Linked above is the January 4, 2012 letter from Rep. Ed Markey (D-Mass) to US Energy Secretary Steven Chu, questioning the prudence of large-scale natural gas exports. In his letter Mr. Markey reasons that LNG exports facilities will absorb domestic natural gas supply in the coming years and dramatically raise natural gas prices. His letter lists a number of potential negative impacts of natural gas exports, including “the potential price impacts of exports and the residual impact of higher gas prices on electricity generation and manufacturing, the potential for more volatile natural gas prices, and the environmental impact of raising the cost of gas, which he characterized as a “bridge” fuel from coal to renewable energy.”(1) The ultimate point of the letter is to suggest to Mr. Chu that the federal government must limit LNG export licenses, which Mr. Markey argues will do all sorts of wonders for the consumers, businesses and the economy in general.
In a preliminary response, the Brookings Institution asserts that Mr. Markey’s arguments are half-cooked and questionable at best. Their response is very insightful and calls into question a number of Mr. Markey’s claims. I will not try to regurgitate their work, but will direct you to the link at the bottom of this entry. What I would like highlight are the economic perils of interventionist policy and the damaging effects that it would have on our economy and our energy industry at home and abroad.
First, it should be noted that limiting natural gas exports would likely have similar effects to a price ceiling. If natural gas prices are kept artificially low by eliminating a source of demand, we can expect that the energy industry will contract to reduce supply. (Note: the recent drop in natural prices to ~$2.50/Mcf has already caused contraction to occur naturally. Names such as Conoco and Chesapeake have already announced gas well shut-ins. At $2.50/Mcf the economics of dry gas wells do not work.) As this contraction occurs we can expect to see energy company failures (primarily E&P, OFS and midstream), job losses, decreased tax revenue and lost land-owner royalties and similar such economic pain that is typical when government intervention unexpectedly severs a critical source of industry demand.
We should also consider the individuals and companies that pioneered the technological revolution that unlocked all of this shale gas in the first place. They have accomplished nothing short of a natural revolution. Why? Because they believed that a free market price awaited their product. It is a dangerous signal to send hard-working and creative business leaders that the government may at any time step in to destroy the value of their work product.
The same logic applies to the hundreds of billions of foreign and domestic capital that has flowed into this country over the last 10 years. Thanks to the drilling and completion expertise/technology that our industry has created, any oil and gas company in the world that wants to operate shale has to pay a US industry peer for an apprenticeship developing one of our shale plays. Or invite us onto their soil for a lesson (as is happen right now in Poland, which has a massive prospective shale play that will end up producing big profits for our O&G companies). Where did this expertise come from? The expectation that if shale gas was unlocked, those that poured their time and money into do so would be rewarded. What would happen if our government gets a reputation for interventionist policy? Capital sources will be scarce the next time our energy industry is called to mobilize.
By the way, prospective Asian buyers of LNG are already betting that Washington will limit exports. They project that exports will be limited to 2 of the 8 proposed terminals. They see US LNG volumes as a major supply risk and as a result are avoiding our product.(2) This will do wonders for our natural gas market efficiency and our reputation as a leader of the globalized, free market economy.
Stay tuned for Mr. Chu’s response.