Natural-Gas prices Have Spiked. Why the U.S. Gets a Discount and How That Might Change.
The U.S. has a big supply of natural gas, and a limited capacity to export it, making prices cheaper for consumers.
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Natural-gas prices in Europe have spiked to record highs this winter, forcing heating bills higher and causing some power plants and fertilizer companies that rely on gas to shut down or reduce activity.
In the U.S., natural-gas prices are up too, adding to costs for consumers and businesses, but not nearly as much as elsewhere.
That’s because the U.S. has an enormous supply of natural gas, and a limited capacity to export it. U.S. consumers get the benefit of plentiful domestic supply without having to compete with as many consumers elsewhere for that gas.
Natural gas is used for several things in the U.S., with 38% going toward electricity production, 33% going to industrial uses such as refining and fertilizer plants, and 15% for residential uses such as heating. The benefit those users get from relatively cheap natural gas is very large right now, though it may narrow in the years to come for several reasons.
Natural gas trades at different prices in different parts of the world. There are three global benchmarks for natural gas, at hubs in the U.S., Europe and Asia. In Europe, the hub is in the Netherlands and the futures contract is known as Dutch TTF. Currently, it’s trading at $42 per million British thermal units. In Asia, it’s the Japan Korea Marker, or JKM, which is trading at $37. In the U.S., gas trades at the Henry Hub in Louisiana and has been trading at about $4.60.
The U.S. price is based on the price of gas transported domestically, generally by pipelines. European and Asian benchmarks are calculated largely based on the price of liquefied natural gas, which travels on tankers around the world and is significantly pricier. Several countries that need gas are competing with each other for cargoes.
A supply shortage starting last year, caused by a slowdown in drilling during the pandemic, has forced prices to record levels. Much of Europe and Asia don’t have large domestic supplies of natural gas such as the U.S., so they have to import most of it. Even after a recent dip, European natural gas futures are trading at levels seven times as high as they were a year ago. U.S. prices are up 88% over the same period—an enormous spike but not on quite the same level.
Russia’s invasion of Ukraine has further complicated the market. Russia is the largest supplier of natural gas in Europe, with most of its exports coming in by pipeline and some through LNG shipments. Russian natural gas is technically exempted from sanctions, but the invasion has cast doubt on whether Russia will continue supplying gas, and whether Europe will want to buy it. That risk premium has kept prices high.
Crude oil, by comparison, has been traded globally for decades, and prices around the world have converged more than natural-gas prices. The U.S. produces the most oil in the world, but that doesn’t insulate U.S. consumers in the same way that they’re insulated from swings in natural-gas prices.
U.S. oil, in the form of the benchmark West Texas Intermediate (WTI) crude price, trades slightly below the global price, which is tracked by Brent crude futures, a product originally based on oil from Europe’s North Sea.
The WTI discount to Brent is currently about 3%, much smaller than the natural gas discount. One reason it doesn’t trade at a bigger discount is that the U.S. both imports and exports oil, in almost identical amounts. (The reason the U.S. is both an importer and exporter has to do, in part, with how U.S. refineries operate, with some specializing in refining certain kinds of oils from overseas.)
Because there’s so much global trade of oil through the U.S., prices aren’t insulated in the same way that gas prices are. A refiner could presumably buy crude overseas instead of in the U.S., so there’s no reason for a large gap between overseas and U.S. prices.
By comparison, about 20% of U.S. natural gas is now exported through pipelines and LNG, and the country imports relatively small amounts of gas. The U.S. is now operating near full export capacity, so producers couldn’t export much more gas even if they wanted to. That probably puts a cap on prices in the U.S. for now.
But export capacity is likely to grow in the coming years as LNG demand rises, so producers may be incentivized to export more. And the more gas is exported, the more likely prices will rise, unless total U.S. supply goes up just as much as exports.
“Every time there’s more exported, the closer we get drawn into the global marketplace,” said Grant Hauber, energy finance analyst at the Institute for Energy Economics and Financial Analysis.
Ten U.S. Senators, including nine Democrats and an Independent, cited rising natural-gas prices in a letter early last month asking Energy Secretary Jennifer Granholm to “take swift action to limit U.S. natural gas exports.” They want the department to study how LNG exports are affecting U.S. natural-gas prices and to develop a plan to keep it affordable.
Meanwhile, they asked her to consider halting permits for new LNG plants. They wrote that “LNG exports are decreasing the surplus for the U.S. market, as the EIA predicts that this year natural gas inventories will reach a full 159 billion cubic feet below its previous five-year average. Projections of exponentially increased U.S. exports will cause real harm to American families’ ability to pay their home energy bills.”
Others, however, caution against limiting exports, particularly as Europe turns to the U.S. to replace Russian supply. Samantha Gross, the director of the energy security and climate initiative at the Brookings Institution, called export limits “a terrible idea” in a recent essay.
LNG, she wrote, is “a good business deal for U.S. companies, a counterweight to Russia’s power over European energy supply, and a gesture of good will toward our staunchest allies.”
Write to Avi Salzman at [email protected]
