A petroleum tanker of a different color: Barriers to a global gas market via liquefied natural gas

The production of unconventional gas, using new extraction technology, has revolutionized US gas markets; driving prices down to a fraction of gas prices in the EU and other destinations for more than six years. Will such major price differences spur trade in oceangoing liquefied natural gas (LNG) to balance local price differences in major gas markets, such as between the US and Europe, as oceangoing trade does for oil markets? We argue that it will not. Major gas markets (like the US and EU) need pipelines to connect suppliers to consumers—which oil markets, with many diverse transport options, do not require. If continental pipeline systems effectively bar independent entry, then no competitive entrant—whether with LNG or with unconventional gas production technology—can reach consumers or undercut the prices of incumbent suppliers. Thus, major gas markets in the EU or East Asia appear to be generally immune to the competitive threat of both LNG and unconventional gas production. The ocean-going LNG trade has a highly useful role, particularly in contract agreements between sellers from thin local gas markets to buyers from resource-scarce markets—or for the sale of low-cost unconventional gas from the United States under long-term contracts with particular buyers. But the role of the LNG trade in the largest gas markets is inherently different than for oceangoing trade in oil, where, even if much of oceangoing deliveries ship under term contracts, prices are tied to deeply liquid global oil markets. A vigorous worldwide LNG trade will surely continue, but it is inherently different than the global trade in crude oil and unlikely to equilibrate prices in major continental markets that regulate their pipeline system in a way that generally bars entry.