New Study on U.S. Natural Gas Exports

Booming U.S. shale gas production has prompted a series of firms to apply for permission to export liquefied natural gas (LNG) from the United States. This prospect has become controversial: some see an opportunity to gain from trade and to shake up global gas markets; others fear environmental damage, higher consumer costs, and lost manufacturing competitiveness.

In a new paper published today by The Hamilton Project, I carefully assess each of these issues, as well as several others, providing a comprehensive look at the likely costs, benefits, and consequences of allowing LNG exports.

I ultimately conclude that the United States should allow LNG exports. I also argue that it should take several steps to mitigate resulting risks and capture opportunities arising from allowing exports.

You can read the paper here.

I won’t rehash all of its arguments – but I do want to highlight a few interesting bits:

• The biggest reason to allow exports is that prohibiting or constraining them would have broad and damaging repercussions for U.S. trade, and hence the U.S. economy. Among other things, it would hurt U.S. efforts to get China to remove constraints on strategic minerals exports. Making export restrictions bind would also probably create significant problems with NAFTA.
• Exports are likely to reach only moderate levels. The resulting gains from trade, while significant, are thus less than some might expect.
• Many have warned that exports would hurt U.S. manufacturing by raising costs. What they miss is that, by increasing production of gas, they would also raise demand for manufactured inputs like steel and cement. My estimates suggest that the latter effect would dominate – allowing exports would be a net positive for manufacturing.
• The tradeoff between exporting natural gas and putting it in our cars and trucks is largely a distraction. Blocking exports wouldn’t drive natural gas into cars and trucks – it would leave it in the ground. If we want to see more uptake of natural gas in transportation, what matters most is targeted policy, not what we do about exports.
• Other countries – particularly Japan – are eager to get preferential access to U.S. LNG exports. The United States should not simply give this away – it should use it as leverage in ongoing trade negotiations.
• The biggest risk arising from exports would be to the local environment. More exports mean more production, and thus more local risk. Exports will not begin for several years at minimum. Industry and government should use the intervening time to ensure that protections are as strong as possible.

I’ll have more to say on some individual elements of the report in the next couple weeks. For now, though, I encourage you to read it here.