Advances in drilling and fracturing underground rock (a.k.a. “fracking”) have unlocked massive supplies of natural gas previously trapped deep under the United States, positioning the U.S. to become the world’s largest producer of natural gas by 2015. Ironically, this gas is now trapped within the geographic boundaries of North America because we don’t have the facilities to export gas to markets in Europe and Asia.
The oversupply trapped in the U.S. has caused the domestic price to collapse to by more than 50% to $2-$3 per thousand-cubic-feet (Mcf). That’s a fraction of prices in Europe where gas goes for $10-$11 per Mcf or those in post-Fukushima Japan which are over $17 per Mcf.
The severity of oversupply in the U.S. relative to global markets offers an opportunity for the United States to achieve something it has never had: a comprehensive energy plan that makes sense in terms of our economy, national security and public health. Better yet, it could rally support from interest groups previously at odds. How? By embracing natural gas exports. This would not only take the slack out of the natural gas market , but by doing so enable renewable energy to become the backbone of our power generation infrastructure.
In today’s energy conversation, much has been made of the benefits cheap natural gas confers on Americans. Today’s cheap gas can be burned to generate electricity at a cost of about $30-$50/MWh (3¢ – 5¢ per kWh). Compare that to utility solar power at $70-$80/MWh and wind power at $40-$60/MWh, both of which are cheap by historical standards but higher than the apparent price of gas-fired power. For consumers and businesses, that looks like a windfall (at least for now) in the form of lower electricity rates. However it’s increasingly apparent that cheap gas has some downsides because it is actually distorting power markets.
The siren song of cheap gas is tempting regulators and utilities to pursue a disproportionate build out of gas-fired power plants. The danger with this trend is that a gas-dependent infrastructure is vulnerable to future gas price shocks. Whereas stability can be found in a portfolio of both renewables and gas offering more predictable prices and greater energy security. The bottom line is that artificially low gas prices are distorting energy markets and complicating our nation’s progress towards a truly secure, clean and affordable energy future.
Promoting a gas export policy will provide an important shift in our national energy debate. This as an opportunity for groups that typically find themselves on opposite sides of energy issues to come together. There is clear alignment between climate advocates and renewable energy industry with the oil and gas industry based on a shared interest in seeing natural gas prices rise a notch or two.
Gas producers clearly stand to benefit from export. One of the lesser known realities of the gas fields is that today’s prices are not sustainable as they don’t offer producers enough value to drill profitably. Even accounting for the cost of gas liquifaction and shipment, the spread between U.S. prices and global prices ensures them a better profit from export than they currently get at home.
Gas power plant developers also stand to benefit from higher prices. Another hidden effect of low gas prices is that it inhibits development of new gas-fired power plants, because the spread between the cost of gas and the price of electricity is tight when gas prices are low. And few developers want to build a plant today that locks in at today’s low electricity prices. Rising gas prices would increase spreads and make new-build gas plants more attractive.
The renewable energy industry should absolutely get behind the idea of exporting natural gas. If gas prices were still at the levels they were three years ago, wind and solar would be solidly competitive with fossil-fired power. And the utility-scale renewable industry wouldn’t be fighting the headwinds it is today. Exporting gas would increase demand and raise gas-fired power prices to a level that would help wind and solar by improving their competitiveness.
But why should climate advocates get behind exporting natural gas? Wouldn’t that just increase the amount of carbon we’re putting into the atmosphere? One of the big downsides of our gas glut in the U.S. is that we’re now exporting our coal to Europe. Cheap domestic gas is replacing coal at home but that coal is simply being burned elsewhere. Thus the result of low gas prices is to increase global carbon emissions because total fossil fuel consumption is exploding.
Exporting natural gas would be more likely to displace coal both at home and abroad, resulting in a lower net carbon emissions overall. This alone gives climate advocates a reason to support the export of natural gas. Beyond that, any economist will tell you that raising the price of a commodity should increase rationing of that product. In other words, raising the price of gas should result in burning less of it and lead to more selective consumption.
The biggest objection to gas export is likely to come from domestic industries and utilities that expect to benefit from cheap gas. Chemical and fertilizer companies that use gas as a feedstock benefit from today’s gas prices, as do industries that use gas for industrial heating. Utilities and ratepayer advocates are also likely to clamor against export in order to keep cheap gas to generate electricity.
It’s important to see these arguments for what they are: industries clamoring for the government to assign them a share of the windfall from our nation’s gas glut. Cheap gas means higher profits for them, but those excess profits simply come out of the pockets of producers who can’t get their product to global markets. These claims are increasingly being cloaked in the political kryptonite known as “saving jobs.”
The fallacy of the jobs argument is made clear in a recent report on the macroeconomics of gas export from NERA Economic Research. A key finding of their report was that “the U.S. was projected to gain net economic benefits from allowing LNG exports.” And “LNG exports [would] have net economic benefits in spite of higher domestic natural gas prices.” Furthermore, the study points out that the industries likely to be impacted by export are extremely narrow and represent only “about one-half of one percent of total U.S. employment.” And as the report states clearly, “LNG exports are not likely to affect the overall level of employment in the U.S.”
The NERA study also addresses alarmist projections that export would result in disastrous price increases for natural gas at home. The report puts this fallacy to bed quickly by pointing out export would only occur when the foreign price was greater than the cost of extracting, liquefying, and shipping gas overseas. That means domestic prices will always be significantly lower than prices in either Europe or Asia–and thus domestic industries would still retain a competitively priced gas supply in the U.S. relative to their global rivals.
A gas export initiative is clearly the best policy for dealing with the current gas glut and provides the least offensive role for government to play in restoring balance to power markets. This initiative has significant potential to garner broad political support by aligning the interest of historical adversaries on energy issues. This latter point is exciting. It suggests a potential political opening for the kind of comprehensive energy plan our nation needs to move forward.
Image: Oil & Gas Tanker via Shutterstock