Should the U.S. be Exporting Natural Gas?

 

Takeaway

  • The wholesale price of natural gas is more than twice as high in Europe and more than three times as high in Asia than it is in the U.S.
  • Exports could increase the price of natural gas, which would benefit the oil and gas industry, drillers, and pipeline companies.
  • Higher prices would harm the chemical industry and anyone else who would benefit from cheap energy.

Due to recent advances in drilling and hydraulic fracturing, the United States currently has an abundance of natural gas. The current price is about $4 per million British thermal units (MMBtu) and, based on information in the forward markets, we expect natural gas prices to stay relatively low in the near future.

To put this in perspective, the wholesale price of natural gas is more than twice as high in Europe and more than three times as high in Asia than it is in the U.S. Moreover, in terms of energy content, oil is now about four times as expensive as U.S. natural gas.

Opportunity in Abundance

The abundance of natural gas is creating a number of opportunities in the U.S. Chemical companies, which use natural gas as a feedstock, now have a comparative advantage if they produce in the U.S., and they are expanding domestic output.

More generally, but to a lesser extent, any energy-intensive manufacturing process benefits from the cheaper energy created by the natural gas boom. Perhaps, equally important is the opportunity to substitute domestically produced natural gas for the imported oil that currently fuels our transportation. We are already seeing significant growth in the use of natural gas for buses and trucks, and the emerging electric vehicles will be indirectly run on the natural gas that generates the electricity.

There is also the possibility of exporting natural gas. Cheniere Energy is currently converting an LNG terminal in Louisiana that was originally built to import natural gas into an export terminal and is expected to start exporting natural gas in 2016. There are several more proposed plans to build export terminals, and these plans have raised concerns from the chemical companies and manufacturers who currently benefit from the cheap natural gas.

In a recent post, my colleague David Spence suggests that relative to the total amount produced, the amount of natural gas that has been approved for export — along with the amount that is likely to be approved in the near future — is probably not large enough to materially affect prices.

However, if restrictions on the export of natural gas are lifted, a significant amount of gas that would otherwise be used domestically will be diverted to international uses, and domestic prices will be higher.

The volatility of natural gas prices may also be affected by a push toward more exports; however, I tend to believe that the opportunity to export natural gas when there is a glut in the U.S. will lead to less volatile prices.

Political and Economic Uncertainties

Since the export of natural gas has losers as well as winners, the effort to export natural gas has become a political, as well as economic, question. The export winners are obviously the individuals in the industries that produce and transport the natural gas: the oil and gas companies, drillers, pipelines and others in the oil and gas service industries. These individuals benefit from anything that expands the market for natural gas.

The losers are those in the chemical industry and anyone else who would benefit from cheap energy. These individuals understand that exporting natural gas would tend to increase domestic prices, offsetting some of the benefits of cheap energy.

A recent energy poll commissioned by the University of Texas finds that more individuals are against the idea of exporting natural gas than support the idea (although about one-third have no opinion). This could reflect the fact that there are more energy consumers than energy producers. It could also reflect an interest in promoting energy independence that has national security as well as economic implications. Or it could simply reflect the gut feelings of a public that is largely uninformed about the issues.

It should be emphasized that the UT poll did not ask whether or not government policy should prohibit or discourage the export of natural gas. Indeed, only 40 percent of the self-described Libertarians disagreed with the statement that “the U.S. should export natural gas to other countries.” I would interpret this to mean that they generally view the export of natural gas as a bad idea, not that they think it should be prohibited. The alternative is that they don’t understand what a Libertarian is (or perhaps, what an export is).

In any event, public opinion does influence policy, and the difference between not favoring exports and favoring a prohibition of exports is a fine line that can be easily crossed. Indeed, Senator Ron Wyden, who favors using the newly accessible natural gas reserves domestically, has cited the poll as support for his position.

The question of whether or not policymakers should encourage or discourage the export of natural gas is an interesting and fairly difficult question. I am aware of two very detailed (and expensive) studies of this issue, one that favors exports and one that favors policies that discourage exports. My impression is that the first study was funded by the natural gas industry and the second was funded by the chemical industry.

