And You Thought Oil Was A Worry

If natural gas producers form a cartel, they could drive world prices even higher

Oil prices are through the roof. OPEC is sitting pretty. Could things get any worse for energy buyers? You bet. There are troubling signs that natural gas producers are moving toward forming their own version of OPEC. While not an immediate threat, such a move could eventually drive up prices for an indispensable element of the U.S. long-term energy supply: In January, the Energy Dept. predicted that gas imports from outside North America will increase more than 700% and account for a quarter of U.S. consumption by 2025.

The concept of a natural gas OPEC is becoming less far-fetched. On Apr. 25-27, a little-known, four-year-old organization called the Gas Exporting Countries Forum will meet in Port of Spain, Trinidad and Tobago. Although the organization says it wants to promote cooperation with gas-consuming nations and "does not seek to control...pricing and supply," in past meetings members have discussed mutual efforts to capture a bigger share of the wealth generated by their own natural resources. That's exactly the line of inquiry that led to the formation of the Organization of Petroleum Exporting Countries 45 years ago.

Natural gas meets one key requirement for price-fixing: a high degree of market concentration. In the last quarter of 2004 members of the forum accounted for 53% of the natural gas imported by the industrialized nations belonging to the Organization for Economic Cooperation & Development. That's in line with the 52% share of OECD oil imports that OPEC provided in the quarter, according to the International Energy Agency. The Trinidadian hosts list the countries invited as forum members as Algeria, Bolivia, Brunei, Egypt, Indonesia, Iran, Libya, Malaysia, Nigeria, Oman, Qatar, Russia, Trinidad, United Arab Emirates, and Venezuela. Many are OPEC members and thus know a thing or two about price-fixing. Norway, Argentina, and Equatorial Guinea have been invited to observe.

Why now? For one thing, technology is making it easier to set up a cartel and enforce control over prices. Until recently almost all exported gas was delivered by pipeline under long-term contract. But with advances in natural gas liquefaction, more of the fuel is being delivered in refrigerated ships. That has led to a developing spot market, similar to that of oil. In a unified market with a single spot price, withholding output in one part of the world can affect prices everywhere.


Gas producers also have a strong hand because demand and prices are already high. Their strength could grow as natural gas becomes increasingly tapped out in places like the U.S. and Canada, leaving more reserves and output in the hands of forum members such as Russia, Iran, and Qatar, according to a 2004 study by Rice University economist Ronald Soligo and Amy Myers Jaffe, associate director of Rice's energy program. Although Soligo and Jaffe think "sustained" monopoly power is years away, they say exporters could begin to influence the price of gas sporadically well before then "by manipulating the availability of immediate supplies."

Russia has been boldest about trying to affect gas prices. As far back as 2002, Soligo and Jaffe say, it led the way in trying to get the forum to block European buyers from reselling their gas. A resale ban makes it easier for producers to divide up the market and keep prices high. It's a favorite tactic of Saudi Arabia in the oil market.

Russia's effort ultimately failed because European customers had too many alternative sources of gas. But a similar push could succeed someday if producers such as the U.S. exhaust their reserves. Last year the Russian newspaper Izvestia quoted the deputy chairman of Gazprom, Alexander N. Ryazanov, as saying: "I think that it is in our countries' interests to sell gas at the highest price possible. That is why one has to stick to correct approaches and coordinated policy."

"Coordinated policy" sounds a lot like a euphemism for price-fixing. An OPEC of natural gas is still a remote possibility. But the idea is sure to be floating on the sea breezes in Port of Spain.

By Peter Coy in New York, with Jason Bush in Moscow

    Before it's here, it's on the Bloomberg Terminal.