Recent debate in natural gas policy has swirled around how to deal with oversupply, namely, whether or not it is wise for the U.S. to begin exporting natural gas. With natural gas prices fetching as much as $18 per million Btu (MMBtu) in Asia, while prices are hovering just above $2.50/MMBtu in the U.S., the natural gas industry is pushing federal regulators to allow them to cash-in on what appears to be an easy arbitrage opportunity. In April, the Federal Energy Regulatory Commission (FERC) granted Cheniere Energy a permit to build the nation’s first liquefied natural gas (LNG) terminal at Sabine Pass, Louisiana.
The permit sparked impassioned reactions from both proponents and detractors. Supporters believe that we should capitalize on our abundant natural gas resources, which would provide new markets for producers, improve our trade balance, create jobs, etc. Perhaps most importantly, the industry is looking for new demand for what appears to be a glut of supply. Opponents, on the other hand, believe that doing so will squander a newly found competitive advantage: cheap natural gas that could fuel a manufacturing renaissance. By opening up natural gas to world markets, the price would immediately converge to match world prices, making domestic gas more expensive.
However, there are reasons to believe that the furor, from both sides, is overblown. Exporting natural gas will neither be as good as supporters believe, nor as damaging as critics would have it. There are several reasons why even if we went full steam ahead with natural gas exports, it would not have a major impact. In fact, it probably won’t even be a big deal.
First, natural gas prices are historically volatile. Even if the U.S. possesses ample supplies for years to come, current domestic prices are probably at unsustainably low levels. Already, low gas prices are hurting drilling companies, prompting them to sell off assets. Rig counts are down, and production may have reached a temporary peak, and has begun to decline. Many companies are either cutting back on production because it has become less profitable or they are shifting their production from dry gas to wet gas and oil production, which are more valuable. As production scales back, prices will have to rise. As prices rise, profit margins for exports will shrink.
Second, LNG capacity to meet Asian demand, particularly in Australia, is expanding. As Roman Kilisek of the Foreign Policy Association notes, LNG exports from Australia will increase by 20-80 million tons per year by 2018. As that capacity comes online, high natural gas prices in Asia will begin to moderate.
Third, exporting natural gas is not like exporting oil. Natural gas needs to be cooled to negative 260 degrees F, which transforms it into a liquid, then transported by ship to its destination, where it is regasified and piped into its distribution system. This is difficult and expensive to do, which both shrinks profit margins and means that export capacity will remain limited at least in the near-term.
Finally, the effects of natural gas exports for the U.S. economy are ambiguous. Certainly, there are distributional effects: producers will benefit and industries using natural gas as a feedstock will be hurt. But, most likely, the overall economic impact will be mixed. A recent report from the Brookings Institution concluded that LNG exports are feasible but would be limited due to high costs. They estimated that exporting natural gas prices would only increase wellhead prices by 2-11%. This would not adversely impact the U.S. manufacturing sector, particularly since energy prices only reflect a small share of total costs in most domestic industries.
In short, the issue is overblown. While exports would affect different stakeholders in different ways, the impact will only be marginal. LNG exports will not be the enormous economic prize that some are making it out to be, nor will it spell doom for our competitiveness.