Banning Natural Gas Exports Revisted

On February 14th I posted a critique of Representative Ed Markey’s (D – Mass) January 4th letter to Energy Secretary Steven Chu, in which he suggests that natural gas exports (primarily through LNG) would bring dramatically higher domestic natural gas prices and devastating consequences for American industrial, commercial and residential consumers.  In my original post I argue that banning natural gas exports would have a number of negative economic consequences, including the contraction of the natural gas production industry, the disappearance of energy business leaders and the drying up of energy-dedicated capital flows.  See the following link for the full discussion:

Since my post, Markey has introduced two pieces of legislation aimed at halting any material natural gas exports.  The first bill, the North America Natural Gas Security and Consumer Protection Act, would prevent the Federal Energy Regulatory Commission (FERC) from approving new LNG export terminals until 2025.(1)  The second bill, the Keep American Natural Gas Here Act, would require that gas produced from federal lands would have to be resold to U.S. consumers(1).  I am still of the opinion that severing international demand from the US natural gas market is counterproductive economic policy, for the reasons that I list in my original post and for a few more that I will discuss below.

Markey’s argument is built on an EIA study, which indicates that US exports may cause natural gas prices to increase by as much as 54% over the next 20 years(2).  However, if you dig a little deeper (i.e. read the EIA report) it clearly states that the projections are based on so many uncertainties that they really can’t be sure of the magnitude of price increases.  The other leading report on the issue, prepared by Deloitte, projects a 20-year price increase of 1.7% and makes the same caveats around uncertainty(3).  A range of 54.0% to 1.7% seems pretty wide.  The Brookings Institution has release a preliminary report, which corroborates this high level of uncertainty and states that far more analysis must be completed before any policy recommendations could be made(4).  I am unclear as to why Markey would propose an export ban as a means to cheap natural gas, when the experts have essentially indicated that without further analysis they really don’t know how exports would affect prices.

Markey might also consider the federal government’s policy track record.  Twice in the past has it created policy regulating to whom gas producers may sell their product or at what price.  The first attempt was in 1954 with the Phillips Decision, which awarded wellhead price control power to the FERC’s predecessor.  The FERC promptly set prices well below the actual market value and caused three decades of gas shortages.  The second, the Fuel Use Act of 1978, restricted the use of natural gas for industrial consumers and power generation.  This attempt created over-supply issues and a lost decade of gas-fired generation capacity development.  Both policies have been completely reversed.  I am not sure why Markey thinks his bills will be successful at managing supply and pricing when such measures have failed miserably in the past.

Finally, we must recognize that Markey is proposing an arbitrary transfer of value, in the form of cheap natural gas, from the oil and gas industry to industrial, commercial and residential consumers.  Let’s consider some economic features of an arbitrary system:

  • Arbitrary policy causes businesses and consumers to lose trust in the political and regulatory system
  • Would-be business leaders and entrepreneurs are discouraged by lack of consistency, resulting in less business activity
  • Less business activity creates higher unemployment
  • Unexpected “regulatory” events raise the cost of capital, which becomes more expensive and scarce
  • Decreased business activity and expensive capital decrease product supply
  • Decreased supply results in higher prices

It would seem that Markey’s legistlation may have an opposite effect to its intention.  As discussed above, this outcome would be more or less in line with the result of past regulation of natural gas supply and pricing.

Markey argues that we must ban exports to preserve cheap natural gas for consumers.  Can we not apply this logic to any US export: planes, cars, tractors, corn, wheat, financial services, etc?  Would it not be great for America’s farmers to have cheaper equipment or for all citizens to have cheaper wheat?    I suppose Markey would be less enthusiastic about banning the export of products that were near and dear to the Massachusetts economy, like biotech.  While we are considering political motivations, I should point out that Markey is up for reelection this year.  Safe to say that a promise of cheap natural gas plays well among the electorate in a state that produces none but is a top consumer.

