Thank goodness for American ingenuity. Fracking technology has provided the United States with energy independence in both oil and natural gas production. The U.S. and the global economy are no longer hostages to the politics of the Middle East. Energy markets are overreacting to events in Iran.
Like oil, liquefied natural gas markets are panicking over the conflict against Iran by the U.S. and Israel. LNG prices are up by some 75% amid fears that the conflict will disrupt production in Qatar. For now, Qatar has halted its LNG production. Qatar supplies about 20% of the global LNG market.
But the global LNG market is not fragile. It is deep, diversified, and flexible. To understand why LNG markets are overreacting, consider that Qatar has every incentive to maintain its reputation as a reliable supplier. LNG infrastructure is capital-intensive and dependent on long-term contracts. A voluntary or prolonged disruption would damage Qatar’s credibility and invite competitors such as the U.S. and Australia to capture market share.
LNG is no longer a single-supplier market. The U.S., because of fracking technology and enormous shale gas reserves, has emerged as the world’s largest LNG exporter, with cargoes flowing from the Gulf Coast to Europe, Latin America, and Asia. American LNG is flexible. Cargoes can be rerouted in response to price signals. If Middle Eastern volumes are temporarily constrained, U.S. exporters can rapidly redirect shipments to the highest-value markets. That flexibility acts as a natural stabilizer.
As noted, Australia is also a major supplier of LNG. In addition, new production is coming online in Africa, and additional U.S. liquefaction capacity is under construction. The global supply base today is geographically diversified in a manner that materially reduces systemic risk. Concerns about shipping LNG cargoes through the Strait of Hormuz are overstated. LNG cargoes can be rerouted around Africa’s Cape of Good Hope. LNG prices would be marginally higher, but not sufficiently high to harm the global economy. The U.S. Navy will also ensure any closure of the strait is limited in duration.
The LNG supply-and-demand dynamic also argues against panic. Europe’s gas storage levels remain robust following multiple winters of diversification away from Russian pipeline gas. Since Russia invaded Ukraine, European nations have rapidly built LNG terminals, signed long-term contracts, and diversified suppliers. The continent is no longer dependent on a single dominant source. Most importantly, winter is ending on the continent.
Asian demand growth, meanwhile, is steady but not explosive. China’s economic growth has moderated, and Japan and South Korea continue to expand nuclear and renewable generation, easing marginal LNG demand pressure. Moreover, China can easily shift from LNG power generation to coal power. China continues to build out its coal-fired capacity.
Financial markets tend to overreact. Traders and investors jump from one side of the market, long or short, to the other. They price worst-case scenarios immediately. But extreme outcomes are rare. Countries in the Middle East rely on oil and LNG revenues to fund domestic budgets and maintain political stability. Self-inflicted export shutdowns are economically irrational and historically short-lived. Iran desperately needs to export its oil to obtain hard currency. Its economy would collapse if the strait stayed shut. The regime will not commit economic suicide.
Volatility is inherent in commodity markets, including the LNG market. Insurance premiums can rise. Freight rates can spike. Spot cargoes may temporarily command higher bids. But there is a wide gulf between short-term volatility and sustained structural scarcity. In fact, higher prices help balance the market. Elevated LNG prices reduce marginal demand and encourage fuel switching from LNG to coal where possible. Markets adjust rapidly.
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The global LNG system has matured. It is broader, more flexible, and more resilient than the media suggests. While caution is always warranted during a military operation, markets should resist the temptation to extrapolate worst-case scenarios into inevitabilities.
In energy, as in geopolitics, restraint and thoughtfulness often prove wiser than irrational panic.
James Rogan is a former U.S. foreign service officer who later worked in law and finance for 30 years. Today, he writes a daily note on markets, economics, politics, and social issues.
