LNG is often viewed as a global commodity with elastic supply & demand curves. However, the reality of LNG is much different.
When disruptions occurred to the global LNG supply chain, the system responds by re-allocating existing supplies or reducing demand. This is why LNG markets do not provide good shock absorption capabilities. In addition, they can make many of these shocks worse.
This is also where I think most of the market based models fail. Most models treat price as an adjusting variable. However, for LNG, the primary constraint on the system is throughput, not price. When such constraints cause adjustments via reductions in demand rather than expansions in supply. The impacts create pressures on inflation rates, create constraints for policymakers & result in tighter liquidity across the entire system.
The asymmetry is the part most analysts miss. Conventional oil’s complexity sits at the importer’s end, where multiple refineries provide redundancy. LNG’s complexity sits at the exporter’s end, in a handful of liquefaction trains that take half a decade to build. When Ras Laffan goes down, there is no parallel facility to absorb the volume. The fuel that looked flexible from the buyer’s side turns out to be brittle from the seller’s side.
LNG's biggest problem is storage and cost. I doubt it will be a long term player against nuclear or potentially high-efficiency low-emission (HELE) coal generation plants.
Excellent article. I just subscribed.
LNG is often viewed as a global commodity with elastic supply & demand curves. However, the reality of LNG is much different.
When disruptions occurred to the global LNG supply chain, the system responds by re-allocating existing supplies or reducing demand. This is why LNG markets do not provide good shock absorption capabilities. In addition, they can make many of these shocks worse.
This is also where I think most of the market based models fail. Most models treat price as an adjusting variable. However, for LNG, the primary constraint on the system is throughput, not price. When such constraints cause adjustments via reductions in demand rather than expansions in supply. The impacts create pressures on inflation rates, create constraints for policymakers & result in tighter liquidity across the entire system.
Brilliant article. Question: is Canada the best placed country to serve future Asian LNG demand?
Great stuff, Chris.
The asymmetry is the part most analysts miss. Conventional oil’s complexity sits at the importer’s end, where multiple refineries provide redundancy. LNG’s complexity sits at the exporter’s end, in a handful of liquefaction trains that take half a decade to build. When Ras Laffan goes down, there is no parallel facility to absorb the volume. The fuel that looked flexible from the buyer’s side turns out to be brittle from the seller’s side.
LNG's biggest problem is storage and cost. I doubt it will be a long term player against nuclear or potentially high-efficiency low-emission (HELE) coal generation plants.
LNG’s biggest problem is electrification and industrial heat pumps…