This article was published by The McAlvany Intelligence Advisor on Monday, October 16, 2017:
There are two basic rules of economics. The first is: if prices go down, more will be demanded. The second is: both sides of any economic transaction must benefit or there’s no deal.
The fracking revolution in the United States has pushed the price of crude oil down to the point where it is threatening the very existence of the OPEC cartel. Consumers are saving at the pump and the energy industry in the U.S. employs more than 10 million people, making up eight percent of the country’s gross domestic product.
But there’s been an all but invisible transformation taking place in natural gas. At least two of the Big Oil companies sell more natural gas than they do crude oil. While the price of oil has dropped from $100 a barrel in 2014 to $60 today, the price of natural gas has declined even further. In fact the world’s reserves of natural gas are so enormous that producers are increasingly tapping into those reserves and are now running into a problem: those who would like to purchase their product don’t have the facilities to unload it, transport it, and then burn it.
And so, the free market has been solving those problems. First comes the technology to turn natural gas into liquid (it happens at minus 240 degrees F) and then the ability to load it, now called LNG, onto huge tankers and ship the product to buyers around the world. A decade ago, just 17 countries had the facilities to offload the product and ship it to power plants inland. Today there are 40.
But what about the other countries without those facilities? What about Ivory Coast, for example? Big Gas titans Total SA and Royal Dutch Shell are building an LNG import terminal for them, along with a pipeline to the country’s power plant in Abidjan. They’re investing $200 million in the project. In other words they’re creating a customer where there was none before. Chevron just invested $80 billion to expand Australian LNG facilities so they can buy more product from them. Total said it’s working with Myanmar and South Africa to build out their infrastructure, including pipelines and power plants, so they can purchase their natural gas. Cheniere Energy is doing the same in Chile. Similar developments are underway in Vietnam.
Even the Panama Canal has widened its portals to handle the larger LNG tankers.
There are political benefits as well. Just ask Poland, which opened its first LNG import terminal last year, lessening its reliance on natural gas piped in from Russia.
The demand for natural gas worldwide is increasing four times faster than for crude oil. The volume of LNG rose by 22 percent over the last three years and is expected to increase by another 21 percent over the next three. At present there are 170 LNG tankers traversing the high seas, up from 150 just a year ago. The free market draws capital to opportunities like that just like bees are drawn to nectar.
It’s having an impact in the United States, as one would expect. According to API, the energy trade group, increased exports of LNG over the next 20 years are expected to add nearly 500,000 jobs to the American economy and $73 billion to the country’s gross domestic product (GDP). Marty Durbin, API’s Chief Strategy Officer, said “This report confirms that increasing U.S. LNG exports would bring great benefits to American workers and consumers and [to] the U.S. economy. Increasing the use of U.S. natural gas throughout the world means more production here at home, cleaner air, and increased energy security for our nation and our allies.”
With Big Gas helping their customers build out their facilities and their pipelines, they’re insuring both of their futures. Their customers – Ivory Coast, South Africa, Australia, etc. – couldn’t be happier.
That’s the second law of economics: both sides must benefit, or there’s no deal.
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