Consumption of natural gas is growing rapidly and now accounts for nearly one-quarter of the world’s energy supply. While natural gas is relatively clean compared to crude oil and coal, its ability to assume a greater role in meeting the world’s growing energy demands will depend largely on price.

In a new report, Anthony J. Melling analyzes the two competing price mechanisms for natural gas: the dominant practice of linking gas prices to oil prices and a second model based on competitive market prices. Although Europe—which uses both mechanisms—is now the battleground in the natural gas pricing war, its effects will likely be felt worldwide. 

Key Findings:

• Growth in consumption. Driven largely by industrialization in Asia, the Middle East, and Latin America, the use of natural gas has increased rapidly over the last three decades—growing faster than oil.   
   
• Connected gas markets. Once-isolated regional gas markets are now interconnected through the rising trade in natural gas. If the commodity pricing mechanism wins out in Europe, oil-indexation would likely be unsustainable worldwide.   
   
• High-stakes impact. Any modifications to existing gas contracts will directly affect exporters that depend on gas revenue—including Russia, Algeria, Indonesia, and Malaysia—enhance or exacerbate energy security, dictate the sustainability of future supply, and impact the potential to achieve environmental targets around the world.

“The price of gas in Europe—and the mechanism used to determine it—will not only impact European companies and customers, but also have profound implications for energy markets around the world,” writes Carnegie’s Adnan Vatansever in the foreword. “Energy security, geopolitics, and the shift to greener forms of fuel that will be critical for combating climate change will also depend on how gas pricing evolves.”