My journalist daughter always reminds me “Don’t bury your leads”, so here goes: we are not just ill-advised, but downright foolish to expand the export of liquefied natural gas (LNG). There are several reasons why.
World LNG prices are based on the price of crude oil or its products. This ignores the fact that natural gas is primarily worth its heat value, crude oil valuable for much more. The current world price is about $15+/million BTUs. The North American price is under $3/MMBTU. Four years ago in mid-2008 the price of NG here was above $12.50/MMBTU, based on just the perception of future shortage.
High natural gas prices were among several elements causing the Great Recession. Chemical industries employing NG for feedstock as well as fuel (e.g., fertilizer and polypropylene) hardly existed in the U.S. at that price. Today they are going great guns. Part of our wobbly recovery is due to that turnaround, one of the few manufacturing sector success stories out there. The jobs to be lost in those industries from a sudden rise in natural gas price are far more than those to be gained by its increased export.
Currently, North America has around 3-5 billion cubic feet per day of excess production. It’s the cause of the four year collapse in NG price that bottomed late this spring. Shale gas developers were afflicted with the same gold-rush mentality that has always characterized the upstream segment of the Oil & Gas Industry: they simply didn’t know when to stop. They finally got the message and slowed down. Those (over)developers of natural gas in North America are free market true believers, disdaining Federal intervention. Now they find themselves in the awkward position of not liking one market, which is performing poorly for their interests. They are asking our government to give them another market, one far higher in price, one that will raise the price of natural gas substantially to everyone. Why should we subsidize them at our expense?
Those shale gas deposits in which the NG is accompanied by significant amounts of natural gas liquids are still being developed. As the produced liquids price similarly to crude oil, those fields are economically viable at lower gas prices. Among the shale plays not currently being developed are a range of gas liquids content. This provides a price governing mechanism. When the price rises, given a similar oil price, more shale gas becomes economically developable, limiting the rise in price perhaps for decades, provided we don’t export the surplus.
Those who haven’t traded commodities have no concept of the radical price difference between one 5% oversupplied against demand (the current situation for natural gas) and one 5% undersupplied. Here’s what happens if we allow enough export capacity to ship out 110% of the surplus: as additional supply is waiting on a price increase, the price of all North American natural gas, not just that which is exported, will rise to meet the world price, less the costs of liquefication. And down we go.
The U.S. produces 60-65* billion cubic feet (BCF) per day, averaged across the year. Call it 60 and keep the numbers round. Each BCF is about one million MMBTUs. If the price rises $9.50/MMBTU, from $3 back to $12.50, the hit to everyone except the natural gas industry is $570 million per day, or over $200 Billion per year. Over the next five years that’s in excess of one-trillion-with-a-t dollars! It will be drawn from all sectors of our economy and transferred to those involved in the natural gas value chain, a very small minority.
This is not a right/left, rich/poor, Republican/Democrat nor pro-markets/anti-markets issue. It’s an issue of providing a second, unjustifiably higher-priced market to folks who just wrecked the market they are in. It benefits a very few at the cost of re-wrecking the economy for the very many. Cheap natural gas is the only really good economic news out there. It’s clearly in the national interest to keep the surplus at home.
All this without mention of the displacement of coal by NG for power generation and transportation fuels. That transition has been credited with the larger part of a 20% reduction in the carbon emissions of the U.S. The current low price of natural gas is economically stimulative, counter-inflationary and pro-environmental, an astounding trifecta. We should take former First Lady Nancy Reagan’s advice and “Just say no.” Export the technology instead.
*Energy Information Agency (EIA), 2011 production 63.0 BCF/D
Image: LNG Tanker via Shutterstock