By Bernard L. Weinstein
American consumers and businesses are currently reaping a windfall from the lowest natural gas prices in years. Cheap gas has reduced heating and electric bills for millions of households, while industries using natural gas as a feedstock or boiler fuel have realized huge production cost savings. But at the same time $2.50 gas at the wellhead has caused many drilling companies to reduce production and move their rigs to more profitable oil plays. Simply put, the current price for natural gas is too low to sustain the pace of drilling and production that has occurred in recent years.
As with all commodities, the price of natural gas is determined by supply and demand. Today the supply is abundant, a consequence of the shale gas revolution, while demand is muted due to a sluggish economy and relatively mild winter. Because of America’s large and growing reserves of natural gas, potential supply will exceed anticipated domestic demand for many years to come.
Though domestic demand for gas may grow only slowly, there is a huge global market for the commodity. For example, with Japan retreating from nuclear power after last year’s Fukushima accident, the demand for gas to generate electricity has risen exponentially. But since Japan produces less than 4 percent of the gas it consumes, it must import the rest. With Germany also planning to phase out nuclear power over the next decade, that country’s demand for natural gas will escalate rapidly. China and Korea are also expected to be huge gas importers for the foreseeable future.
Over the long-term U.S. producers will need higher prices if they are to remain profitable, and selling our gas abroad offers the best opportunity for boosting demand. Of course, in order to ship American gas across the oceans it must first be liquefied. This requires huge investments in liquefaction plants, export terminals and special LNG (liquefied natural gas) carriers. To date, only one terminal and liquefaction plant has been approved by the U.S. Department of Energy—Cheniere Energy’s Sabine Pass facility in Cameron Parish, Louisiana. But seven other applications are pending.
Unfortunately, liberal members of Congress, as well as some corporations and environmental groups, are pressuring the DOE to go slow by claiming that exporting LNG will be bad for the economy and bad for the environment. For instance Congressman Edward Markey of Massachusetts argues that exports will push up prices, reduce the competitiveness of U.S. business, and slow the transition away from dirty fuels. Dow Chemical, one of the most vocal opponents of LNG exports, says America would be better off using its “cheap” natural gas to boost domestic manufacturing as opposed to indirectly shifting jobs abroad.
Most of these arguments are flawed. First, there’s a big difference between “cheap gas” and the “dirt cheap” gas available today. A recent study by Navigant Consulting estimates that LNG exports of 2 billion cubic feet per day would boost prices 17 percent by 2020. But a study by Deloitte estimates only a 1.7 percent gas price increase from LNG exports due to the supply response. In either scenario, the impact on domestic prices will be minimal—somewhere between 8 cents and 85 cents if gas prices climb back to a more “normal” $5 per million BTUs.
Similarly, adding LNG shipments to gas demand should not adversely affect export-oriented manufacturers since their foreign competitors depend more heavily on higher-cost oil as an industrial feedstock. What’s more, since LNG is produced from “dry” gas, exports will not significantly diminish the availability of natural gas liquids, such as ethane and benzene, which are the principal components of many manufactured products.
Some environmental activists, such as the Sierra Club, are opposed to LNG exports because, they claim, the liquefaction process results in air and coastal water pollution while endangering wildlife. They also argue, with little basis in fact, that processing plants and LNG tankers are inherently unstable and prone to explosions. But their real objective is to prevent any undertaking that results in more fossil fuel demand.
As an energy-abundant nation, America should logically be a major energy exporter. This is already the case with coal and there is no reason we can’t become one of the world’s largest gas exporters as well, with all the attendant job creation that will entail. We should also bear in mind that Canada is pushing to become a major LNG exporter and has already issued export licenses to several projects on their Pacific coast. Let’s not repeat the mistake of the Keystone XL pipeline decision by imposing roadblocks to exporting LNG from the U.S.
Weinstein is associate director of the Maguire Energy Institute and an adjunct professor of business economics in the Cox School of Business at Southern Methodist University, Dallas.