Ed Dolan's Econ Blog

Arguments against Exporting Natural Gas Don’t Add Up

The energy policy topic of the week is whether to export more of America’s newly abundant natural gas. Like any good card-carrying economist, my instincts favor free trade. Other things being equal, that makes me pro-export. Still, shouldn’t we listen to what the other side has to say? Maybe gas is different. Maybe exporting it is not such a good idea after all. So just how strong is the case against permitting more natural gas exports?

Would low gas prices strengthen the U.S. economy?

Large users of natural gas are among the most vocal opponents of increased exports. Not surprisingly, they argue that today’s gas prices, still only a little above their historic lows, are a boon for the U.S. economy. Speaking recently to Politico, Andrew Liveris, CEO of Dow Chemical, put it this way:

[w]hen natural gas is not solely used as an export, and is used as a building block for manufactured goods, it creates eight times more value across the entire economy. In this way, American’s natural gas bounty is more than a simple commodity. It’s a once-in-a-generation opportunity to export advanced products and not just BTUs.

Unfortunately, pointing out that we could use any exported primary good to make advanced products at home instead does not, by itself, tell us much about whether it should be exported. Existing trade patterns suggest that the United States sometimes has a comparative advantage in exporting primary goods and sometimes more highly processed ones. For example, we export more wheat than pasta, but we import primary aluminum and export aircraft. There is no general rule that says exporting advanced products is the path to prosperity.

We should believe what markets tell us. If they tell us we can’t profitably export certain advanced chemical products without imposing barriers to overseas sales of natural gas, that probably means we should be exporting the gas. Forcing exports uphill against market fundamentals only makes us poorer in the long run.

Would gas exports lead to skyrocketing prices?

The fear of higher prices is another favorite argument of those who oppose gas exports. The Financial Times quotes Peter Huntsman, chief executive of Huntsman chemicals, as saying, “If all the proposed gas export projects were built with reckless abandonment . . . then the U.S. price of gas would skyrocket.” We could “wake up tomorrow and find we have a flat gas price internationally,” he warns.

Since natural gas currently sells for $18 per thousand cubic feet (Mcf) in Japan and $12 per Mcf in Europe, compared with prices that have recently been as low as $2 per Mcf in the United States, the prospect of international parity for gas prices does look frightening. For three reasons, however, the actual effects on U.S. prices are likely to be far from full equalization.

First, no one expects U.S. prices to stay of $2 per Mcf over the long term. Prices have already rebounded to over $4 per Mcf. Michael Levi, who has studied gas exports for the Hamilton Project, uses $5 per Mcf as a consensus estimate for U.S. domestic prices in the medium-term, not taking the impact of exports into account.

Second, it is expensive to ship gas from the United States to Asia or Europe. There are no transatlantic or transpacific pipelines; the gas has to move in liquid form, as LNG. Levi estimates costs of liquefaction, transportation, and regasification to be about $5 per Mcf. That means foreign prices are likely to stay at least that much higher than U.S. prices for the foreseeable future.

Third, gas prices in many parts of the world are currently high because they are linked to the price of oil. That link has now been broken in the United States, where it also once held. It is likely that large-scale U.S. exports would undermine the oil-gas link in the rest of the world. If so, exports would cause foreign prices to fall at the same time they put upward pressure on U.S. prices.

When all is said and done, it seems unlikely that U.S. gas prices would rise by more than 10 to 20 percent even with unrestricted exports, while U.S. users of gas would retain at least a $5 per Mcf advantage over foreign competitors. That ought to be enough to establish a comparative advantage for U.S. producers of many gas-based chemical products, especially where transportation costs relative to value are lower for advanced products than for the gas itself.

Some observers also worry that even a small increase in gas prices would disproportionately impact low-income families. For example, Levi estimates that a $1 per Mcf increase in gas prices would cost $50 per year for a family with $20,000 of income, but proportionately less—about $90 per year—for a family with $100,000 of income. On the face of it, however, that strikes me as a weak argument in favor of restricting exports. Taking Levi’s estimates at face value, it is clear that the great bulk of the consumer benefits of low gas prices accrue to middle- and upper-income families. It would be far more cost-effective to offset any distributional impact of gas prices by means of an expansion of targeted programs, such as the existing Low Income Home Energy Assistance Program, than through the blunt instrument of export restrictions.

