Importers of U.S. gas could see their energy bills head north as an unprecedentedly strong hurricane season threatens the U.S. Gulf Coast.
The U.S. Southeastern coastline is no stranger to hurricane-inflicted destruction. What has been making news is the apparent impact on the local energy market that could have global implications.
According to the U.S. National Weather Service, an average of ten tropical storms develop each year over the Atlantic Ocean, Caribbean Sea, and Gulf of Mexico. Many of these remain over the ocean. Six of these storms become hurricanes each year. In an average 3-year period, roughly five hurricanes strike the United States coastline, killing approximately 50 to 100 people anywhere from Texas to Maine. Of these, two are typically major hurricanes (winds greater than 110 mph).
The U.S. Energy Information Administration (US EIA) has put out a cautionary warning (22 May 24), indicating a particularly intense Atlantic hurricane season this year; they expect 20–25 named storms with a possibility of 30 or more. This is a cause of worry for the U.S. oil and natural gas industry due to weather-related production outages. Last year was a good year; out of 20 named storms, none made landfall on the U.S. coastline. The American hurricane season generally lasts between June to November.
For obvious reasons, the energy industry is concentrated along the coastal belt, most vulnerable to hurricanes’ fury. Apart from the offshore oil and natural gas floating production units dotting the Gulf Coast (which will need to be evacuated in some cases), refineries are also concentrated in the coastal belt; those in Texas and Louisiana account for almost half of total U.S. refining capacity. Here, the risk of flooding, power outages, and flying debris causes precautionary evacuation and shutdown.
Background
The United States has undergone a major transformation in the global energy landscape, shifting from a great importer to a crucial exporter. This shift mainly occurred due to the discovery of vast shale gas reserves in the late 2000s. The United States’ rapid progress in extraction and processing methods due to technological advancements has made it one of the biggest exporters in the global gas markets. This led to large sums of money being used to construct liquefaction facilities that transform natural gas into LNG that is fit for export.
Today, the U.S. is a leading global liquefied natural gas (LNG) supply hub. Because of the variety of its clients, the dangers of depending on a single supplier have been reduced, improving energy security for the United States and its trading partners. Furthermore, many nations find the United States LNG to be a good alternative due to the competitive pricing used, which is generated by many resources and effective production. The U.S.’s geopolitical power has increased from this strategic position since it can use its energy resources to promote closer diplomatic and economic cooperation.
Globally, the energy market is looking nervously at the met predictions of the U.S. Gulf coast in the coming weeks. The reasons are not far to seek; as per USEIA, Turkey alone buys 66 per cent of US LNG exports, followed by 26 per cent to Asia, with Latin America and even the Middle East settling for 8 per cent. The U.S. supply came at a critical time for Europe when Russian gas was sanctioned, with the Netherlands, France and the U.K. turning out to be its biggest customers. Germany constructed three new floating storage and regasification units (FSRUs) on an emergency basis and switched to U.S. LNG; four more FSRUs are projected to come online between 2024 and 2027.
In Asia, Japan and South Korea were the fourth- and fifth-highest U.S. LNG exporters by volumes in 2023. Japan, China, and India increased LNG imports from the United States in 2023.
In Latin America, U.S. LNG exports to Brazil declined last year as Brazil primarily used hydropower for electricity generation.
Analysis
The increase in United States gas exports has broader implications for the global energy transition. With the world moving away from fossil fuels, many countries consider its alternative, natural gas, cleaner. Hence, there has been a sudden increase in the demand for natural gas from the United States.
Any disruptions to the United States LNG would create a supply shortage, causing prices to increase drastically globally. Price volatility would rise as buyers fight for the few available volumes, impacting businesses and consumers globally. Because of this price increase, nations that are heavily dependent on natural gas may experience economic instability and inflation. Reduced LNG supplies in the United States would worsen the shortages in parts of Europe and Asia.
The U.S. presents a lifeline for its energy demands for Europe, no longer quenched by the cheap and bountiful Russian supplies. When the Ukrainian war broke out, the U.S. LNG became a principal geopolitical weapon to punish Putin for his misadventure. The United States and the European Union formed the U.S.-EU Task Force on Energy Security to help reduce E.U. reliance on Russian energy, diversify E.U. gas supplies, and accelerate the transition from imported fossil fuels in Europe. LNG exports to Europe far exceeded targets for 2022 and 2023, reaching 56 bcm and 63 bcm, respectively. About 50 per cent of Europe’s LNG imports today come from the United States. One can only imagine what will happen to European economies if the flow of LNG from the U.S. is impeded for any length of time! Similarly, Asia, too, would be equally concerned about the potential supply disruption.
More importantly, the scramble for LNG will exacerbate geopolitical tensions. Countries would find themselves in a competitive bid for limited LNG cargo, potentially leading to bidding wars, diplomatic disputes, and trade conflicts. Existing geopolitical rivalries could be intensified, further worsening relations.
Assessment
- While U.S. LNG production has become a crucial alternative for many hard-pressed countries due to its competitive prices, the dependence also makes them a captive of a single source supply.
- Increasingly, LNG is being viewed as the transitional fuel before all fossil fuels can be finally abandoned. However, the vulnerability of their supply to climatic conditions, especially considering the unique and expensive technical arrangements necessary for the safe transportation of LNG across oceans, raises serious questions on reliance on LNG as a transitional fuel. But then, what other choices do we have in the short and middle term?
- The renaissance in U.S. oil and gas production over the past decade has been nothing short of remarkable. Technological advances unlocked new resources and significantly changed global energy markets. However, it, too, is as susceptible to nature’s extremities as any underdeveloped nation. Since climate change is being attributed to the worsening of a natural phenomenon like the Hurricane season, it is yet another clear warning to humankind to mend their ways.