I will end with a quote from Alaska senator Mark Begich, regarding an Alaskan pipeline that Markey’s bills would block.  “Yet again, Rep. Markey is trying to shut down any Alaska development,” Begich said. “I find it laughable that after 30 years of blocking the development of Alaska’s oil and gas resource for American manufacturers, farmers and families he is now demanding we supply them. I eagerly await his sponsorship of bills to support development of ANWR and the Arctic OCS to address his newfound concern for American consumers.”(5)



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One response to “Banning Natural Gas Exports Revisted

  1. robschimmel

    The potential economic consequences of Congressman Markey’s protectionist policies are significant. Let’s examine what happens to JOBS when cheap natural gas is abundant.
    A few facts to start the discussion:
    • On April 2, 2012 the Henry Hub spot price for 1,000 cubic feet of natural gas fell to a record low of $1.87(1)
    • Today, April 12, 2012, the price of natural gas has dropped below $2 on the futures market for the first time in more than a decade(2)
    • As of late March 2012, the 663 natural gas rig count remains 59% below its high of 1,606 that peaked in late summer 2008(3)
    What do the above facts mean for American Jobs? Let’s use the Marcellus Shale as a general example.
    According to the Marcellus Shale Education and Training Center:
    It takes 420 different people across about 150 different occupations to bring a single Marcellus well into production… When we take the total hours worked by the 420 individuals, we find a fulltime equivalent (FTE) estimate of 13.10 direct jobs to bring a dry gas well into production. Of the fulltime jobs, 12.9 FTE’s per well are required during the pre-drilling and drilling phase of development [and] 0.18 FTE’s per well are required during the production phase…To illustrate the model, if a county has ten rigs operating, over the course of a year those rigs would drill 100-150 natural gas wells. Using the 13.10 FTE per well estimate, about 1,291-1,936 fulltime jobs would be created to support pre-drilling and drilling operations [and] 15-27 fulltime jobs would support production.(4)
    Based on the quoted FTE estimates noted above, the 943 natural gas rig count decline from 2008 to present has cost Americans between ~123,000-185,000 jobs.
    Examine the following quote from President Obama’s 2012 State of the Union Speech:
    On the day I took office, our auto industry was on the verge of collapse. Some even said we should let it die. With a million jobs at stake, I refused to let that happen. In exchange for help, we demanded responsibility. We got workers and automakers to settle their differences. We got the industry to retool and restructure. Today, General Motors is back on top as the world’s number-one automaker. (Applause.) Chrysler has grown faster in the U.S. than any major car company. Ford is investing billions in U.S. plants and factories. And together, the entire industry added nearly 160,000 jobs.
    It is important to understand the relative significance of oil & gas industry jobs vs. every other industry sector in America. One of the key job creation accomplishments noted by the U.S. President (regardless of your political opinion on the statement) is within close range of the approximate job destruction caused by lower rig counts, which was caused by low natural gas prices.
    Congressman Markey as well as President Obama should be careful to advance future energy policy that matches the rhetoric of their stated intentions. It is disconcerting that the CEO of Chesapeake Energy, the most active driller of new wells in the United States, wrote “An Open Letter to President Obama: Actions, Not Words, Will Determine Our Energy Future.”(5) The letter has its own political overtones.
    Everyone whom this debate effects (which is all of us who turn on lights or go anywhere without walking) would benefit from accurately presented research and honest information disclosure from Chesapeake Energy, Congressman Markey, and President Obama.
    (1) Tulsa World. “Natural gas hits lowest price in decade due to U.S. glut.”
    (2) Ibid.
    (3) Zacks Analyst Blog Highlights. 12 April 2012.
    (4) Marcellus Shale Education and Training Center (MSETC) in cooperation with the Southwest Pennsylvania Oil and Gas Industry Partnership. “Marcellus Shale Workforce Needs Assessment.” 30 Sept. 2010.
    (5) Chesapeake Energy Corp. “An Open Letter to President Obama: Actions, Not Words, Will Determine Our Energy Future.”

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