World reserves of natural gas and oil, converted into energy terms, are about equal. Natural gas supplies approximately one-fifth of the world's energy consumption; oil two-fifths; the remainder comes from various other sources, such as nuclear power, coal, and hydroelectric power. The imbalance between natural gas and oil results from the incongruent geography of reserves and consumption. Economic factors include the economics of transportation, which is related to geography. Market factors, such as amount of consumption and substitutability, must also be considered. These factors are all highly dynamic. Between 1975 and 1992 natural-gas consumption worldwide rose 67 percent, in contrast with 17 percent for oil. Most significant of the changes was the growth in industrial consumption of natural gas, which is geographically concentrated in the developed part of the world. All of these phenomena interact through pricing mechanisms that include market arrangements such as contracts and governmental policies and activities.
This article focuses on the international trade in natural gas, although observations can also apply to limited national and subnational contexts. In 1992 international trade accounted for only 16 percent of the world consumption of natural gas. Three-quarters of the gas moved by pipeline and the remainder, as liquefied natural gas. This proportion can also change. For example, pipeline exports from the former Soviet Union dropped substantially in recent years, but that decline was offset by increased exports by pipeline from Canada to the United States. Long-term international trade in liquefied natural gas can be expected to increase and that by pipeline, to decrease.
Costs of natural-gas production differ with geological conditions, depth and size of production zones, yields per well, type of terrain, and transportation. Natural gas has no significant refining costs, except to handle the noxious substances released into the air. There is also no costing problem for associated gas from oil production. Much of this associated gas is burned off or reinjected into wells to raise pressure. The problem of costing natural gas is becoming more complicated as deeper drilling is now required, especially in long-established producing regions such as North America.
Because of pipeline transportation, costs for entry equivalents and distance are significantly higher for natural gas than for oil. To start with, pressure in pipeline technology is greater for natural gas than for oil: the same diameter pipeline can carry one-fifth of the energy of the former than of the latter a day, even though the former flows much faster. These higher transportation costs tend to restrict natural gas to regions close to production. For example, in Great Britain the cost of transporting natural gas to consumers is higher than the cost of the gas. To minimize costs the British government has a privatized company with a monopoly on supplying households, which permits maximum utilization of transportation facilities and reduces overall costs.
Because of flammability and dangers of explosion, much governmental regulatory intervention in pipeline transportation has been imposed and tends to increase with time and experience. Regulations lead to control of quantities of natural gas that can be transported, which affects markets and price interference and control. Imposition of such controls occurs even where governments traditionally intervene little with markets and the economy.
Risk of flammability and explosion is even greater for ship transportation than for pipelines. The natural gas is liquefied and cooled in an expensive process. The large facilities occupy much land and must provide ship berthing that minimizes the loss of coldness. Tankers carrying the liquefied gas must be large, at least 250,000 tons deadweight, to be economical. At destination terminals the liquefied gas is returned to its former state and then distributed to consumers. …