Dubious Campaign Against Liquefied Natural Gas Exports Ignores Fundamental Market and Economic Benefits of Free Trade

Washington – A dubious campaign by America’s Energy Advantage seeking to restrict expansion of liquefied natural gas (LNG) exports ignores fundamental economic and market facts, the American Council for Capital Formation (ACCF) said today. America’s Energy Advantage, a coalition backed by Dow Chemical and other large domestic natural gas users, relies on a gross overestimation of U.S. domestic demand for natural gas, estimating it to be more than 50% higher than estimated by the U.S. Department of Energy in the AEO 2012 report. Contrary to America’s Energy Advantage’s assertions, DOE notes that the U.S. has a robust 100-year supply of natural gas at today’s consumption level, which is more than adequate to meet the needs of manufacturers and utilities.

“It is unfortunate that industries with a clear market agenda are attempting to restrict LNG exports due to possible price impacts,” ACCF Senior Vice President Thorning said.   “It is analogous to the cereal industry attempting to curtail grain exports by U.S. farmers in order to hold down grain prices.”

Thorning pointed to the recently released DOE report reinforcing other economic findings that under all LNG export scenarios, the U.S. economy benefits even when factoring in the impact of price increases:

“Across all these scenarios, the U.S. was projected to gain net economic benefits from allowing LNG exports. Moreover, for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased. In particular, scenarios with unlimited exports always had higher net economic benefits than corresponding cases with limited exports.  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. This is exactly the outcome that economic theory describes when barriers to trade are removed.”

“It’s important to note that the drop in U.S. natural gas prices in the past three years has caused the number of rigs drilling for gas to fall sharply, for example there were 811 rigs drilling for gas in 2011 but only 439 at the beginning of 2013,” Thorning noted.  “At current natural gas price levels, employment and output of the U.S natural gas industry will continue to decline.”

Increasing natural gas exports will provide domestic producers with market-based incentives to increase their production and expand trade to support our economic recovery. :

  • According to Brookings Institute, Liquid Markets: Assessing the Case for U.S. Exports of Liquefied Natural Gas: “both Deloitte and EIA found that the majority—63 percent, according to both studies— of the exported natural gas will come from new production as opposed to displaced consumption from other sectors.” (See page 33) http://www.brookings.edu/research/reports/2012/05/02-lng-exports-ebinger
  • Opponents of LNG exports contend that investments in U.S. petrochemical and plastics plants would be deterred in the future as a result of increases in the price of natural gas. “However, the evidence suggests that the competitive advantage of U.S. industrial producers relative to its competitors in Western Europe and Asia is not likely to be affected significantly by the projected increase in natural gas prices resulting from LNG exports. As European and many Asian petrochemical producers use oil-based products such as naphtha and fuel oil as feedstock, U.S. companies are more likely to enjoy a significant cost advantage over their overseas competitors. Even a one-third decline in the estimated price of crude oil in 2035 would result in an oil-to-gas ratio of 14:1.” (see page 35) http://www.brookings.edu/research/reports/2012/05/02-lng-exports-ebinger
  • “There is also the potential for increased exports to help industrial consumers. Ethane, a liquid byproduct of natural gas production at several U.S. gas plays, is the primary feedstock of ethylene, a petrochemical product used to create a wide variety of products. According to a study by the American Chemistry Council, an industry trade body, a 25 percent increase in ethane production would yield a $32.8 billion increase in U.S. chemical production. By providing another market for cheap dry gas, LNG exports will encourage additional production of natural gas liquids (NGL) that are produced in association with dry gas. According to the EIA, ethane production increased by nearly 30 percent between 2009 and 2011 as natural gas production from shale started to grow substantially.” (see page 35) http://www.brookings.edu/research/reports/2012/05/02-lng-exports-ebinger
  • The Baker Institute’s “U.S. LNG Exports: Truth and Consequence” notes: “To begin, we must comment on the shapes of the supply curves in the U.S. and abroad, in other words, what is the appropriate elasticity of supply to inform our analysis. Without a doubt, the elasticity of supply in the North American gas market is substantially larger since the emergence of shale. Using the data from the recently completed Baker Institute study, “Shale Gas and U.S. National Security,” we estimate that the elasticity of supply in the U.S. post shale has risen over five-fold, from 0.29 to 1.52.”…This in turn has effectively stretched the domestic supply curve, rendering it relatively flat at a price between $4 and $6 per mcf.” pg 14-15 http://bakerinstitute.org/publications/US%20LNG%20Exports%20-%20Truth%20and%20Consequence%20Final_Aug12-1.pdf

Thorning stressed the tremendous benefits of free trade, regardless of the commodity or produce being traded.  Expanded trade will yield very large benefits to the U.S economy, ranging from increased jobs and economic growth to increased governmental revenues.  History shows, in contrast, the very harmful consequences of protectionist policies, which attempt to shield the interests of a narrow industrial sector at the expense of the larger economy.

“From corn to cars to wheat, exports have proven to be a net positive boost for the U.S. economy and LNG shouldn’t be treated differently,” Thorning concluded.