Gas price volatility raises questions on its suitability as a bridging fuel

Escalating tensions in the Middle East are once again set to increase global liquefied natural gas (LNG) prices, which raises questions on whether it is a good bridge fuel to the transition to clean energy, especially for importers like India, according to a new briefing note by the Institute for Energy Economics and Financial Analysis (IEEFA).

The note highlights that while various factors govern commodity prices, geopolitics has been the dominant driver of volatility in recent years. The note compares the volatility (Figure 1) in various commodity prices as well as stock market indices and finds that the sharpest moves have been for LNG prices.

“LNG price fluctuations have been extreme in months of minimum variability for other commodities, such as in October 2023 when LNG price jumped by 21%, only to drop by 29% in December 2023,” said the note’s author, Purva Jain, Energy Specialist, Gas & International Advocacy, IEEFA.

On 18 October 2024, spot gold prices touched a record high of US$2,696.78 per ounce (or Rs80,970.27 per 10 grams). Similarly, oil prices have shown signs of stress as geopolitical tensions increase, reaching US$90 per barrel (bbl) on 4 April 2024, before easing over the northern summer months due to the subsiding of geopolitical tensions. The price went as low as US$69/bbl on 10 September 2024 before spiking to US$81/bbl on 8 October amid rising Middle East tensions.

LNG futures for 2025 are already at US$13 (Rs1,093) per million British thermal units (MMBtu), which raises major affordability concerns. If realised, US$13/MMBtu would be double the regulated domestic gas price and well above India’s general affordable threshold of US$10/MMBtu.

“India should re-evaluate its strategy of increasing reliance on LNG as a fuel amid persistent market volatility. Not only are LNG trade flows disrupted by geopolitical disturbances, but prices appear sensitive to many other factors, as the large swings in monthly prices over the past year demonstrate,” said Jain.
“A wiser strategy for India would be to invest in diversifying fuel sources and increasing the share of renewable energy in the energy mix to insulate the economy from entrenched LNG price volatility,” she adds.

The note also highlights that India’s focus on new technologies and inclination to gain global leadership in producing and exporting greener fuels could help it move away from LNG dependence. Green hydrogen and green ammonia, along with the increasing awareness of natural fertilisers, could lower the dependence on gas in the fertiliser sector, which has few alternatives.
Source: Institute for Energy Economics and Financial Analysis (IEEFA)