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Would Natural Gas Exports Make U.S. Prices More Volatile?

by Michael Levi
January 17, 2012


Debate over whether the United States should export natural gas is heating up. One of the most common questions being asked is whether allowing exports would increase price volatility in the U.S. natural gas market. Since a post I wrote last spring is apparently being invoked by people who are worried about volatility, I thought I’d weigh in.

My original post concluded this about exports and price volatility:

“It is not obvious that allowing exports would increase volatility in the U.S. natural gas market.”

So much for the claims that I’ve said anything firm one way of the other.

But I’ve had some more time to think about the issue over the past several months. I tend to conclude that, for modest export capacity, volatility is unlikely to be a large problem.

Here’s the thing: if I build some amount of export capacity and it is fully used at all times, there’s no way for international volatility to be transmitted into the U.S. market. Effective international demand for U.S. natural gas will be constant – it will be equal to U.S. export capacity. If demand for exports can’t change in response to international events, then domestic prices can’t either. It doesn’t matter whether international prices remain constant or triple or do something else – the amount of gas left for domestic consumption will be unchanged, and since the domestic demand curve won’t change either, domestic prices should stay the same.

Volatility only becomes a problem when so much export capacity is built that it isn’t always fully used. In that case, international events can change effective demand for U.S. natural gas, and alter U.S. prices as a result. If policymakers consider new exposure to volatility intolerable – whether they should is a separate question – they should make sure to draw the line on export capacity well short of what international demand would otherwise merit. There is little reason to believe that this should lead them to block the various export permits that are currently under consideration. (There may, of course, be other reasons for them to go slow on natural gas exports.) Whether they should go substantially beyond what has been proposed is a separate question.

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  • Posted by R. Dean Foreman, Ph.D., Chief Economist, Talisman Energy

    Let’s be frank that when people complain about “price volatility” the concern is usually not about volatility per se but whether the level of gas prices will in fact rise.

    Your initial comment concerning volatility seems to be accurate. There’s a pull for North American gas due to the continent’s ample supply and relatively low prices compared with Europe and Asia. A solid underpinning of long-term gas sales contracts and high expected utilization rates also is necessary for these projects to be financed and built.

    As for whether this pull for North American gas exports would materially affect price levels, the answer depends on the domestic supply-demand balance. The EIA issued an analysis this week that suggests there would be a small long-run increase in electricity prices as a result of exporting natural gas. However, the EIA also has been relatively slow to reflect the evolving resource potential and economics of prolific shale gas. As the recent U.S. National Petroleum Council study demonstrates, shale gas has added tremendously to North American reserves of low-cost recoverable gas resources — decades of potential supply at low costs. And some North American gas export projects, such as the Kitimat project in Western Canada, may motivate their own incremental supplies and therefore have no net impact on the market’s balance. In this case, gas produced out of the Horn River basin might not otherwise be developed soon because of its relatively high cost and distance to market.

    Permitting gas exports from North America will be a hot issue as parties seek permits to move forward. Thanks for touching a timely and interesting topic.

  • Posted by fireofenergy

    This is rather off topic, however, I believe that the United States should re-develop closed cycle nuclear (which does not require water for cooling) such as LFTR or the IFR.
    The LFTR has the potential to render obsolete the necessity to burn many billions of tons of fossil fuels, not to mention the 85,000 tons or so of uranium needed to power humanity every year with just 5,000 tons of thorium (once started with fissile material).
    If implemented on a large enough scale, this (almost) clean electricity should lower demand for the domestic use of NG, and thus may help the cause for NG exports.

    Valid concerns about excess CO2 should yield towards inherently safe reactors based on thorium because they do not require enrichment (after start up) and because thorium is about 4 times less scarce than uranium.

    Thank you for considering.

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