By Michael J. Economides
Natural gas production is at a decade high, fueled by innovative technologies that pushed the President of the United States to label the country the “Saudi Arabia of Natural Gas.” Billions upon billions of dollars are ready to be funneled into new facilities along the Gulf Coast and elsewhere. And Massachusetts Representative Ed Markey has introduced a bill to place a moratorium on natural gas exports.
One of these things is not like the other.
In fact, that’s just the latest in an ongoing story that would make any entry-level economics major’s head spin.
The Energy Information Administration estimates that in just three years natural gas supply could exceed demand. Such a scenario would enable the United States to become a net exporter of liquid natural gas (LNG). That, in turn, has led to more than a dozen applications to the Department of Energy to create facilities to export natural gas.
As a result of the increased demand to export LNG, the Department of Energy commissioned a two-part study to analyze the effects of exports. The second part of that report, an economic analysis of three different export scenarios conducted by NERA Economic Consulting, was released in late 2012. The NERA report’s conclusion was simple: the higher the volume of exports, the greater the net economic benefit to the United States. There was no mincing of words:
Across all these scenarios, the U.S. was projected to gain net economic benefits from allowing LNG exports. Moreover, for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased. In particular, scenarios with unlimited exports always had higher net economic benefits than corresponding cases with limited exports.
NERA is not alone in its findings. The Brookings Institute drew similar conclusions, noting that “the job potential” is stronger further upstream than in solely the LNG market. And a study by Deloitte also found net benefits, noting that the benefits to American allies in Europe from gains in energy security would come from displacing Russian gas on the market.
Enter America’s Energy Advantage.
The Energy Advantage?
In late 2012, a new coalition of manufacturing companies spearheaded by Dow Chemical was launched, ironically named America’s Energy Advantage. The group advocates for policies that would artificially alter natural gas prices. Under the guise of protecting domestic manufacturing, the coalition’s main goal is to ensure their own financial interests with total disregard for free trade, jobs, the U.S. economy or America’s energy security. It’s an effort that the Wall Street Journal has called a “self-interested campaign to bar LNG sales abroad.”
Dow Chemical CEO Andrew Liveris has led the charge in this effort. In February, Mr. Liveris penned an opinion piece in the Wall Street Journal advocating that the United States put an arbitrary limit on the amount of natural gas our country exports to its allies. In Mr. Liveris’ own words, the U.S. should do this “by adopting a measured approach to natural-gas policy.”
Such talk of “measured approaches” is, in reality, simply code for limiting exports. Senator Ron Wyden of Oregon, the new chairman of the Senate Energy & Natural Resources Committee, was the first to speak of limiting exports. In a hearing in February focused on the export of LNG, Senator Wyden discussed the “sweet spot where U.S. gas producers make enough money to continue producing and U.S. manufacturers have an affordable, stable supply of natural gas.”
It was a comment echoed in testimony by Mr. Liveris as well, who, when asked to define more closely what the “sweet spot” would be, was unable to provide clarification. In his testimony, Liveris said, “How much of this natural bounty should we export? I’m here because the answer is neither simple nor obvious.”
In reality, the answer was both simple and obvious. As any entry-level economics major would tell you, free markets should determine the optimal level of natural gas exports. Not only would enabling exports allow high levels of natural gas production to remain sustainable, it would boost job growth and reduce our trade deficit – goals shared not just by free-traders, but also, albeit surprisingly, by our current President.
The evidence overwhelmingly shows the shale gas exploration boon has been a key job creator over the last four years. Allowing LNG exports will further reduce our trade deficit with China, increase gross domestic product, and increase the overall economic welfare of Americans. At a time when the economy is desperately trying to recover and we are faced with an increasingly difficult geopolitical situation, limiting LNG exports is not a credible option.
Checks & Balances
Despite Dow and America’s Energy Advantage’s misgivings about “unfettered” exports, the reality is that there are currently two different sets of checks in place that will naturally ensure that exports won’t rise to levels that Dow ominously warns of. The first is the sound process in place through the Department of Energy to carefully analyze all export applications to non-FTA countries. Exporting also requires an investment of tens of billions to create a facility that would operate under a 20-year contract under the Federal Energy Regulatory Commission (FERC).
Anyone who has rationally analyzed this debate would tell you that while there is indeed a current rush for export applications from the Department of Energy, it’s very unlikely that those applications – even if approved – would all come to fruition. And even those that would are unlikely to come online until the latter half of this decade, at the earliest. As The Economist recently noted, of the two dozen applications for an export terminal, only one has actually began investment and construction to build its facility, Sabine Pass in Louisiana. And even that facility will not start exporting until the end of 2015.
America is blessed with an abundant energy source and its exportation will put America in the best position to create more jobs here at home while improving our energy security. However, allowing exports would undermine the number one input cost for Dow Chemical: natural gas. This helps explain not just the effort by Dow and its allies in America’s Energy Advantage to slow exports, it also helps explain the moratorium bill introduced by Representative Markey.
All of the economic studies analyzing this issue have found that allowing exports would allow for a very moderate increase in the price of natural gas here in the United States. That would help sustain our current heady levels of production, as international demand for LNG continues to grow each day. But even those increases, it should be noted, would be marginal. As both CNBC and The Economist wisely noted – even with exports, the U.S. will still enjoy the industrial world’s lowest natural gas prices.
The question, remains, however: how low is low enough for Dow Chemical and America’s Energy Advantage? To flip the question: is the United States willing to accept new, artificial limits on exports to maintain Dow’s preferred low prices at the expense of the larger economy?
Publisher’s Note: This week (June 4, 2013) the Energy Department approved ConocoPhilips application to export natural gas from their Gulf facility. There are 20 more requests pending.
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