Like it or Not, U.S. Will Soon Become a Natural Gas Exporter
- June 27, 2013
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The revolution in drilling technology that has made fracking a household word has changed the American energy policy discussion. Just a few years ago the focus was on dwindling fossil fuels reserves. Now the U.S is debating what to do with all this extra natural gas we have laying around. According to the Associated Press, up to 40% of the U.S. production of liquefied natural gas (LNG) could be exported if all of the current energy company export requests are approved by the government.
There are two dimensions to the debate: environmental impact and economic impact.
Natural Gas Fracking: Environmental Friend or Foe?
The use of hydraulic fracturing has been the subject of intense debate focusing on ground water contamination, earthquakes, and methane release. Proponents point out that the increased use of natural gas has helped to curb growth in CO2 emissions. As natural gas increasingly becomes the fuel of choice for producing electricity, it is largely replacing coal resulting in a net win in terms of carbon dioxide emissions.
Critics had countered this by pointing out that natural gas drilling operations often result in large unintentional releases of methane into the atmosphere. As a greenhouse gas, methane is several times more powerful than CO2. This could in theory more than offset any gains made by reducing the carbon footprint of electricity generating fossil fuels.
The methane argument recently lost some clout as the EPA itself dramatically lowered its estimates of the amount of methane leaked by modern natural gas drilling operations. The new data shows that new technologies deployed to reduce methane leaks have resulted in less methane release even as natural gas production has grown considerably.
From an environmental perspective, the impact of increased natural gas production is laudable or regrettable depending on which side of the argument you already fall on. If you feel that increased use of natural gas comes at the expense of other less clean fossil fuels such as coal then it would be seen as a win.
If you fall in the camp that feels every kilowatt of electricity produced by natural gas is a missed opportunity to deploy a renewable energy technology such as solar or wind then you are not too enthusiastic about the prospect of seeing tankers laden with U.S produced liquefied natural gas heading toward foreign ports.
Economic Impact of Exporting Natural Gas
Potential environmental issues aside, its hard to deny the potential economic benefits of the U.S. becoming a natural gas exporter. The glut of natural gas production in the U.S has brought prices down so low its getting harder for producers to make a profit. Other parts of the world, on the other hand, are seeing higher prices for natural gas. Energy companies are eager to exploit this.
Undoubtedly, the loss of this supply to the domestic market would affect energy prices in the U.S. This raises the question of whether the economic benefit of increased tax revenue, employment, and, yes, energy company profits would offset the detrimental impacts of higher energy costs.
To begin with, natural gas production has leveled off lately not because there is a shortage of product in the ground but because low prices remove incentive for increased production. Throwing foreign markets into the demand mix might not dramatically impact prices if supply can easily be increased by ramping up production.
The Department of Energy must approve requests to export LNG. To that end, the Department commissioned a detailed study conducted by a third party consulting group named NERA Economic Consulting. NERA used sophisticated modeling techniques to look at various scenarios taking into account a range of possible values for prices, domestic output and foreign demand. The results, laid out in excruciating detail in the 230 page report, point to natural gas exporting being an economically positive outcome for the U.S. The study concludes that the positive effects increase with assumptions of greater levels of export.
Across all these scenarios, the U.S. was projected to gain net economic benefits from allowing LNG exports. Moreover, for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased. In particular, scenarios with unlimited exports always had higher net economic benefits than corresponding cases with limited exports.
In all of these cases, benefits that come from export expansion more than outweigh the losses from reduced capital and wage income to U.S. consumers, and hence LNG exports have net economic benefits in spite of higher domestic natural gas prices. This is exactly the outcome that economic theory describes when barriers to trade are removed.
Much like the environmental debate, the two camps on the economic debate are defined by their own entrenched interests. Manufactures and those who have an interest in continued low energy prices dont want to see anything happen that will result in higher prices. Exporting LNG will certainly do that. This wont be felt just by large manufactures. Anyone who uses electricity will see their rates go up since natural gas prices are a driver of electricity rates; especially in deregulated areas such as Texas.
Those who stand to benefit from the windfall that could be realized by selling U.S. LNG to overseas markets are likely to win the day, however. Ultimately, there is too much money on the table and too much political pressure.