“There’s nothing like being a victim of your own success.”
That must be what American natural gas producers are thinking right now. Their profound success in recent years in expanding our national energy supply has inspired American policymakers to consider strapping them with strict new trade restrictions.
These regulatory efforts are deeply misguided and will, ultimately, deprive the country of jobs and growth.
Thanks to major innovations in drilling techniques, America is facing a natural gas surplus, with the per-unit price of gas now sitting at just $3-about one-third to one-fifth the price in Europe and Asia. Utility plants have shifted from cheap coal to even cheaper-and cleaner-natural gas. As a result, energy-related carbon emissions have been declining rapidly and now sit at levels not seen since the early 1990s.
But natural gas supply is outpacing demand. So, producers have cut back on extraction and the drilling of new wells. Many are turning back to more profitable oil plays. The number of natural gas rigs now in operation is half the total of a year ago.
As a result, natural gas producers are looking for new markets. The United States does currently export some natural gas to Canada and Mexico, but the real opportunities lie in overseas markets, where prices are much higher.
Shipping natural gas across great distances is challenging. This substance can’t be easily loaded on a tanker like crude oil, so producers have to liquify it. The process involves super cooling gas to -260F, and the necessary facilities to cool it are predictably quite costly.
Most distressingly, however, is that the Department of Energy has been dragging its feet when considering natural gas firms’ applications to establish export facilities. The department was waiting on a just-released study intended to assess the impact of natural gas exports on domestic natural gas prices. The study concluded that expanding natural gas exports would be an economic winner.
“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,” according to the report. We’ll have to see how the DOE responds.
Private sector companies have also been raising concerns that expanding exports could also force them to pay higher gas prices. They claim that cheap natural gas is spurring economic growth here at home and providing America’s manufacturing sector with a valuable competitive advantage.
But their concerns, while understandable, are overblown. Allowing natural gas exports would, at worst, drive up domestic prices only slightly. The consulting firm Deloitte took a close look at the issue and determined that allowing exports would increase domestic prices by just 1.7 percent over the next 20 years.
What’s more, banning exports might have the unintended consequence of driving gas prices up. Firms are already cutting back on production because of historically low prices. If they can’t sell at higher prices in foreign markets, this ratcheting back will continue, causing the domestic gas supply to shrink anyway and forcing prices skyward. That’s the very last think we want.
And even if expanding gas exports pushes domestic prices up initially, natural gas producers would have a new, substantial financial incentive to further ramp up production and develop more wells. This expansion would increase supply and put downward pressure on domestic prices.
Plus, expanding natural gas production to meet new foreign demand would create new jobs right here at home. Banning exports would deprive Americans of those opportunities.
That’s precisely the effect we’d expect if policymakers installed a similar export ban on, say, American car companies. Ford and the like would take a massive hit as demand for their product declined. The car industry would suffer significantly lower revenues, inevitably leading to layoffs.
This exact same causal chain will transpire if federal policymakers prohibit gas exports.
There are vast new international markets for cleaner-burning natural gas. Allowing U.S. energy companies to fill that demand makes good economic sense and would lead to the creation of many new high-paying jobs.
Trade restrictions are almost always a bad idea. In the case of natural gas exports, they would be particularly foolish and economically disastrous.
Merrill Matthews is a resident scholar at the Institute for Policy Innovation in Dallas, Texas. Follow him on twitter: @MerrillMatthews.