Would gas exports harm the environment?

The chemical industry has been the most vocal element of the coalition opposing natural gas exports, but environmentalists are an important junior partner. Recently a group of environmental organizations, headed by the Sierra Club, sent a letter to President Obama urging a time-out on natural gas export permits. The letter points to the potential environmental harms of increased U.S. natural gas production, including increased local air and water pollution from hydraulic fracturing, and to adverse impacts on climate change.

The concerns are real, but an export moratorium for natural gas is a clumsy and possibly counterproductive way to address them. In an earlier post on the economics of fracking, I agreed that local air and water pollution from fracking are problems that need attention. Necessary measures include regulations to ensure that all operators follow industry best practices, regulatory and legal mechanisms to ensure that operators compensate parties harmed by local pollution, and further research into methods for mitigating adverse environmental effects. However, we should undertake all of those measures whether we use the gas produced by fracking domestically or export it.

If environmental organizations can make tactical use of the export controversy to secure greater efforts to mitigate the adverse effects of fracking, more power to them. However, that is no reason to make the export ban an end in itself. In fact, strengthening U.S. regulations on fracking and then exporting the resulting gas could well be better for the global environment than would be a policy that encouraged fracking in countries where regulations are weaker.

Similarly, a ban on gas exports is a poor tool for addressing the problem of climate change. As I have often argued, we could best address climate change in the context of an energy policy that promoted conservation and low-carbon alternatives by imposing emission charges for greenhouse gasses on all energy users and producers.

The Sierra Club letter makes the claim that natural gas exports would accelerate climate change. It cites a life-cycle analysis by Paula Jaramillo and colleagues at Carnegie Mellon University that challenges the reputation of LNG as a low-carbon fuel when methane leakages and energy used in transportation are taken into account. Other studies, like that of Michael Levi, cited above, argue that exported LNG would displace enough coal to produce a modest net reduction in global greenhouse gas emissions.

Regardless of which studies are right, an appropriate charge for greenhouse gas emissions remains the optimal solution. If further research shows that climate impact of LNG exports is near the high end of the (wide) range given in the Jaramillo study, and that the climate impact of coal is near the lower end of the range, a carbon charge could render natural gas exports uneconomic. We would then know that gas exports are not a good idea after all. However, short-circuiting the process by banning exports a priori is not the right approach.

The bottom line

When it comes down to it, the strategy of the anti-export lobby is to frame the issue as narrowly as possible: Focus on wages and profits in gas-using industries without looking at effects on the broader economy; bring in distributional effects without asking whether there is a better way to help the poor; and mobilize grassroots opposition to fracking without questioning the perversity of an energy policy that encourages waste by holding domestic prices as low as possible. Indications are that these efforts will fall short. The White House seems on the verge of approving new export permits. Let’s hope that is just the first step in a comprehensive rethink of all of our energy and environmental policies.



13 Responses to “Arguments against Exporting Natural Gas Don’t Add Up”

obliviaMay 9th, 2013 at 3:04 am

Wasn't gas sold to the public as a way of making America energy independent? Indeed, didn't advocates use strongly emotive and divisive arguments to support this case? (See Sarah Palin etc.)

Now it turns out that these arguments were a complete smokescreen (what a surprise!). US gas isn't about securing energy independence at all. It's about providing profits to the usual suspects, at everyone else's expense, with absolutely zero social benefit.

If gas is so promising, why is Chesapeake insolvent?

Ed Dolan EdDolanMay 9th, 2013 at 10:27 am

You raise some good points here.

1. I did not go into the strategic or geopolitical arguments regarding gas exports. They are complex and cut both for and against.

