The ongoing debate about whether the US should permit additional LNG exports to countries with which it does not have a free trade agreement (non-FTA) is far from being just a question of whether we have enough gas to remain well-supplied domestically and export to other countries. The LNG export issue touches upon prospects for domestic economic growth, responsibilities to our allies, diplomatic engagement, and free trade – whether we support it as a matter of course.
“Is it better to allow substantially expanded exports of LNG, which would have the effect of raising prices in the US – whether by a large or small amount, depending on whose model you believe – or is it better to simply let market forces work, and allocate gas on an international basis as driven by price dynamics?”
Four speakers engaged in spirited debate in response to that question, posed by energy scholar Benjamin Zycher, at the American Enterprise Institute on Tuesday.
David Montgomery, Senior Vice-President of NERA Economy Consulting, stated unequivocally that LNG exports provide a clear net benefit to the US economy, while Ken Ditzel, a Principal with Charles River Associates, said that net benefit was outweighed by the benefit of keeping that gas in the US. Wallace Tyner, a professor at Purdue University warned that while freer trade offers global benefits, those benefits are not always spread evenly. And Claude Barfield, a trade scholar at AEI, pointed out that export restrictions could be difficult to defend from a diplomatic perspective.
Will LNG exports or LNG export restrictions be more beneficial to the US economy?
Restrictions
“We found that LNG exports actually benefit the economy. But what we also found was that gas used for gas-intensive [domestic] manufacturing produces a value-added or GDP effect that is twice as large as LNG exports for commensurate use of natural gas.” – Ditzel
Exports
“Efforts to restrict LNG exports in the US to non-FTA countries are simply self-defeating. Because Canada is right now committed to building immense export capacity on its west coast.”
“The most likely outcome that we see is that if the US has cheap gas – the only circumstances under which we’d be likely to export – and does not allow exports to non-FTA countries, it will become the prime supplier of natural gas to eastern Canada, which the shale reserves are quite well-suited to do. It will displace gas in western Canada, and Canada will get the trade benefits.”
“In some ways, debating whether or not to restrict exports to non-FTA countries is pointless – it’s just a way of shooting ourselves in the foot.” – Montgomery
Unclear
“My bias is that increased free trade is commonly better, and it is better in all cases, or almost all cases, globally. The globe gains from freer trade.”
“But hundreds of studies show circumstances in which regions or countries do not benefit from freer trade. There’s absolutely nothing in economic theory that says everyone wins in all circumstances from movements towards freer trade.” – Tyner
How much LNG is the US likely to export?
A lot
“A 20 bcfd [billion cubic feet per day] case isn’t that unlikely. The fundamentals also suggest that US could supply this gap. Asian LNG remains priced near oil parity, the Asian markets remain fairly insensitive to increased LNG prices.” – Ditzel
Not much
“It’s a fantasy to think that even a small fraction of the applications that have gone to DOE [the Department of Energy] are going to actually be built. It costs you less than $100 to submit an application to DOE, it’s FERC [Federal Energy Regulatory Commission] where it matters. FERC is the one where you have to spend hundreds of millions of dollars to get a permit, and there are only three facilities that I know of that are actually officially in that process.”
“The willingness of foreign buyers to buy the gas from us…is limited by the availability of other sellers who can undercut the US price. And if you take a look at a reasonable representation of what the full allocated costs are – getting gas, for example, to Japan from all the different regions – the answer is, it’s Qatar that is the gorilla in the room. Qatar can undercut everybody.” – Montgomery
Does allowing LNG exports risk undermining specific sectors of the US economy, such as manufacturing and chemicals?
Yes
“Manufacturing is very sensitive to rising gas prices. That means there are going to be tradeoffs when we get to these levels of unconstrained LNG exports.” – Ditzel
Not really
“This really does not matter to the survival of the chemical industry. It’s purely a fight over rents.”
“Of course exports will raise US prices and will lower our rivals’ costs. But it doesn’t matter.”
“There is going to be a built in 2:1 gas cost advantage for US manufacturing against any of its rivals in countries that import natural gas. It’s very simple: if you take a US wellhead price of $6, and you add in what pretty much everybody agrees is a reasonable transportation cost of $6 to get from the Gulf Coast to Asian markets, you end up doubling the US price in Asian markets.”
“If the US chemicals industry can’t survive when its competitors pay twice as much for natural gas as it does… then the US does not have a comparative advantage in chemicals and we would be far better off importing chemicals from places where they can be produced by an efficient industry.” – Montgomery
Would restricting LNG exports violate World Trade Organization rules?
Yes
WTO rules prohibit export restrictions other than duties, tariffs, or other charges, except in cases of critical shortages or for environmental reasons. “We ought to get away from the thought that we could actually win a case in the WTO if we go forward with restricting LNG [exports].” – Barfield
Unclear
“I would characterize it as ‘uncertain’ what the rules are, and ‘uncertain’ how they will be interpreted. In any event, suppose that somebody brings a case against the US if we decided to limit exports – that would take years and years to play out as these WTO cases always do, and in some ways might be the best thing if we’re uncertain about what the benefits and the costs to the country are.” – Tyner
Would restrictions on LNG exports be consistent with the US’ position on global trade?
“This goes beyond just LNG or energy. The United States has been a leader in trying to persuade other countries not to impose export restrictions. For us to go in the other direction really will have major policy implications for larger trade policy questions that we’ve raised and have actually championed for several decades. We’re not perfect, but we certainly have by and large pushed against any export restrictions since the 1970’s.” – Barfield
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