Unconventional natural gas production has driven North American prices down
to a fraction of those in Europe for many years, separating the two largest natural
gas markets. The entry of the United States as a major LNG exporter and the energy
crisis in Europe invites the question of whether LNG can eliminate those price
differences in a global natural gas market, as oceangoing trade does for oil markets.
The relative degree of asset specificity in the infrastructure to trade natural
gas or oil between regions separated by oceans provides insight into why, despite
increased liquefaction capacity in the United States and soaring exports to Europe
in 2022, regional price differences remain likely to persist. The fixed capital cost of
LNG infrastructure is an order of magnitude greater than for crude oil. Additionally,
the regulation of the natural gas industry in major markets outside of North
America effectively precludes competitive entry of LNG, driving a wedge between
regional gas prices. Given these constraints, LNG trade will likely remain dominated
by long-term
contracts instead of the spot markets that typify world oil markets.
