The Coming Natural Gas Cartel

In a recent poll, Americans ranked energy dependence as their second greatest concern, after the Iraq war. That is hardly surprising. It is now a well-publicized fact that the United States imports 65 percent of the oil it consumesmuch of it from unsavory, hostile countries. But the situation is even tougher than most people think. The United States is not only dependent on foreign oil, it is also increasingly dependent on foreign sources of natural gasa fuel that provides 20 percent of Americas electricity and heats more than half of U.S. homes (including 70 percent of all new homes).

Natural gas is popular because it is the worlds cleanest-burning fossil fuel. It produces fewer emissions and pollutants than either coal or oil. Since the early 1970s, worldwide reserves of natural gas have increased steadily, at an annual rate of around 5 percent. The number of countries with known reserves has increased from around 40 in 1960 to more than 85 today.

There is virtually no overlap in the United States today between the uses for oil, almost all of which goes to transportation, and uses for natural gas, most of which goes to heating and electricity production. With oil supplies dwindling and production capacity strained, there will be an attempt by the worlds leading economies to use more natural gas for transportation, both directly, as some cities have done with their public transit systems, or indirectly by, for instance, electrifying cars. This will cause the demand for natural gas to skyrocket, creating what may be Americas largest future energy shock.

Why? The United States has historically relied on domestic sources of natural gas. Imports constitute a very small percentage of U.S. gas consumption: Thirteen percent comes from Canadian pipelines, and an additional 4 percent is imported as liquid natural gas (LNG) from other nations such as Qatar. That would hardly be concerning, were bad news not en route. Domestic gas production is in decline. Companies have scrambled to drill more fields to stem the decline, with little luck. During the past four years, the number of rigs drilling for gas has more than doubled, from around 600 in March 2002 to more than 1,300 today. Yet, natural gas production has remained flat or falling and it cannot even be attributed to the recent hurricanes. The country no longer has the geological and physical requirements to increase production. The increase in drilling activity, fuelled by increases in natural gas prices, is not slowing the inevitable decline of domestic production.

Importing natural gas from foreign countriescooled into LNGwill soon be Americas only option for meeting demand. That is increasingly the case in other countries such as Japan, South Korea, and much of Europe, all of which have no significant domestic reserves and, like the United States, are eager to import.

This situation puts LNG exporters, like oil exporters, in an incredibly powerful position. Countries such as Algeria and Qataralso-rans in the oil businessare poised to become natural gas powers in the 21st century [see chart]. They are certain to organize a natural gas cartel, similar to OPEC. That scenario worrisome for several reasons. Some of these countries, such as Russia, have already used natural gas as a political weapon.

Others, notably Iran (which has only scratched the surface of its gas potential), already appear headed for confrontation with the United States and Europe. Iran helped form the Gas Exporting Countries Forum (GECF)a group of 15 gas-producing countries that met for the first time in Tehran in May 2001. Collectively, the GECF controls 73 percent of the worlds natural gas reserves and 41 percent of production. Somehow, the GECF has escaped the worlds attention. As the gas market grows increasingly global, that kind of indifference will become a luxury of the past.