Federal Reserve Chairman Alan Greenspan last Tuesday said he believes the wave of liquefied natural gas (LNG) imports destined for the United States will dampen gas prices, “possibly significantly,” in the years ahead.

In the past couple of years, when domestic gas prices hovered around $6/MMBtu, import prices of LNG in Europe have ranged from $2 to $4/MMBtu, and those in Japan and Korea have generally been between $3 and $5/MMBtu, he said. “In the short run, exporters to the United States are likely to receive our domestic price, currently above $7/MMBtu. But unless world gas markets tighten aggressively, competitive pressures will arbitrage the U.S. natural gas price down, possibly significantly, through increased imports.”

Speaking via satellite to a National Petrochemical and Refiners Association meeting in San Antonio, TX, Greenspan said he believed the difficulties associated with inadequate domestic gas supplies would eventually be resolved as significant global trade in natural gas develops.

“Indeed, the process is already under way. As a result of substantial cost reductions for liquefaction and transportation of LNG, significant global trade in natural gas is developing. This activity has accelerated sharply over the past few years as profitable arbitrage has emerged in natural gas prices across international markets,” he noted.

He cited the number of liquefied natural gas (LNG) facilities that are being built in Qatar, Egypt and elsewhere to export gas to world markets. In order to receive LNG imports, the United States has reopened mothballed LNG terminals, expanded existing facilities and proposed a number of new projects for construction. At last count, the Federal Energy Regulatory Commission said the number of approved and proposed new or expanded LNG import terminals in the U.S. stood at 32 with a capacity to import 15 Tcf annually, Greenspan noted.

Natural gas and crude oil markets have been subject to a “degree of strain over the past year” that has not been experienced for a generation, he said. “Increased demand and lagging additions to productive capacity have combined to absorb a significant amount of the slack in energy markets that was essential in containing energy prices between 1985 and 2000.”

Because international trade in natural gas has been insufficient to equalize prices across markets, U.S. gas prices since late 2002 have been noticeably higher on average than prices abroad, thereby putting significant segments of the North American gas-using industry in a weakened competitive position, according to Greenspan. Ammonia and fertilizer plants in the U.S. have been particularly hard hit, he said.

Greenspan estimated that industrial natural gas use in the United States has declined 12% since 1998.

“The longer-term outlook for oil and gas is, if anything, more conjectural. Much will depend on the response of demand to price over the longer run. Prices of spot crude oil and natural gas have risen sharply over the past year in the face of constrained supply and the firming of overall demand. But if history is any guide, should higher prices persist, energy use will, over time, continue to decline.”

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