Against exports: Yes, you are right, in one sense we could become more independent by keeping all the gas for ourselves. If we banned exports and kept prices low, that would slow production but accelerate substitution of gas for oil, not just in power (as at present) but also transport via CNG instead of gasoline and diesel. We could even ban exports of advanced chemical products made from gas to hoard even more from ourselves. There would be a penalty to pay in terms of economic efficiency, but there would be a certain strategic logic to it if our main goal were to stop imports.

For exports: There are two arguments here. One is that what we should aim for is *net* self sufficiency, that is, net zero sum of oil imports and gas exports. Exporting gas keeps the price high, encourages exploration and production, and accelerates the progress toward net energy independence. Also, there is the idea that our gas exports would undermine the geopolitical position of reival powers, especially the Russian dominance of the European gas markets. Insiders say that argument carries a lot of weight with the Obama administration.

2. You write "these arguments were a complete smokescreen (what a surprise!). US gas isn't about securing energy independence at all. It's about providing profits to the usual suspects, at everyone else's expense, with absolutely zero social benefit." Well put. Yes, our energy policy is often made on that principle. However, in this case, I think what you say very much fits the arguments used by the chemical industry who are against exports, trying to stoke their profits at the expense of the rest of us while giving a fig leaf of public interest.

3. As far as Chesapeake's financial woes go, I only know what I read in the press. I found this good summary of the issues:

As regards the issues in this post, it is clear that low gas prices are one of several factors that have pushed Chesapeake to the brink. Clearly opening the export market, which would raise domestic prices a bit (to about $5 per Mcf, my sources say) would help that company return from insolvency.

BurkMay 9th, 2013 at 11:43 am

"Regardless of which studies are right, an appropriate charge for greenhouse gas emissions remains the optimal solution."

Well, isn't this making the perfect the enemy of the good? A carbon tax would indeed be wonderful, but will apparently only happen when hell freezes over (or the reverse). The decisions being made now are about gas export permits and oil sands pipelines, etc., and if making them one way helps reduce the extraction and use of fossil fuels, then anyone interested in reducing climate heating will go that direction.

Matthew LindquistMay 9th, 2013 at 1:30 pm

Ah, exporting natural gas is a terrible idea for one very good reason that your article did not cover at all:

Shale gas is not going to last. Between the sky-high depletion rates (a typical well is completely depleted within five to ten years, versus up to fifty for conventional wells) and the fact that shale gas is currently produced at around $9 per Mcf, most of the shale gas drilling companies are going bankrupt. This has all the marks of a bubble, not a boom.

I don't expect you to take my word for it, so here are some links:

rjsigmundMay 9th, 2013 at 8:58 pm

at these prices, the gas co's are losing their shirts; we'd be selling at a loss…
as a result the rig count is at an 18 year low:

quoting Kevin Hansen:
look at what the industry does, not what it says. While hyping the future of natural gas, the industry was doing the following:
Organizing their natural gas gathering systems into master limited partnerships and selling them to investors. (suckers)
Selling producing acreage to foreign investors who, believing the hype, generally overpaid.
And when gullible foreign investors got wise, selling land packages at rock bottom prices when many companies were desperate to raise cash to meet their debt obligations.

ThomasGrennesMay 10th, 2013 at 12:01 pm

Even though "energy independence" has been supported by every President since Nixon, it is a poor rationale for promoting natural gas. The gain from exporting gas or anything (without a subsidy) is that by producing and exporting more goods in which one's relative productivity is higher and producing fewer goods in which relative productivity is lower, residents of a country can have more of both goods. Greater prosperity is the rationale for trade.

What if the known supply of natural gas diminishes? It's cost will rise, profitability will fall, and exports will decrease. New discoveries and new technology contribute to the volatility of energy markets. However, the possibility of diminished future supply should not prevent prudent people from taking advantage of a profitable current opportunity.

Thomas FisherMay 13th, 2013 at 3:17 am

Time to park the charts. Game changing Info. Tony Ingraffea Ph.D lectures on major gas and oil considerations at Chautauqua, on Youtube and in two parts. The impact is monumental.

