It's all connected: The natural gas market and its casualties

Natural gas was supposed to be the so-called bridge fuel to the low-carbon renewable energy economy. It was abundant, cleaner to burn than oil and coal, and more and more available to anyone who wanted it as a global market in liquefied natural gas (LNG) blossomed and boomed.

But this season it is looking increasingly like that metaphorical natural gas bridge is going to come up short. And, the effects are starting to ripple throughout the economy, not only in the natural gas markets themselves, but also in the electricity and agricultural markets.

First, there are the obvious signs in the natural gas market. In both North America and Europe natural gas prices have bounded upward. In Europe gas import prices have zoomed up more than 400 percent in the last year from $2.86 per million BTUs (MMBtu) to $15.49 per MMBtu. (A million BTUs is roughly equivalent to the U.S. measure of a thousand cubic feet or mcf.)

In the United States the levitation is not as dramatic, but that may change once the cold weather sets in. U.S. natural gas futures prices were around $2.90 per mcf a year ago and closed Friday at $5.10 per mcf for the October contract. But the U.S. natural gas price was only about $3.90 per mcf just before Hurricane Ida knocked half of the natural gas production from the U.S. portion of the Gulf of Mexico offline.

The other cause for rising natural gas prices is the surge in demand worldwide as economies boom in the wake of record fiscal stimulus and low interest rates in response to the pandemic.

It wasn't supposed to be this way, we were told a decade ago. Natural gas from newly available shale deposits was going to provide the United States and the world with ample gas supplies for decades. Skeptics of this claim (myself included) thought we had a few years or at best a decade of incrementally better supply, but only if investors kept throwing money at the shale gas drillers despite ongoing losses—which investors did.

Now, seven of the 10 major shale gas basins in the United States are in decline. The spike in U.S. prices is partly due to reduced drilling as investors finally pulled back from throwing good money after bad. The other problem is that drillers have exploited many of the sweet spots and soon will have to move on to gas that is harder to get and that will cost more to extract.

In electricity markets the natural gas price spike had, well, electrifying effects, and not in a good way. Electricity prices in Europe have climbed 250 percent since January owing in part to the rise in the price of natural gas which now powers an increasing number of  electric generating plants. In the United Kingdom electricity prices traded near all-time highs. The culprit once again was the price of natural gas and the fuel's expanded role in electricity generation.

In the United States, the ability of power plant operators to switch between natural gas and coal may keep electricity prices from spiking there. But that's if U.S. coal prices don't continue to rise dramatically as they have all year.

The effects on agriculture may also be dramatic because nitrogen fertilizers are made largely from natural gas. Two fertilizer factories closed in the U.K. recently because of high natural gas prices.

It is an irony that high fossil fuel energy prices increase the cost of fertilizer which, in turn, increases the cost of growing biofuel crops such as soybeans and corn. Soybean and corn prices are soaring this year as their use for food competes against their use as feedstocks for fuels such as biodiesel and ethanol.

A second irony is that just at this moment American consumers would be glad to have extra natural gas supplies and thus lower prices. They heard natural gas producers promise growing natural gas production far into the future. Investors heard that, too, and financed liquefied natural gas export terminals in the United States to send the excess production abroad. The greater portion of those exports is tied to long-term contracts that can last 20 to 30 years. So, even if production in the United States stalls or dwindles, the country will be obliged to send some of its natural gas supply overseas regardless of domestic needs.

The tightly linked global system of natural gas trade now means that difficulties and disruptions in that market will increasingly effect everyone across the globe who uses natural gas. Advocates of wind and solar power should be rejoicing because higher natural gas prices make these alternatives more attractive.

But wait, wind and solar are intermittent sources of power which depend on reliable baseload power plants to keep the electric grid balanced when those alternatives are not producing enough power. And, many of those power plants are now fueled by what was supposed to be a cheap and abundant bridge fuel called natural gas that would gently and seemlessly transport us to the renewable energy economy!

Kurt Cobb is a freelance writer and communications consultant who writes frequently about energy and environment. His work has appeared in The Christian Science Monitor, Resilience, Common Dreams, Naked Capitalism, Le Monde Diplomatique, Oilprice.com, OilVoice, TalkMarkets, Investing.com, Business Insider and many other places. He is the author of an oil-themed novel entitled Prelude and has a widely followed blog called Resource Insights. He can be contacted at kurtcobb2001@yahoo.com.