Thought Piece
[The following piece from James Taylor is spot on! While it is reasonable to expect a former Texas Governor to understand energy issues, this piece adds some intellectual firepower to the expansion of the whole hydraulic fracturing revolution.
If it makes geopolitical and economic sense to export US oil (and it does), it certainly makes the same sense to export liquefied natural gas. The US simply does not need any more restrictions of oil, natural or LNG industries.
The “invisible hand” will provide downward pressures on containing LNG costs, and at the same time, the LNG marketplace will be able to join in the American energy renaissance. Steve]
An Open Letter To Rick Perry On Natural Gas Exports
By James Taylor, Forbes Contributor
Last week you received a letter from a special interest group, the Industrial Energy Consumers of America (IECA), imploring you to expand the power of government to prevent energy producers from building natural gas export terminals. The letter also asked you to create new layers of bureaucracy and regulations to stifle what little natural gas exports currently occur. I hope and trust you will not be tempted to expand government and curtail economic freedom as the special interest group desires.
High Demand for American Natural Gas
America is positioned to become the OPEC of natural gas. Our vast natural gas resources together with our technologies and efficient production allow us to produce and sell natural gas at a much lower price than other leading producers. Russia, for example, leads the world in proven reserves and exports, but the price of Russian natural gas is twice as high as the price of American natural gas. The world is clamoring for clean-burning natural gas, and Russia rather than America is getting rich off this demand because the United States has only one operational export terminal.
WASHINGTON, DC – MARCH 02: Rick Perry speaks during his swearing-in ceremony, officiated by Vice President Mike Pence (L), as Perry’s wife Anita (R) looks on in the Vice President’s ceremonial office at Eisenhower Executive Office Building March 2, 2017 in Washington, DC. Perry has been sworn in as the Energy Secretary for the Trump Administration. (Photo by Alex Wong/Getty Images)
The IECA, a special-interest trade group whose members purchase and use large quantities of natural gas, seeks to have government block the construction of new export facilities – and impose new restrictions on existing exports – because the trade group believes stifling exports and preventing overseas customers from offering to buy U.S. natural gas will keep prices low. The trade group then argues that government intervening on its behalf is good for America’s national interests as well as its own interests. The trade group’s arguments fail to stand up to logic and facts.
Exports Bring Net Economic Benefits
Many abundant natural gas resources are being left in the ground because supply saturates domestic demand and it is not economical for energy companies to produce more natural gas for a limited quantity of customers. Allowing energy companies to access foreign demand will do little to raise domestic natural gas prices because the demand can be met through increased production of easy-to-access resources. Rather than forcing more customers to chase limited supply, allowing energy producers to market their products overseas will incentivize energy producers to produce more easy-to-access natural gas. The IECA sees American natural gas production as a limited economic pie for which customers must fight each other for access. Instead, American energy companies can easily expand natural gas production if they are allowed to sell natural gas overseas.
The IECA arguments could be made against any American producers. Restricting American steel companies from exporting American steel would impose a captive market on steel producers. Restricting American farmers from exporting American corn, wheat, and soybeans would impose a captive market on American farmers. An immediate and short-sighted benefit of such policies would be to lower domestic prices for steel and food, but ultimately it would induce a slow-down in steel production and food production. The steel industry would lose workers, farmers would lose their farms as they would no longer get a decent return on their labor and investments, and the short-term drop in steel and food prices would soon dissipate as steel companies and farmers cut production in response to reduced demand. Yes, export restrictions might cause some short-term price benefits for steel and food consumers, but prices for steel and food would rebound in the medium to long term as steel and food production is cut back to match the lowered demand. In the long run, nobody gains much but steel workers and farmers lose and the nation’s unemployment rate rises as a result of the many displaced steel and farm workers.
Exports Bring Net Benefits
President Trump realizes that being a net exporter of goods and services brings our nation substantial economic benefits. That is why he is taking measures to increase American exports and rectify trade imbalances with China and other nations. Directing government to further restrict the ability of energy companies to export American natural gas would only make our current trade deficit worse.
OPEC provides a good example of how nations benefit from exporting goods and services, particularly energy. There is a reason why OPEC nations have gotten rich from energy exports. True, gasoline prices for Saudi drivers might be lower if the Saudi government did not allow the export of Saudi oil. However, the benefits to the economy and ultimately Saudi automobile owners are greater precisely because Saudi Arabia allows and encourages oil exports. Overseas money flows into Saudi Arabia, with the proceeds elevating the entire Saudi economy and providing prodigious funding – without the need for much domestic taxation – to support Saudi Arabia’s extensive social welfare programs.
DOE Study Confirms Economic Benefits
The common-sense benefits of allowing U.S. energy producers to sell their product overseas was confirmed and fully explained by the U.S. Department of Energy (DOE) in 2012. Following a study requested by the DOE and conducted by NERA Economic Consulting, DOE reported that increased natural gas production would satisfy 60 to 70 percent of the increase in natural gas exports. Imports from Canada would help fill the remainder.
NERA reports that the economy-wide benefits of natural gas exports more than compensate for the modest increases in domestic natural gas prices. “A higher natural gas price does lead to higher energy costs and impacts industries that use natural gas extensively. However, the effects of higher price do not offset the positive impacts from wealth transfers and result in higher GDP over the model horizon in all scenarios,” NERA reports.
