Congressman Markey still worries about U.S. natural gas exports

Michael Giberson

A few weeks back Congressman Ed Markey asked the U.S. Department of Energy whether exports of natural gas might not be in the public interest (see prior note here, related note) as exports would tend to push U.S. gas prices higher.

The USDOE’s response apparently didn’t mitigate Markey’s concern; today the Congressman introduced two bills intended to impede the export of natural gas. (See here and here.) One bill would prevent the Federal Energy Regulatory Commission from approving any new LNG export terminals until 2025. Another bill would require natural gas produced from federal lands be sold only to American consumers. (Shall we require hotels on federal lands to only rent to American consumers as well? Those foreign tourists visiting the Grand Canyon are just driving up the cost for American tourists, right Congressman?)

I’m neither for or against the prospect of exporting LNG, but I’m entirely for letting companies finding the best offer for their products. If the product is natural gas and the best offers come from customers outside the United States, then by all means I’d want them to export.

I continue to wonder why the Congressman from Massachusetts is singling out natural gas exports as an object of concern, since any big growth in such exports is a few years from reality and the United States remains a net importer of natural gas. At the same time, Massachusetts producers are exporting billions of dollars worth of goods and services each year – over $26 billion worth of goods and services in 2010 – which by the Congressman’s crabbed logic is contributing to higher prices for U.S. consumers and therefore harmful to the public interest.

Congressman, why are these Massachusetts exports okay, but natural gas exports are not?

WSJ says EIA says natural gas prices could jump 54 percent with exports

Michael Giberson

Yesterday the Energy Information Administration released the results of its analysis of possible price effects from increased natural gas exports, and the Wall Street Journal finds the drama (“Gas Prices Could Rise With Exports”):

Increased exports of U.S. natural gas could drive up domestic gas prices as much as 54% in 2018, federal officials said Thursday, in a projection that could complicate efforts by more than a half-dozen companies hoping to spend billions of dollars on new export terminals.

Sounds like a disaster for U.S. natural gas consumers, and that is the impression that some U.S. manufacturing companies would like you to form about possible natural gas exports.

If you read through the article, you pick up the slimmest bits of context: the 54 percent number is from just one of several scenarios studied, that scenario one assuming the lowest level of increased gas production and the fastest imaginable increase in exports; and current gas prices are below $3 per million BTU, the lowest in a decade. Also, the 54 percent is the peak price effect in the scenario, for 2018, but prices retreat after 2018 as the higher price sparks additional production.

I’d count the WSJ article as overly dramatic and misleading. (I haven’t had time to examine the EIA report in detail. It is available online, along with lots of data and context: “Effect of Increased Natural Gas Exports on Domestic Energy Markets.”)

EIA expects prices to recover over the next few years, even without exports, to just under $5 by 2018 in mid-line cases and to $6 for low gas production scenarios. Worst case prices (from consumers’ viewpoint) could average around $9 in 2018, then prices fall back toward $6. More likely scenarios have much more moderate price effects.

The EIA makes another interesting point in the report introduction. For all practical purposes, the export licensing requirement is only a big issue for trade with countries for which we are not in a free trade agreement. Under our free trade agreements, any proposed export is already deemed to be in the public interest and so satisfies the export licensing review standard.

So, let’s imagine the most successful anti-natural gas export political scenario: LNG export licenses get denied, Canada stops exporting gas to the U.S. because of low U.S. prices (already happening) and then starts importing gas from the U.S. Canadian companies build LNG export facilities on the Pacific and Atlantic coasts, buy low cost U.S. gas and exports high priced LNG to Asian and European markets. We already are net natural gas exporters to Mexico, and Mexican companies could provide the same kind of import/export service.

Else domestic industrial natural gas consumers – the primary interest group raising objections to potential LNG exports – will have to take on amendments to our current free trade agreements. I’d judge that unlikely, at least for now.

Robert Rapier on the U.S. exports of gasoline – isn’t this a good thing?