SonnyMay 14th, 2013 at 8:27 am

I beleive it tis possible that the Obama administration may be waiting for a more lucrative offer from the Saudis, before stopping the export of natural gas out of the country. You can bet that the Saudis don't want our natural gas out on the world market.

crmorrisMay 14th, 2013 at 10:44 am

It is wonderful to watch the oil industry prate free market values in favor of gas exports. Oil prices are set by a cartel that limits production to force pricing to high-marginal cost alternatives. US gas, is now priced outside of the energy cartel umbrella. The current low prices are mostly due to excessive production by the Chesapeakes etc required by leasing commitments but without adequate pipeline capacity to get it to users. The pipeline bottlenecks will be mostly remedied this year and prices will rise to a profitable $4-6 or so, that will still represent an attractive edge for US-based businesses. Asian demand for US gas could be almost limitless, transport costs will fall as exporting expands, and gas prices will inevitably become oil-linked. That's why the Exxons and Shells are pushing exporting so hard. According to the link below, oil-price linking has already started in eastern Australia as large scale LNG export terminals near completion. (It's from a post by the industry group opposing exports and you don't have to believe all the projections, but the fact that prices are already jumping rapidly in anticipation of the exports is sobering to say the least.) .
We should follow Ron Wyden's suggestion and issue permits conforming to the low (albeit unbelievable) estimates in industry-trumpeted NERA report. Finally, the notion that investors won't support expensive LNG plants is naive. Japanese, Indian, Chinese money will be more than happy to build US LNG export facilities. So we can supply the raw materials for their industrial juggernaut, sort of like Qatar.

rjsigmundMay 14th, 2013 at 3:09 pm

chris martenson has been speaking, writing & teaching about the economy, energy & the environment for years…in this long post he shows the rapid depletion of US shale gas plays (he covers several) and explains that if we export gas now when it's cheap, we'll end up importing it when it's much more expensive in a couple dozen years…

While exporting natural gas would certainly prove to be an economic boon for a very select minority of companies and individuals, it makes no sense from an energy standpoint and undermines our national interests. All it will do is enrich a few while boosting prices for all domestic consumers and shortchanging the energy and environmental inheritance we pass along to our children.

Ed Dolan EdDolanMay 14th, 2013 at 5:15 pm

I don't know whether Martenson is right or not about the supply situation, but let's say he is for the sake of argument. On that assumption, here are two questions I would ask:

1. If gas prices are arificially low now, but will spike in the future, why are we better off to waste the gas now on uses that, at the margin, barely cover it's current low price, rather than export it and at least get cash that is worth more than the current marginal use of the gas?

2. If Martenson is is right, why isn't he, and everyone else he can convince who has a few bucks to invest, buying gas in the ground and leaving it there until, as predicted, the price rises?

You have read more of Martenson than I have, maybe you can explain.

rjsigmundMay 14th, 2013 at 5:59 pm

on your questions:

1. only a few gas companies are "losing their shirts" at current prices; the rest of us are benefitting from low prices; personally, i switched electric companies to one using more gas for a 12% kwh reduction…
2 although i dont know what he owns, marterson is an investor in hard assets (distrusts paper) so it wouldnt surprise me if he did own resources in the ground…if i had money to invest, that's what i'd do; i'd be assured of a return greater than anything else i can think of…and in saying that for myself, that's what i'd want for the future of our country as well..

rjsigmundMay 14th, 2013 at 5:58 pm

the depletion rates martenson describes are consistent with what ive seen at the oil drum and state dept of natural resources graphs…unlike conventional wells, where you might drill one well that produces decently for 40 years, the typical shale well production falls by over 80% in just two years, because after the initial oil flow from the pulverized rock, the flow slows to a trickle…so to continue to produce from a shale formation, you have to drill more & more wells, smash more bedrock, truck in millions of gallons more of water & chemicals, all of which is an ongoing capital drain…i've been watching the rig count as an indicator of profitability; it's approximately one-quarter of the peak and still going down every week (see my link above)…

Most Read | Featured | Popular