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

Would Natural Gas Exports Make U.S. Prices More Volatile?

January 17, 2012

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Debate over whether the United States should export natural gas is heating up. One of the most common questions being asked is whether allowing exports would increase price volatility in the U.S. natural gas market. Since a post I wrote last spring is apparently being invoked by people who are worried about volatility, I thought I’d weigh in.

My original post concluded this about exports and price volatility:

“It is not obvious that allowing exports would increase volatility in the U.S. natural gas market.”

So much for the claims that I’ve said anything firm one way of the other.

But I’ve had some more time to think about the issue over the past several months. I tend to conclude that, for modest export capacity, volatility is unlikely to be a large problem.

Here’s the thing: if I build some amount of export capacity and it is fully used at all times, there’s no way for international volatility to be transmitted into the U.S. market. Effective international demand for U.S. natural gas will be constant – it will be equal to U.S. export capacity. If demand for exports can’t change in response to international events, then domestic prices can’t either. It doesn’t matter whether international prices remain constant or triple or do something else – the amount of gas left for domestic consumption will be unchanged, and since the domestic demand curve won’t change either, domestic prices should stay the same.

Volatility only becomes a problem when so much export capacity is built that it isn’t always fully used. In that case, international events can change effective demand for U.S. natural gas, and alter U.S. prices as a result. If policymakers consider new exposure to volatility intolerable – whether they should is a separate question – they should make sure to draw the line on export capacity well short of what international demand would otherwise merit. There is little reason to believe that this should lead them to block the various export permits that are currently under consideration. (There may, of course, be other reasons for them to go slow on natural gas exports.) Whether they should go substantially beyond what has been proposed is a separate question.