Michael Giberson

At Robert Rapier’s R-Squared Energy Blog he offers his list of  Top 10 Energy Stories of 2011. One of the stories: the U.S. was a net exporter of finished petroleum products such as diesel and gasoline for the first time since 1949.  In a post today he notes that some people have been troubled by the news:

This news did not sit well with some people, who argued that those exports could have been better used in the U.S. I read numerous comments from people angry that we are exporting fuel. In fact, one of the arguments against the Keystone Pipeline is that the fuel could end up being exported after it is refined.

The objections to exporting gasoline and diesel seem essentially the same as motivated Markey’s letter on natural gas exports. As Rapier said, “I don’t think the people who are making these arguments have thought this through very well.”

When we import oil, many folks complain about all the money we send overseas and say it would be better to keep that money in the domestic economy. When we export finished petroleum products, many folks complain that it would be better to keep those valuable energy products at home.

At the very least, for any one person complaining about both imports and exports of petroleum, we should invite them to note that (1) when we import oil, people overseas ship valuable energy resources into the United States, and (2) when we export petroleum products, people overseas send money into the U.S. economy.

Then, while they try to work out an explanation that can make both imports and exports of energy bad, and inflows and outflows of money bad, give them a little explanation on “comparative advantage”.

Congressman Markey worries about U.S. natural gas exports

Michael Giberson

Congressman Ed Markey recently sent a letter to Energy Secretary Steven Chu inquiring into the possibility that natural gas exports may be harmful to the public interest (see press release, copy of letter). Markey’s concern is that exports will tend to push U.S. gas prices (currently around $3 or $4 per mmbtu) to international levels (in the $10 to $12 range), and higher prices would be harmful to industrial, commercial, and residential consumers of gas in the United States. The direction of his thinking is that, perhaps, the Department of Energy may want to deny LNG export licenses in an effort to keep natural gas resources in the U.S. economy.

Markey’s inquiry demonstrates a firm grasp on the basics of supply and demand, but is weaker on the economics of comparative advantage. In addition, his interest in potential LNG exports seems a bit selective, because the U.S. exports a lot of other things as well.

In 2010, Massachusetts exported over $26 billion worth of goods including optics, industrial machinery, electric machinery and pharmaceutical products. I wonder whether Congressman Markey is similarly concerned about how these exports are raising costs for U.S. producers and consumers? Alternatively, I’d like to hear his explanation of why these exports are okay, but other exports are not in the public interest.

More on the trade dependence meme

Lynne Kiesling

In the Chicago Tribune, economist Allen Sanderson riffs on the same faulty “dependence” logic that I mentioned briefly last week:

I speak, of course, of our complete dependence on coffee that we are importing mainly from Brazil and Colombia. It’s time to wean ourselves from this harmful addiction. My “Coffee Independence” proposal is the key first step.

We may constitute only 5 percent of the world’s population, but we consume fully a third of the planet’s coffee. This nation runs off coffee, most all of it from a sketchy continent. Should we be cut off by one of these sources, for our caffeine fix we’d be forced to drink Coca-Cola for breakfast as well as 10 other times a day.

Read the whole thing to see just how absurd and illogical the trade “dependence” argument truly is.

Economics error: trade makes people “dependent”

Lynne Kiesling

I am listening to an NPR story right now on the conflicts over the construction of the new pipeline to bring Canadian heavy crude oil from the tar sands to the US. Steve Inskeep introduced the story by observing that as Canadian tar sands production increases, US consumers will “become more dependent on Canada”.

This error is more than just a rhetorical one; it’s an error of logic and a failure of basic economic understanding, because it shows that Inskeep and his staff don’t grasp the reciprocity and the mutuality of trade and exchange. You could just as easily say that more oil transactions between US consumers and Canadian producers makes Canada “more dependent on the US”, because the revenue they earn from selling us oil is income that they use to do what they want to do in their lives, in much the same way that the oil we buy from them is a product that we use to do what we want to do in our lives.

Failing to incorporate the reciprocity and mutuality of exchange into your analysis is an all-too-common logical flaw, particularly in the increasingly breathy and Chicken Little media. They should know better.