Costs, Jobs, and Innovation

Unfortunately, I’m not being paid to offer my own opinion, but I would like to provide a framework that may be helpful for sorting out the relevant issues. Very briefly, the choice between exporting natural gas and using the gas domestically depends on the following considerations:

  1. Transformation and transactions costs. I’m talking here about fairly straightforward comparisons between the costs of using domestic natural gas to produce polyester and plastic products that we export versus liquefying and exporting the natural gas directly.
  2. An analysis of the jobs that are created. On one hand, if the natural gas is exported there will be more U.S. jobs created in industries associated with the production and transportation of natural gas. On the other hand, if we limit the export of natural gas, prices will be lower and there will be more available for domestic industries, like chemicals, which will expand and create different types of jobs.
  3. Investments and innovation. In either case, the increased availability of natural gas is likely to lead to investment opportunities, and new investments are likely to spur innovation. The question is which investments will spur the more important innovations.

When I first saw the UT Energy Poll question, my first thoughts were about consideration No. 1. It is likely to be more efficient to export the natural gas in the form of plastics and polyester rather than liquefy the natural gas for export. Moreover, if coal is less costly to ship overseas than natural gas, then speeding up the replacement of coal-fired electricity generation with natural gas–fired electricity generation (and increasing the amount of coal exported) may be preferable to exporting natural gas.

However, if we have an abundance of natural gas we might do all of the above. In any event, if the only considerations are these transportation-related costs, the appropriate choice will be made in a free market without government intervention. If the natural gas is more valuable to the chemical industry, the chemical industry will be able to outbid Cheniere and the other LNG exporters for the gas.

Complicating Factors

If consideration 1 is the only consideration, then the appropriate policy response is to let the markets decide on the highest-value use of the natural gas without government intervention. The second and third considerations, however, are much more complicated and do provide an opening for a possible policy response.

For example, given the current state of the economy, there are more people looking for jobs than there are job openings, so policy choices that create jobs can be socially beneficial. Unfortunately, it is very difficult to compare the jobs that would be created in the chemical industry with jobs that would be created in the LNG industry, and besides, those jobs are not created overnight. They are likely to be created over a three- to five-year period.

Hopefully, the excess slack in the labor market will correct within the next three years, and if that does turn out to be the case, and there is nothing special about these particular jobs, then the social benefits associated with the creation of the new jobs may evaporate.

Natural Resource Innovations

Of course, not all jobs are equal and it’s possible that there is something special about jobs in chemicals and manufacturing versus jobs in the oil and gas industry. Indeed, a branch of the economic development literature refers to what has become known as the resource curse, which argues that resource-rich countries are slower to develop partly because jobs in the resource industry do not develop human capital as much as jobs in manufacturing, and as a result, there is less innovation in countries that rely on natural resources.

However, as the current situation illustrates, extraction industries can be just as innovative as manufacturing industries. Indeed, the domestic glut of natural gas is a result of considerable innovation in the extraction of natural gas, which has spilled over to extraction of oil and may have other spillover benefits as well.

Too Close to Call

In short, considerations 2 and 3 are relevant to the policy debate, but it is very difficult, at least from the perspective of an economist, to determine whether these should lead us toward or away from limitations on the export of natural gas.

The fact that it is difficult to make an economic call on these types of policy choices is itself relevant to the policy debate. When economic choices are not crystal clear, policy choices tend to be made based on public salience and the political power of the relevant interest groups.

In other words, bad choices tend to be made. As a result, in the absence of a very compelling argument for why government intervention is in the broad public interest, most economists favor market solutions.

Disclaimer

The views expressed are those of the author and not necessarily The University of Texas at Austin.
 

About The Author

Sheridan Titman

Walter W. McAllister Centennial Chair in Financial Services, McCombs School of Business

Sheridan Titman is a professor of finance at The University of Texas at Austin and a research associate of the National Bureau of Economic...

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