Despite the entry of the United States as a key exporter of liquified natural gas (LNG) and the desire for alternative sources of the fuel in Europe following Russia’s invasion of Ukraine, there exists no worldwide price of natural gas. Recent extraordinary spikes in European gas prices, even with increased availability of substantial new US-sourced LNG, demonstrate the continued disconnect between regional natural gas markets. Such price differences invite the question of why such new global LNG trade has not balanced supply and demand to produce worldwide competitive spot prices, separated only by the cost of shipping, as with the worldwide oil trade.
Director Laura T.W. Olive published an article titled “Still a Petroleum Tanker of a Different Color: Enduring Obstacles to an LNG-Based Global Natural Gas Spot Market” in the Economics of Energy & Environmental Policy Journal. Dr. Olive explains that transactions cost economics and the concept of asset specificity provide useful insight as to why a competitive global natural gas market remains unlikely to develop. Capital-intensive businesses that rely upon assets with large, upfront, nondeployable, sunk capital investments dedicated to a particular use (such as LNG facilities) present unique risks because they only realize their full value for that use and have little value outside of it.
Dr. Olive notes that unlike any other bulk commodity, the international trade in gas is dominated not by the cost of production but by sunk costs involved in LNG transformation for shipping. Such sunk commodity transformation costs demand a kind of transacting common to no other bulk commodity in worldwide trade. Additionally, Dr. Olive argues that pipeline regulation in major gas markets outside of North America does not provide unregulated access to LNG. Regional natural gas markets each contend with their own array of political, social, economic, climate, and geographic characteristics. Competitive entry from independent producers, transport links, or US LNG of the type that drive down competitive natural gas prices in the US is effectively impossible in Europe.
Dr. Olive argues that the market for LNG appears to be limited to a commodity trade between regions of resource abundance and scarcity, relative to local demand, where investors will seek relationship contracts between regions long enough to recover sunk transformation costs. Dr. Olive concludes that to mimic the global spot market trade in crude oil, natural gas would need a reduced maritime cost and competitive access to consumers.
Olive, Laura T.W., “Still a Petroleum Tanker of a Different Color: Enduring Obstacles to an LNG-Based Global Natural Gas Spot Market,” Economics of Energy & Environmental Policy, 15/1, February 2026
