Global demand for natural gas is rising faster than anticipated, according to a recent report from the International Energy Agency (IEA). The agency predicts this demand will remain strong into next year but cautions that supply growth may not keep up, creating a potential shortage.
Last year, the IEA had forecasted that oil and gas demand would peak before 2030. At that time, the agency suggested that no further investment in hydrocarbon production was necessary. However, the current outlook has shifted dramatically. The IEA now says there hasn’t been enough investment in new natural gas production, and as a result, a shortage seems imminent.
A few years ago, the market was flooded with liquefied natural gas (LNG). Many countries rushed to build LNG plants, leading to a rapid rise in supply. Demand couldn’t keep pace at the time. But recently, more nations have embraced LNG as a cleaner, affordable alternative to coal. The dynamics of the market shifted dramatically in 2022, when Europe, cut off from Russian pipeline gas, outbid Asian buyers for LNG, driving up prices.
Today, Europe is a major importer of LNG. It’s preparing for the complete loss of Russian pipeline gas as Ukraine plans to end a transit agreement with Gazprom. This means Europe will need even more LNG. However, the supply of new LNG isn’t growing fast enough to meet this demand, likely causing another price spike. Once again, poorer countries, attempting to reduce their reliance on coal, are being priced out of the market.
One might wonder why new LNG supply is so slow to materialize, especially with such strong demand forecasts. The IEA is not alone in predicting growing gas demand, driven by factors like the shift from coal, population growth, and the increasing use of artificial intelligence (AI).
Several factors are slowing supply growth. One is the time it takes to build LNG production plants, which are facing rising construction costs and increased regulatory burdens, particularly in the United States—the world’s largest LNG producer and exporter. Recently, a U.S. court revoked the permit for an LNG project due to climate change concerns, adding to the industry’s challenges.
Additionally, the Biden administration has implemented a pause on new LNG capacity based on a study that suggested natural gas could be more harmful to the environment than coal. Although the study has faced criticism, it has been enough to tighten future gas supply markets.
In Europe, despite the continent’s increasing need for LNG, new regulations are also creating obstacles. The European Union recently passed the Methane Regulation, which mandates that only low-emission LNG can enter the EU market. This would raise the costs for LNG producers and increase the price of the fuel. However, this rule could free up non-certified LNG for poorer nations, helping to alleviate demand pressures.
“The growth we’re seeing in global gas demand this year and next reflects the gradual recovery from a global energy crisis that hit markets hard,” said Keisuke Sadamori, the IEA’s energy markets director, in a news release. “But the balance between demand and supply trends is fragile, with clear risks of future volatility.”
This statement is notable given the IEA’s prior belief that alternative energy sources like wind and solar would reduce hydrocarbon demand. That belief led the agency to repeatedly predict that oil demand would peak by 2030, with gas demand following a couple of years later. However, the current situation shows that gas demand remains closely tied to economic growth, with far-reaching implications.
Europe, in particular, is struggling to achieve any significant economic growth, and affordable access to natural gas is crucial for its success. Meanwhile, international organizations concerned about climate change are encouraging Asian nations to shift from coal to gas. But for that to happen, gas prices need to remain low—something that doesn’t seem likely in the near future. This presents yet another hurdle in the global transition to cleaner energy.
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