Matthew Smith — Natural Gas: The Next Bottleneck - [Invest Like the Best, EP.483]

Analyst Matthew Smith forecasts a historic natural gas deficit starting in 2028. The combined demand from new AI data centers and committed LNG exports will exceed the country's production and delivery capacity, leading to unbounded price risk and potential shortages.

The foundation for the impending natural gas deficit was laid years ago by long-term contracts to export LNG. The recent surge in AI data center demand is merely an accelerant to a pre-existing structural supply-demand imbalance, a fact overlooked by many.

The US isn't running out of natural gas in the ground. The critical constraint is the lack of processing capacity, gathering pipelines, and interstate transmission lines needed to get the resource from the wellhead to consumers and export terminals.

The seemingly simple solution of halting LNG exports is highly complex. Billions in project financing, binding contracts with allies, and the US's role as a major global supplier make it politically and legally difficult to simply turn off the tap.

Since natural gas sets the marginal price for electricity, a spike in gas prices will drive up electricity prices significantly. Solar companies, with zero fuel cost, will see windfall profits as they sell power at these higher market rates without any increase in their operational expenses.

AI giants are focused on building power generation but are budgeting based on historically cheap natural gas. They are not hedging fuel costs or securing physical supply, exposing them to a crisis where energy could surge from 10% to over 30% of their compute costs.

To meet massive future energy needs, the only scalable solution is building large, proven nuclear reactors like Westinghouse's AP1000. Small modular reactors (SMRs) are largely unproven "science experiments" and cannot scale quickly enough to address the impending deficit.

Despite the looming deficit, companies are not financially contracting for natural gas in 2028 and beyond. This lack of hedging and physical supply agreements will lead to a chaotic scramble for gas, creating massive counterparty risk for anyone who needs it.

Companies like Caterpillar are doubling capacity for gas turbines just as high natural gas prices threaten to make these assets uneconomical to operate. This mirrors past boom-and-bust cycles where capacity was added at the peak, leading to a glut.

Fifteen years of abundant, cheap natural gas have created a dangerous complacency. The forward price curve is flat, and investment in new supply is lagging because the market is focused on near-term oversupply, ignoring the structural deficit looming in 2028.