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New Study on U.S. Natural Gas Exports

by Michael Levi
June 13, 2012

Booming U.S. shale gas production has prompted a series of firms to apply for permission to export liquefied natural gas (LNG) from the United States. This prospect has become controversial: some see an opportunity to gain from trade and to shake up global gas markets; others fear environmental damage, higher consumer costs, and lost manufacturing competitiveness.

In a new paper published today by The Hamilton Project, I carefully assess each of these issues, as well as several others, providing a comprehensive look at the likely costs, benefits, and consequences of allowing LNG exports.

I ultimately conclude that the United States should allow LNG exports. I also argue that it should take several steps to mitigate resulting risks and capture opportunities arising from allowing exports.

You can read the paper here.

I won’t rehash all of its arguments – but I do want to highlight a few interesting bits:

  • The biggest reason to allow exports is that prohibiting or constraining them would have broad and damaging repercussions for U.S. trade, and hence the U.S. economy. Among other things, it would hurt U.S. efforts to get China to remove constraints on strategic minerals exports. Making export restrictions bind would also probably create significant problems with NAFTA.
  • Exports are likely to reach only moderate levels. The resulting gains from trade, while significant, are thus less than some might expect.
  • Many have warned that exports would hurt U.S. manufacturing by raising costs. What they miss is that, by increasing production of gas, they would also raise demand for manufactured inputs like steel and cement. My estimates suggest that the latter effect would dominate – allowing exports would be a net positive for manufacturing.
  • The tradeoff between exporting natural gas and putting it in our cars and trucks is largely a distraction. Blocking exports wouldn’t drive natural gas into cars and trucks – it would leave it in the ground. If we want to see more uptake of natural gas in transportation, what matters most is targeted policy, not what we do about exports.
  • Other countries – particularly Japan – are eager to get preferential access to U.S. LNG exports. The United States should not simply give this away – it should use it as leverage in ongoing trade negotiations.
  • The biggest risk arising from exports would be to the local environment. More exports mean more production, and thus more local risk. Exports will not begin for several years at minimum. Industry and government should use the intervening time to ensure that protections are as strong as possible.

I’ll have more to say on some individual elements of the report in the next couple weeks. For now, though, I encourage you to read it here.

Post a Comment 4 Comments

  • Posted by MarkB

    We give them LNG, they give us money. What else is there to say? If demand increases in the domestic market, then the gas will be retained here. Don’t we run a trade deficit? Hello – is there anyone there?

  • Posted by dm

    there is plenty of gas to go around,by not exporting,the drilling is slowing down in the US,which will put people out of work. The politicians want to raise our taxes but they are worried about gas prices going up a small % ??? What a joke!!!

  • Posted by Levis Kochin

    After reading the Levi paper on Natural
    Gas Exports I wrote the following letter to Senator Wyden of Oregon
    You are taking the lead in the Senate in opposing exports of natural gas from the US. The aim of this opposition is to reduce natural gas prices to American and particular Oregonian buyers. But 15% of the US natural gas supply and most of the natural gas used in Oregon is supplied by Canada. Under the US free trade treaty with Canada the Canadians are free to import US natural gas and export their own gas internationally as Liquid Natural Gas (LNG) . Even gutting North American Free Trade treaty (which you supported when you were in the House) would not not prevent the Canadians from diverting their exports to the US to the international LNG market. The only way to prevent the Canadians from such diversion would be to impose a naval blockade on Canada.
    Absent war with Canada the most the blockage of American LNG exports can achieve is to force
    the export of LNG from North America to proceed from Canadian rather than US ports. The facilities for Canada to export the natural gas is now exports to the US as LNG to Asia would cost tens of billions of dollars to build and would support tens of thousands of jobs as they were constructed and yield hundreds of millions of dollars in annual income tax revenue to the country where they were built.. The measures you suggest would place those jobs in Canada rather than the US and have those tax revenues go to Canadian rather than American governments.
    Levis A. Kochin

  • Posted by Levis Kochin

    p.19 Exports from Canada have supplied about 15% of US natural gas consumption. The Canadians will redirect those exports to the world market if US export controls on LNG appreciably lower the US domestic natural gas price unless the US blocks such exports by an act of war.
    As you note if a US block on LNG exports appreciably lowers US natural gas prices but does not void the North American Free Trade Agreement Canada and Mexico would in addition import large net flows of natural gas from the US to export as LNG.

    p.23 LNG export contracts
    Futures and other forward contract markets for US (Henry Hub) natural gas a buyer of LNG an LNG importer to convert a contract to buy LNG at a price pegged to US natural gas into a contract to purchase LNG at a fixed US$ price. By contracting in addition on forward foreign exchange markets the importer can convert his contract into a contract to buy in any traded currency. Or the importer could also contract on the Brent market and turn his Henry Hub contract price into a contract pegged to the international oil price

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