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While virtually everyone is focused on what’s happening at the border of Russia and Ukraine, it’s also important to take a moment and look at what in the world is going to happen to natural gas if the situation escalates.
The U.S. and the Brits have been trying to dissuade the Russians from a full invasion with a full package of financial sanctions, and the Russians say if that happens, they will cut off all energy exports to Europe. That could spell trouble for Europe because Russia provides just more than one third of the natural gas the Europeans use, as well as about 30% of their oil. Here comes the Biden Administration with a rescue plan to ship natural gas from the U.S. and others to to Europe to make up for the shortfall.
Sounds like a great plan, right? You know, this should just solve the issue. The U.S. is the world’s largest natural gas producer. We get lots of waste stuff outta the shell fields. It’s perfect. Right? Well, not really. Natural gas is a gas. It’s difficult to store, so it’s not like we’ve got a big pile of the stuff laying around somewhere.
In addition, demand for natural gas tends to be relatively inelastic. So if you have like 2% shortage, the prices can go up by like 50%. And that’s certainly the case in Europe where most of the natural gas is not used for chemical purposes, but to burn for electricity. And if you run out of electricity in the winter, well, that’s a problem. So, what’s going on here? What’s really going on? Well, there’s a little, a little bit of hope that this plan might work a little bit. Most natural gas is shipped via pipe. It’s produced, put in the pipe. It’s sent to the end consumer, end of the story. But when you ship it across oceans, you usually don’t use pipes. You usually freeze it down into a liquid and put it on a special liquified natural gas carrier vessel, which then sends it to the wider world.
Because of that, oftentimes there are tanks of LNG either at the point where it’s sent or the point where it is received, and that buffer can be played with a little bit. So there might be enough natural gas out there to get one or 2 billion cubic feet per day to the Europeans, without too many problems.
That’s not gonna cover 10% with what they need, but it’s not insignificant.
That leads to the question: Can the U.S. really provide enough natural gas to sustain all of Europe? The answer is no.
So for this to work, Europe, as we understand it, has to stop functioning, which means that a Russian invasion of Ukraine is really just the first step down on a very, very long road to European dissolution.
