While politically significant, these maneuvers were mere skirmishes compared to the current crisis. There are interesting parallels between today and the 1973 oil crisis, when Saudi Arabia led a group of Middle Eastern oil producers in an embargo of exports to America and Europe, in an effort to isolate Israel.
At this point, we should emphasize that although oil and gas are both principally consumed as primary energy sources, their markets have important differences.
Gas exports require hugely capital-intensive infrastructure, such as pipelines and ultra-secure gas terminals for the ships carrying liquefied gas (LNG) at minus 160°C. There is also the need for regasification facilities and secondary pipelines. By contrast, the export of oil merely requires tankers and refineries close to tanker terminals. As a result, the gas market is dominated by long-term contracts, whereas the oil market is primarily determined by the interaction of spot and futures markets. Because the oil market is deeper, more liquid and has more sophisticated hedging instruments, its prices have largely determined gas prices-at least until recently.
There is a second structural difference: any discretionary reduction in OPEC oil exports immediately affects all importers since OPEC prices are those of the spot market. Besides, a supertanker bound for Rotterdam via the Cape of Good Hope can divert at any point to Singapore if its cargo is claimed at a higher price by Asian refiners. This is impossible for pipelined gas, where the destination is fixed in advance. From a geopolitical perspective, gas can therefore be considered as both a market and a localized weapon. For now, the battlefield is Europe.
The European gas market is experiencing its "1973" moment.
As in 1973, the world economy is in a phase of strong recovery - close to overheating - judging by the rapid rise in inflation. As previously, recovery is driving a strong demand for energy products, this time with an emphasis on natural gas, the preferred option for many countries seeking to reduce their dependence on coal. Additionally, in parallel to the years following 1973, oil producers are drilling at full capacity.
For producers with significant market power, these are ideal circumstances for exercising that power by reducing production. The resulting price surge - as competitors are unable to produce more oil - will more than compensate for a reduction in deliveries.
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