other supply bottlenecks. Nor do industry executives mind making life harder for Biden ahead of mid-term elections in November. Although the Democratic president has now embraced the oil and gas sector, he had campaigned on an ambitious environmental agenda, famously promising that he was “going to end fossil fuels”. Wall Street has also become reluctant to finance the industry over climate-change concerns.

—Bloomberg