The shale gas boom in the United States holds the prospect of inexpensive natural gas for the foreseeable future. One of the happy consequences of that fact is the redirection of investment (particularly in energy-intensive industries) away from foreign countries and back toward the United States.
However, natural gas prices have been volatile historically, and energy analysts have not done a good job predicting future prices. Many analysts thought the United States would run out of natural gas in the late 1970s; and in the 1990s projected gas price increases begat plans to build liquefied natural gas (LNG) import terminals along the Gulf Coast. Now, thanks to horizontal drilling and hydraulic fracturing, we face a glut of gas, and a very large price differential between natural gas prices in the United States (currently hovering below $4/mcf, or thousand cubic feet) and, say, Asia (where prices typically exceed $12/mcf).
All of this has triggered plans to transform former LNG import terminals into export terminals. Those plans have upset an alliance of manufacturers known as America’s Energy Advantage (AEA), which worries that exports will reduce domestic supplies, increasing the probability that the prices will soar again. Section 3 of the Natural Gas Act requires that anyone seeking to build and operate an LNG export terminal to secure a permit from the Federal Energy Regulatory Commission (FERC). AEA is urging FERC to deny permits to prospective LNG exporters, on energy security grounds.
No one can say for sure how much more manufacturers will have to pay for natural gas in the event the United States begins to ship significant amounts overseas in liquefied form. However, the AEA’s concerns seem premature and overstated. A recent Department of Energy study concluded that LNG exports will yield a positive net economic effect for the U.S. economy. Examining a number of different scenarios, DOE predicted a relatively modest effect of exports on domestic prices. Historically, U.S. gas prices have ranged as high as $12/mcf (in current dollars), and as low as $2/mcf briefly last year.
DOE’s baseline scenario projects future prices in the $4 to $5 range well into the future. Under a variety of assumptions about domestic production levels and foreign prices, the DOE predicted price increases ranging between $0.30 and $2/mcf. In other words, the DOE does not see the gap between American natural gas prices and world prices closing in a significant way, even if the United States begins exporting LNG in significant amounts. More importantly, the DOE sees significant domestic economic benefits arising from the flow of money from foreign purchasers of natural gas to American sellers.
Moreover, even if FERC opens the door to exports, we should not expect to see a sudden and large increase in exports. Building an export facility is a very, very difficult proposition, for a number of reasons. It requires the upfront investment of huge amounts of capital in a long-lived plant subject to competition in an extremely unpredictable market, scaring off most risk-averse investors. For that reason and others, at any given point in time, the number of proposed LNG terminals has always been a large multiple of the number actually built. The approval process can be very slow and contentious, as regulators scrutinize the proposal and local opposition groups try to stop it, or slow it down. Once those hurdles have been overcome, the construction process is lengthy. Therefore, while FERC currently lists proposals for 17 export terminals, it is unlikely that the number actually built will exceed the low single digits – and each of those will be several years in the permitting, planning and construction stages.
Finally, while it is customary for Americans to worry about energy security and energy independence, neither of those terms was ever intended to describe a world in which all of the energy consumed in the United States was produced here. There will always be energy trade, even if the United States becomes the world’s largest energy producer. And economic theory tells us that voluntary exchange occurs because each party realizes gains from trade. The recent DOE study confirms that basic notion in the context of natural gas exports. While not everyone in the United States will gain from LNG exports, many will, and the economic benefits of LNG exports ought to outweigh the costs.
Associate Professor David Spence researches energy and environmental policy at the McCombs School of Business. He also contributes to The UT Law Grid, a blog presented by the Center for Global Energy, International Arbitration and Environmental Law, where this article originally appeared.