Suddenly, the US is a potential natural gas exporter. This post tells how that happened, and why it's controversial. Watch this space for analysis from RFF economists on the pros and cons of this shift.
[caption id="attachment_3056" align="alignright" width="300" caption="LNG tanker. Source: Royal Dutch Shell"]
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Just a few years ago, strong US demand for natural gas and high prices led energy companies to build massive liquefied natural gas (LNG) import facilities. These turn out not to have been good investments. One of the best illustrations of the speed, size, and surprise of the shale gas boom is that these facilities now are largely idle, while equally large bets are being made on gas export, including conversions of import facilities. The Department of Energy (DOE) and Federal Energy Regulatory Commission (FERC) have recently approved a large export facility in Louisiana, and 7 other facilities are planned. The Energy Information Administration (EIA) models LNG exports of 6-12 billion cubic feet (bcf) per day in the near future - a significant portion of current US production of about 64 bcf/day (though that number has been rising fast).
While this shift is a short-run surprise, it isn't necessarily a long-term shock. Patterns of trade in goods and services shift all the time. But natural gas isn't a standard commodity, for practical, legal, and political reasons. All three complicate trade itself, predictions about future trends, and evaluations of policy.
1. There isn't an integrated global market for gas, like there is for oil and most other commodities.
Natural gas prices vary greatly across the world - for example, in Japan gas costs about 16 times what it does in Saudi Arabia, and more than 8 times the current US spot price. These price discrepancies exist in part because transporting gas internationally is hard. It must be cooled to a liquid state, stored and transported, and then re-vaporized on arrival. All of these steps require specialized facilities and vessels, and add time, cost, and complexity. The volume of LNG trade is also much smaller than that for oil.
Even given this complexity, one would ordinarily expect trade to reduce (though not eliminate) price disparity. If shale gas makes the US a low-cost, high-volume producer—a Saudi Arabia, or at least a Venezuela, for gas—then investors will see the opportunity to profit from exports. And this is indeed happening to some extent. But, of course, it's not that simple.
2. Government is deeply involved in international gas trade.
In the U.S., Explicit government approval is necessary to export natural gas. The Natural Gas Act requires DOE authorization of all gas imports and exports, and FERC approval of siting and construction approval. (It is these permits that were recently granted to the Sabine Pass export facility in Louisiana). DOE must issue a permit unless it finds that approval is "not consistent with the public interest". Exports to countries that have free trade agreements with the US automatically meet this standard, but it is otherwise not defined. The permit process also triggers federal environmental (NEPA) review, and potential exporters must also comply with a suite of other federal and state environmental laws.
Together, these regulatory barriers make it much more difficult, time-consuming, and financially risky to export natural gas than other commodities. They also provide an easy route for politicization.
3. Energy is inevitably a political issue.
Natural gas exports have rapidly become controversial. Opponents claim that exports will lead to higher domestic gas prices, undermining the benefit of cheap gas for US consumers and industries that depend on gas. Congressman Ed Markey (D-MA) calls exports "a clear threat to affordable American industry." To some extent, opposition appears to reflect worries about oil rather than natural gas: high prices and unstable sources. But not only is gas cheap (even in Japan, gas is cheaper than oil on an energy-content basis) and secure, it is not currently a substitute for oil, certain fleet vehicles aside. Nevertheless, critics' core claim that exports will lead to higher US natural gas prices is correct, as new EIA modeling shows - though how much higher is an open issue.
For these reasons - and others - the natural gas export question is complex. Look for economic and policy analysis from RFF's Joel Darmstader, Alan Krupnick, and others over the next few days.
