West Texas Intermediate is at $111 a barrel as of Friday afternoon and average U.S. gasoline prices topped $4 a gallon all week. Ongoing war in the Middle East has prevented crude oil from passing through the Strait of Hormuz.
But in the U.S. we are catching a break on one price: natural gas, a critical commodity that has been hit hard by the conflict. Prices here are relatively flat despite spiking roughly 70% in Europe and Asia.
Why is the U.S. protected from the natural gas supply shock, but not the oil supply shock?
The war in the Middle East has disrupted roughly 20% of the world’s liquefied natural gas and crude oil, two vital commodities. Both are abundantly produced here in the U.S., said Ken Medlock, an energy economist at Rice University.
“The U.S. is actually the largest producer of crude oil and natural gas on the planet,” he said.
But crude oil and natural gas have a really important differentiator.
“Crude oil and petroleum products are liquids. Because of that, they’re actually very easy to put on vessels and move around the world,” Medlock said.
Being so easy to move around is why crude oil is a truly global commodity. And why the supply shock abroad is driving up everyone’s prices. But natural gas is different — it’s a gas. And that gas needs to become liquid to move across international waters.
“When you get to liquefied natural gas, you actually have to cool methane down to negative-260 degrees Fahrenheit, so cryogenic, so that it becomes a liquid,” Medlock said.
The U.S. has a limited amount of that liquefaction infrastructure, said Tom Seng, a professor of energy finance at Texas Christian University.
“We are constrained by the ability of our export facilities, specifically the LNG export facilities, to provide any additional natural gas that other countries need,” he said.
Even if the U.S. wanted to export more natural gas to Europe or Asia, it just can’t.
“And it is almost one of those, ‘Sorry guys, there’s no price at which we can increase what we’re doing presently,’ because you can’t overnight build the liquefaction facilities,” he said.
So natural gas prices and supply in the U.S. are insulated from the crisis in the Middle East. That’s shielding the U.S. from challenges happening abroad, said Jamison Cocklin, managing editor at Natural Gas Intelligence.
“In Europe right now … the energy ministers have asked to scale back energy consumption. Asia has scrambled for extra cargos, and they’re taking a hard look at efficiency measures,” he said.
But U.S. consumers don’t have to worry about that.
“You’re not going to see higher peak prices for electricity, for example, and we’re approaching the summer when air conditioning bills go up,” said Rice’s Ken Medlock.
Cheaper natural gas prices are a silver lining as consumers here grapple with higher diesel, gasoline and jet fuel.
