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 (NYSE:DOW), 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 (NYSE:HUN) 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, or 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.
Don’t Miss Ed Dolan’s “Quantitative Easing: Your Ultimate Cheat Sheet to the Monetary Policy“.