The Flaws of a Gas Cartel

We only partially agree with this Financial Times piece, which explains why Russia’s formation of an OPEC-like natural gas cartel with Iran and Qatar has some serious weaknesses which will in some ways prevent its ability to coordinate production. However the focus should be not only the price manipulation, but also the carve-up of markets and the steady reduction of competition. These suppliers may also be sharing development and investment plans to cause further distortions in the market. True, the biggest punch of the gas cartel at the moment is simply a PR stunt to panic speculators, but neither is this a development to just ignore.

That is where the similarities end. Unlike petroleum, natural gas is still for the most part split into regional markets served by pipelines. It is supplemented by a growing market for liquefied natural gas that, like crude, can be shipped to the continent where it fetches the highest price. Notwithstanding Gazprom’s sway over the European Union and success in bullying former vassal states, the economics of the two markets are different enough that a successful gas cartel is a pipe dream for now.

The LNG market requires hugely expensive facilities on both sides of the supply chain in order to work, plus specialised tankers to move the gas around. Getting it from places such as Qatar to big users such as Korea thus requires multi-decade contracts to support the necessary investment. Unlike crude, there is plenty of undeveloped “stranded gas” worldwide, so buyers place a premium on reliability. Iran, late to the LNG game, would see its gas stay underground if it played hardball with customers.Decades from now, when current facilities are paid for, a cartel might work. But one would hope that future Gopec members learn from Opec’s folly. Its greed in the 1970s spurred conservation and development efforts that have left it a shadow of its former self.