Analyzing a future in which American energy companies increase natural gas exports, “there is positive income from higher resource value and net wealth transfer. This additional source of income is unique to the export expansion policy. This leads to the total increase in household income exceeding the total decrease. The net positive effect in real income translates into higher GDP and consumption,” NERA reports.
“The macroeconomic analysis shows that there are consistent net economic benefits across all the scenarios examined and that the benefits generally become larger as the amount of exports increases,” NERA adds.
“Every scenario shows improvement in GDP over the No-Exports cases,” NERA explains.
In short, many factors explain why the economy-wide benefits of more natural gas exports outweigh the modest challenges presented to special interest groups like the Industrial Energy Consumers of America. More natural gas exports will spur more domestic natural gas production, which will create new jobs in the energy industry. Government will collect more taxes and royalties from the increased production, which will alleviate our tax burden and the national debt. And more money coming into the United States from overseas will raise the living standards of all Americans.
Since the DOE/NERA analyses in 2012, the situation has only gotten better. In an update published in 2014 NERA concludes, “The findings of the updated study confirm and extend the findings of the previous study that were endorsed by DOE in its Freeport Order (No. 3282) and subsequent LNG application approvals. LNG exports provide net economic benefits in all the scenarios investigated, and the greater the level of exports, the greater the benefits.”
The NERA update also alleviated concerns about more exports leading to higher domestic natural gas prices. “The market for LNG exports is self-limiting, in that little or no natural gas will be exported if the price of natural gas in the US increases much above current expectations. High levels of exports can be expected only if natural gas is plentiful and inexpensive enough to produce so that prices remain below current levels, even with high levels of exports,” NERA explained.
Environment, National Security Also Benefit
The economic benefits alone argue strongly for more natural gas exports, but there are additional environmental and national security benefits.
Many foreign nations, especially in Asia and Europe, suffer terrible air pollution, exacerbated by high population densities, rapidly industrializing economies, and a heavy dependence on coal power. Russia is partially filling the demand for cleaner-burning natural gas power to alleviate air pollution in these countries. As noted above, however, Russian natural gas is much more expensive than U.S. natural gas, which limits the amount of natural gas these nations can import. Allowing American energy producers to export our lower-priced natural gas will induce a greater conversion to natural gas power. This will in turn allow people in heavily polluted nations to enjoy better air quality and better health.
The extent to which Asian and European nations suffer worse air quality than America is documented by the image below. The image is taken from the Berkeley Earth website, which provides satellite-based real-time air quality monitoring over much of the globe. People in Asia and Europe desire to breathe the same clean air we do in America but they currently can’t afford more Russian natural gas. More U.S. natural gas imports will fill this demand and deliver cleaner air around the globe. It will simultaneously reduce global carbon dioxide emissions, alleviating the concerns of people worried about global warming.
U.S. national security will also benefit. Russia and the Middle East currently lead the world in natural gas exports. Every dollar sent by Asian and European nations to Russia and the Middle East enriches and empowers these nations to engage in actions counter to America’s strategic interests. Similarly, China leads the world in coal production and Russia exports nearly twice as much coal as America. Replacing Chinese and Russian coal with American natural gas will produce the same foreign policy benefits as replacing Russian natural gas exports with American natural gas exports.
Also, the high global reliance on Russian coal and natural gas hamstrings many nations’ foreign policy options. In Eastern Europe in particular, nations reluctantly appease and embolden Russian foreign policy aggression for fear that principled opposition will lead to Russia cutting off their vital energy imports. Replacing Russian coal and natural gas with American natural gas will limit the free hand Russia has to engage in aggressive foreign policy. It is far better, from a national security perspective, for foreign nations to be dependent on American energy exports than Russian energy exports.
More Restrictions, Regulations Undermine President Trump’s Agenda
Expanding government rules, restrictions, regulations, and bureaucracy is counter to President Trump’s agenda. Yet this is exactly what the IECA requests in last week’s letter. Quite clearly, requesting government to prevent any new export facilities from being built is an expansion of government restrictions and a new level of oppression on American businesses and American economic freedom. Worse, the IECA requests unprecedented government restrictions on the small of amount of exports that currently occur. The IECA requests the DOE “establish a process of ongoing monitoring and adjustment to LNG export volumes.” The IECA then explains that even after blocking the construction of any new export facilities, government bureaucrats should critically examine the small amount of current exports and, presumably, impose new restrictions or an altogether halt to American natural gas exports. Such an unprecedented expansion of government authority and restrictions on the U.S. energy industry runs counter to President Trump’s agenda, economic freedom, and the DOE’s purpose of facilitating energy production.
Conclusion
A key economic truth, and a key component of President Trump’s economic policy, is that America benefits by exporting more, not less, goods and services. There is nothing about natural gas exports that counter this principle. Allowing and encouraging more natural gas exports will create jobs, raise American living standards, and create additional environmental and national security benefits. On the other hand, granting the special-interest requests of the IECA would expand government, restrict freedom, harm the economy, harm American security interests, and damage global environmental health. The choice is clear, and I hope and trust you will make the right decision for America.
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