Opponents of Natural Gas Exports Have It All Wrong
Americans opposed to the export of U.S. natural gas give many reasons for their position. But almost all of them are wrong.
The problem is that people underestimate the amount of this country’s natural gas and the potential
effect exports could have on the world market.
Russia has swallowed parts of Georgia and Ukraine. No one is proposing that America send soldiers to defend those countries, even though we guaranteed Ukraine’s sovereignty in 1994 under the Budapest Memorandum. Instead, we can help our allies by diminishing Russia’s economic power over them. And that power rests on oil and gas.
America is overtaking Russia as the world’s largest oil and gas producer, and we could be exporting natural gas abroad, cutting into Russia’s markets. Two dozen applications to export natural gas, some dating to 2011 and 2012, are awaiting approval by the Energy Department. Potential exporters face political barriers because many believe the U.S. should keep all its natural gas rather than export it.
Here are four reasons for not exporting natural gas, and why they are wrong.
Myth 1: Exporting natural gas will increase prices. According to Massachusetts Sen. Ed Markey, exporting natural gas will increase prices by $2.50 per thousand cubic feet. He said in a press release: “U.S. energy consumers could be facing as much as $62 billion per year in higher energy costs as a direct result of exporting.”
That is misguided because America has a massive capacity to expand natural gas. Over the past decade, exports have increased and prices have declined. That is because American withdrawals of natural gas have grown from 24 trillion cubic feet to 30 trillion cubic feet. In 2013, about 15% of natural gas withdrawals were not marketed. This amounted to 4.5 trillion cubic feet per day, most of which was wasted. Exporting 15% of natural gas would not raise prices substantially.
Natural gas exports will not harm U.S. manufacturing’s comparative advantage in cheap energy. Natural gas will still be less expensive here than abroad because it is costly to transport. Energy-intensive multinationals will still face a cost advantage locating in the U.S. Yet, foreign consumers will benefit from our exports, which, even with transportation costs, will be less expensive than what they are now paying Russia.
Drilling efficiency has substantially increased over the past seven years. Productivity of oil and natural gas wells is increasing across many places in the U.S. because horizontal drilling and hydraulic fracturing are becoming more precise and efficient.
The U.S. has the capacity to produce much more natural gas than it has in the past, as the chart shows.
Drilling activity in U.S. shale is generally producing more oil and natural gas than in the past. For example, each drilling rig in the Eagle Ford Shale will contribute 400 barrels of oil per day more in April 2014 than it would have in the same formation in January 2007, an increase of over 800 percent.
With increased natural gas exports, more people would be employed in oil and gas production and transportation. Over 1.1 million people are already directly employed and about 9 million are indirectly employed in the sector, the vast majority from small and mid-size companies.
Myth 2: Actions today won’t increase exports until it is too late. There is no point in exporting natural gas, according to naysayers, because we do not have the infrastructure in place. To export gas, we need more pipelines to get gas to shipping terminals as well as more shipping terminals. That could take as much as five years.
However, that disregards the role of expectations. Announcements about our intentions to build infrastructure to export send signals to futures markets, which affect prices today. Russian President Vladimir Putin is watching our intentions carefully.
Lucian Pugliaresi, president of the Energy Policy Research Foundation, told me: “If we increase exports, we can open up the opportunity to shift long-term expectations on domestic supply and receive the benefits of lower prices even before the supplies come to market.”
That can be seen by the speed with which events influence current prices. When war breaks out in the Middle East, or a hurricane is forecast to blow through the Gulf states, or when a refinery is shut down due to an accident, prices climb on the news — even though supply has not changed. Prices climb not only due to the disruption in supply, but also due to expected disruption in supply, and to a change in futures prices.
It works in the opposite direction, too. An announcement that oil will be released from the Strategic Petroleum Reserve sends prices down before they are released. Futures prices change, affecting current prices.
Myth 3: Exporting natural gas will increase production and emissions. Environmentalists take a different tack. Rather than forecasting that exports will result in less supply for Americans, they admit that exports mean more production — which will keep price levels stable and raise the numbers of Americans employed. Environmentalists are opposed to increased usage of natural gas because they are concerned that greenhouse gas emissions will rise.
It is likely that American natural gas would displace not only Russian gas, but also some coal use. To the extent that natural gas displaces coal, greenhouse gases will be reduced. And energy production in Asia (and Africa) is far dirtier than in America, so our gas exports would lower global emissions even more. Increased production of cheaper gas could reduce world prices and lead to greater consumption, which would lower greenhouse gas emissions.
Myth 4: America is incapable of using economic power to promote our strategic national interest. Perhaps this is the most dangerous myth of all: America is helpless in the face of its adversaries, and that we have to let Russia gobble up its neighbors without being able to retaliate. It is false.
Congress and President Obama could immediately assist Ukraine and other countries by amending the Natural Gas Act to ensure that the Energy Department approved LNG export applications within a shorter period of time. Congress could pass legislation allowing LNG to be exported to all World Trade Organization members, regardless of whether they have free-trade agreements with the U.S.
America should look in the mirror. In that way, instead of seeing a country incapable of assisting its friends, it would see the greatest economic power in the world. Instead of seeing itself paralyzed by weakness, America would see the possibilities that free enterprise and free trade can provide. Instead of seeing a perennial loser rudderless in a hostile sea, America would see a country capable of exercising commercial power and moral authority.
Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, directs Economics21 at the Manhattan Institute. You can follow her on Twitter here.
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