Is It (Finally) Time for a Gas OPEC?

Every few years, analysts will revisit an age-old question: will the major gas exporters form an organization akin to the Organization of Petroleum Exporting Countries (OPEC)? Technically, such an organization exists—the Gas Exporting Countries Forum (GECF), founded in 2001, although it does not function like OPEC (adjusting supply to balance the market). Then again, OPEC instituted its first quotas in 1982, more than two decades after being founded. Perhaps the GECF will finally evolve into an OPEC-like organization. In fact, the preconditions for a gas OPEC have never been better; then again, its prospects for success remain dim.

The theoretical case for a gas OPEC is evergreen: gas prices, like oil prices, are cyclical and volatile. It takes time to bring production online, and so it is useful for producers to be able to adjust supply to balance the market and prevent volatility. In reality, however, a gas OPEC has always been hampered by how the global gas industry is structured. When gas exports are underpinned by long-term contracts, and when gas prices are linked to oil, the obvious lever for a gas OPEC does not work because production cannot be adjusted easily, and prices reflect the fundamentals of oil, not gas. OPEC-like behavior has been impossible during much of the history of international gas markets.

But the gas market has changed. Almost a third of the world’s liquefied natural gas (LNG) is traded on a short-term basis, and much LNG capacity is amortized, unshackled by restrictions that might prevent a producer from adjusting output. Meanwhile, gas prices have delinked from oil, especially in Europe (but not in Asia). These changes favor a gas OPEC: exports are less tied to fixed, long-term contracts, and gas prices increasingly reflect short-term fundamentals. In fact, Gazprom was open about its exercise of OPEC-like behavior in the early 2010s when it touted profit maximization, rather than maximum exports, as its yardstick for success. And in the interim, conditions for a gas OPEC have matured further.

The cyclical moment is also favorable for a gas OPEC. Gas prices have been weak this year, hit by an unprecedented boom in supply and lackluster demand, including in China. Exports and export capacity, meanwhile, keep growing. The geopolitical moment is precipitous too. Russia has cooperated openly with OPEC, even though its involvement is as much about optics as it is about adjusting output. And Qatar has found itself politically stranded, even deciding to leave OPEC last year. These are the indispensable partners for a gas OPEC, and both have reasons to want it—or, at least, be more open to the idea than before.

Then again, cartels emerge because of significant and sustained pain. The Russian economy is in trouble, but export revenues from oil are almost four times greater than export revenues from gas—Russia has far more to gain from slight movements in oil prices than it does from similar changes in gas. Qatar is in a different position because it depends more on LNG revenues, even though its LNG—being sold to Asia—depends heavily on oil prices. But even though economic growth has slowed in Qatar, pain is hardly the way to describe the country’s economy.

The bigger inhibitors for a gas OPEC, however, are the elasticity of demand and antitrust policy. Cartels only succeed if consumers keep buying a product despite higher prices. For years, OPEC has benefited from the relative inelasticity in the transportation sector: if oil prices go up, people might drive less, or they might, when the time comes, buy a more fuel-efficient car. But for decades, the world had no alternatives to oil in transportation. In fact, higher oil prices after 1973 have shrunk the market for oil outside the transportation sector: in 1973, transport was just 36 percent of oil demand, while it was almost 60 percent in 2017. Even with this relative inelasticity, it is not obvious that OPEC has succeeded all these years—besides a few instances where it has propped up prices over a short period of time.

The demand for gas, however, is more varied and elastic, while the process of price discovery is far more nuanced and complex, which means a gas OPEC can easily misjudge market realities. Almost 40 percent of gas is used in the power sector, where higher prices might trigger short-term switching towards coal and long-term switching towards renewables. In industry, some consumers can still switch to liquid fuels. In buildings, gas competed with electricity or biomass, even in the short term. In other words, higher gas prices can easily backfire by killing demand. In fact, the main story of 2019 has been weak demand despite record-low gas prices—what gas needs is lower prices, not a concerted effort to push prices up.

The second headwind for a gas OPEC is antitrust policy. The United States has, at times, weighed legislation to punish OPEC countries. But that process is mostly political theater—Congress threatens antitrust action so that the White House can ask (or tweet at) Saudi Arabia to pump more oil. And while the threat lingers over OPEC members, it remains mostly theoretical. Unlike the United States, however, the European Union takes antitrust seriously, and a gas OPEC would be an obvious target. The European Commission has investigated every big gas supplier—Norway, Algeria, Russia, Nigeria, and, now, Qatar. It has threatened fines and forced changes. A gas OPEC would trigger a European response, and that response would have teeth. Europe would not give a gas OPEC the space that the United States has given OPEC.

There are, in short, several drivers for a gas OPEC: the gas market has changed in ways that make cartelization possible. Gas prices are in the doldrums, meaning that measures to prop up prices might make sense. Some of the geopolitical inhibitors for a gas OPEC have lessened as well, even though the two likely drivers of a gas OPEC might not be motivated to act. But any effort to prop up prices is likely to trigger a demand response—just at a time when record-low prices are failing to create demand. And any concerted effort among gas producers will likely lead the European Union to respond with antitrust measures. So the prospects for a gas OPEC have never been better, but its odds of its success remain incredibly low.

Nikos Tsafos is a senior fellow with the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C.

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Nikos Tsafos