from Energy, Security, and Climate and Energy Security and Climate Change Program

How to Stop Natural Gas Exports

August 27, 2012

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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The ongoing debate over whether to allow liquefied natural gas (LNG) exports has featured a recurrent theme: people insist that the gas would be better used within the United States. “We will go down,” T. Boone Pickens has written, “as the dumbest generation ever if we export our clean, cheap, abundant supplies of natural gas in favor of dirtier, more expensive OPEC oil.” In a letter to the editor today responding to my op-ed on the subject of a couple weeks ago, Bob Bailey writes, “We finally have an alternative to foreign oil in the form of natural gas, and Mr. Levi wants to ship it overseas. I’m confused. Why don’t we keep this resource here? Use it here?”

I actually agree with much of the sentiment. If the United States exports as much natural gas as many currently envision, it will probably be a sign that U.S. policy has failed. But the right response is not to bar exports – it’s to directly boost other sources of natural gas demand.

The underlying logic is similar across different uses for natural gas. Exports raise natural gas prices. That reduces natural gas use in other sectors. Conversely, though, boosting natural gas consumption in other sectors increases natural gas prices. That reduces exports.

This applies no matter what the alternative use is for natural gas. Want to use natural gas as a more climate-friendly substitute for coal? Implement a carbon price, clean energy standard, or regulation that promotes greater use of gas. Natural gas prices will rise. As a result, the gap between U.S. and overseas natural gas prices will shrink. Some export projects will no longer be viable. Exports will thus decline.

How about natural gas as a transport fuel? Same thing. Write CAFE standards in a way that boosts the use of natural gas in cars and trucks, subsidize the purchase of natural gas vehicles, or raise oil and gasoline taxes, and more people will use natural gas for transport (including through conversion of natural gas to methanol and other fuels). Natural gas prices will rise, the gap between U.S. prices and overseas ones will decline, and exports will no longer be as attractive.

The same thing even holds for natural gas use in manufacturing. I happen to find arguments in favor of using policy to steer natural gas into manufacturing suspect. But perhaps you don’t. Then subsidize manufacturing, as several administrations have done (and continue to do) through the tax code. You know the routine by now: more gas use in manufacturing will boost prices, and exports will decline.

We can even put some numbers on this. Recent modeling by the EIA suggests that a modest price on carbon could raise natural gas use in the power sector by as much as five billion cubic feet a day as of 2020. Using natural gas to back out a million barrels of oil a day in the transport sector could add roughly six billion cubic feet a day of demand beyond that. The EIA has recently estimated what that much new demand might do to natural gas prices (though in a different context). Assuming no surprises on the supply side, natural gas prices circa 2020 would rise from about six dollars to between seven and eight dollars for a thousand cubic feet. This would erode a decent part (if not all) of any edge that U.S. exports might have. The result would be lower (or vanishing) exports in the first place.

What if U.S. shale gas resources turn out to have been overestimated? The combination of scarcer gas and a big boost in domestic demand would crank prices up quickly. It would not be surprising to see prices rise well above ten dollars for a thousand cubic feet (though demand in other sectors would probably fall to restrain that increase). Needless to say, with natural gas prices that high, exports would most likely become uneconomic. U.S. exporters would probably still do just fine – their contracts typically guarantee payment for liquefaction services regardless of whether those services are actually used. Actual exports, though, would not materialize in any meaningful quantity.

None of these domestic policies, of course, would be easy to implement. But blocking exports isn’t an effective substitute. Barring exports would do far less than even mediocre climate policy to move natural gas into power plants. Moreover, it would actually undermine renewable energy, nuclear power, and energy efficiency. Its impact on natural gas use in transport would be negligible. People who want to see the United States make better use of its natural gas have only one option: they will need to promote those better uses directly.

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