U.S. Natural Gas Surplus: To Export or Not To Export?

natural gasCampaign promises are one thing to make, but quite another to fulfill. That the promises were insincere, made simply to win the election, is one way to explain why a president’s pledges failed to materialize, but often times, promises fall short just because the reality of leading a nation of approximately 313 million people simply does not play out as expected.

When running for president in 2008, Barack Obama pledged to make climate change a top priority. It is true that he has made very real accomplishments in supporting renewable energy and efficiency. Yet, the Obama administration is now mired in a controversy over whether the United States should pursue a policy conducive to natural gas exports; on one hand, exportation is expected to be an economic boon, but on the other hand, it could cause domestic prices to soar and produce unintended environmental consequences.

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During Obama’s tenure in the White House, soaring production of natural gas from horizontal drilling and hydraulic fracking has pushed supplies to record highs in each of the past four years. The boom in domestic production of both oil and natural gas has provided the United States with 84 percent of its energy requirements last year, the highest annual level since 1991. Even though his policies were hardly the cause of the boom and most of the new fracking is taking place on private land largely outside of federal regulation, the president has not done much to stand in the way of natural gas producers, at least according to environmentalists. With producers clamoring for Obama to approve liquid natural gas exportation, he has been given an opportunity to make an important decision regarding the future of energy in the United States.

Environmentalists want Obama to stop the proposed Keystone pipeline and halt the expansion of fracked oil and natural gas, but given several moves he has already made in his second term, that seems unlikely.

Natural gas producers have been lobbying for the federal government to ease restrictions on exporting natural gas in liquefied form. That companies are able to even consider exporting is evidence in and of itself of the boom. Less than ten years ago, domestic production of natural gas was so limited that import facilities were constructed in U.S. ports. However, fracking has changed the supply situation. Now, the United States produces more natural gas than it can use, and as a result, prices have plummeted to approximately $4 per million British thermal units.

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Falling prices have benefited U.S. utilities, which have taken advantage of cheap natural gas to close coal plants, a move that has helped them comply with new environmental regulations aimed at reducing pollution and carbon emissions. Low prices — meaning cheap power — have also helped American manufacturers.

But for natural gas producers, the glut of natural gas has posed difficulties. The fuel cannot be easily stored, unlike oil, and as a result, drilling is costing companies more than they can make selling the product.

When supply eclipses demand, the only way to increase prices is to reduce the supply or increase demand. Reducing the supply is not an easy proposition for natural gas producers; their contracts on wells often require them to keep drilling in order to maintain the lease. Demand for natural gas in the U.S. appears to have reached a ceiling though. Therefore, the best way to boost demand is to access new markets abroad, especially ones where the price of natural gas is much higher. In Japan, which has almost no natural gas resources, the fuel costs about $17 per million BTU.

On May 17, the Department of Energy conditionally approved the Freeport LNG liquefied natural gas export project in Texas, sending gas futures to the highest settlement price in weeks. The announcement was met with approval from natural gas companies, but chemical companies worried that that exports will cause even higher domestic prices while environmentalists argued that more exports would result in more fracking.

While environmental concerns about hydraulic fracking are legitimate, there is a huge economic value to exporting a product that will sell for much more abroad than it does domestically. As New York Times columnist Joe Nocera wrote in a May 18 article, “Exporting natural gas has enormous benefits for the United States. Exports create jobs that are every bit as good as manufacturing jobs. They help our trade deficit. They tie us closer to important allies like Japan, which desperately need the gas.”

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However, incremental gains in natural gas prices — partially in response to the Energy Department’s decision — have already prompted utilities to switch back to burning coal. Coal now provides approximately 40 percent of U.S. electricity. That figure may be a smaller percentage than coal represented a few years ago, but it is still a sign that more expensive natural gas, which is cleaner-burning than coal, will mean more carbon emissions in the U.S.

Follow Meghan on Twitter @MFoley_WSCS

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