What People Really Want When It Comes to Natural Gas Exports

The University of Texas recently published an interesting study on American views towards natural gas, hydraulic fracturing, and liquefied natural gas exports.  This study will inevitably be used by anti-LNG advocates to support their position.

The study was circulated to reporters by Senate Energy and Natural Resources Committee majority staff illustrate that Americans don’t want natural gas exports. The study shows by an almost three-to-two margin Americans are opposed to the exports of natural gas.  To summarize the study, this would be correct: 39 percent said they opposed to natural gas exports and 28 percent said they’re for it.

However, like any good poll, the study asks the individuals just how familiar with natural gas they are.  It turns out that those who are familiar with natural gas production (ie. “fracking”) are supportive of LNG exports, and even people who describe  themselves as “Active Environmentalist” are evenly split on the issue. The people who are not familiar with “fracking” are opposed towards it, and, perhaps tellingly, the strongest group opposed to LNG exports is “greater than age 65”.

click to enlarge

What do we make of this?  The study also asked individuals their attitudes towards regulation of natural gas and the numbers indicate that people are overwhelmingly supportive of regulation – almost 62%.  Yet, over the past six months, as more individuals have become familiar with natural gas, and also felt that it should be regulated, the more they were also in favor of hydraulic fracturing.

click to enlarge

Therefore, the real question that a poll should ask is, “Are you in favor or opposed to exporting regulated natural gas?” Natural gas production has expanded by 29 percent from 2006-2012 due to new technologies that have allowed for the safe development of shale gas. And Americans more than anything else want jobs, and a better economy.
It would be natural to think that by common sense most Americans are in favor of
exports, as long as they aren’t harmful.

Interior Secretary Sally Jewell said new hydraulic fracturing regulations will be released in coming weeks.

What is the opposition to natural gas exports?

ACCF recently sat down with three energy and economic scholars to explore the topic, “Should Free Trade Principles Apply to U.S. Exports of Liquefied Natural Gas?”  We discussed the general public’s perception of the LNG export issue.  During the conversation, Michael Levi, the Director of the Council on Foreign Relation’s (CFR) program on energy security and climate change noted that a primary driver of opposition to LNG is how slightly higher natural gas prices could be a burden on U.S. industry, forgetting that “there are opportunities in the production of the natural gas that would arise from exports that would benefit U.S. industry and workers.”

“There has been a focus on energy intensive manufacturing which pays a decent fraction of its cost on energy and on natural gas. But if you look at natural gas development and shale gas development in particular, it’s quite intensive in some of these commodities. It uses a lot of steel and a lot of cement,” Levi explained. “So new demand for natural gas from exports would actually help some of these industries by increasing demand for their products.”

Jagdish Bhagwati, a University Professor, Economics and Law, at Columbia University and Senior Fellow in International Economics at the Council on Foreign Relations contended that even if natural gas prices rise from LNG exports, the effect will be “relatively miniscule.”

Richard Schmalensee, a Professor of Economics and Management, Emeritus at the Massachusetts Institute of Technology and Director of the MIT Center for Energy and Environmental Policy Research at the MIT Sloan School of Management concurred.

“In addition, U.S. natural gas prices are now at historically low levels and are at low levels internationally. The notion that the small domestic price increases that are likely from exports would change that ignores the fact that the costs of liquefying and transporting natural gas are significant relative to current domestic prices. So the existence of exports isn’t going to make the U.S. domestic price equal to prices elsewhere that are determined by the costs of LNG imports.”

“To try and figure out which industry will be hurt more and which less is hardly a productive use of our skills and time. Change is continual and prices change all the time; entrepreneurs have to get used to such changes instead of trying to insulate themselves through lobbying-led interventions,” Professor Baghwati added.

All experts agreed that free-trade must drive America’s LNG policies, a sentiment that was echoed by former Sens. Bennett Johnston and Byron Dorgan at a House Energy and Commerce Committee on May 7.

“Markets are dynamic. There are many factors which are working which change by the month. Some change daily,” Johnston, a former Senate Energy and Natural Resources chairman, told the committee. “All of those things are working rapidly and the way to allocate that great beneficence of natural gas is to let the market do it because it can react faster than the regulators can react.”

Dorgan, a co-chairman of the Bipartisan Policy Center’s Energy Project echoed the free market approach to natural gas exports. “We believe the market should make the decision about the exports of natural gas.”

On May 21, the Senate Energy & Natural Resources committee will hold a forum to “examine estimates of domestic supply and the potential benefits or unintended consequences caused by expansion of natural gas exports.”  Free trade principles should be embraced by the Senate. Even President Obama shares a positive outlook on natural gas exports, noting in his remarks on May 13 that  “The United States” will probably be a net exporter of natural gas in somewhere between five and 10 years.”

To learn more about ACCF’s position on LNG exports, visit: http://accf.org/search/LNG

Dubious Campaign Against LNG Exports Ignores Net Benefits of Free Trade

A dubious campaign by America’s Energy Advantage seeking to restrict expansion of liquefied natural gas (LNG) exports ignores fundamental economic and market facts. AEA relies on a gross overestimation of U.S. domestic demand for natural gas, estimating it to be more than 50% higher than estimated by the U.S. Department of Energy in the AEO 2012 report. Contrary to America’s Energy Advantage’s assertions, DOE notes that the U.S. has a robust 100-year supply of natural gas at today’s consumption level, which is more than adequate to meet the needs of manufacturers and utilities.

The recent DOE report reinforces other economic findings that under all LNG export scenarios, the U.S. economy benefits even when factoring in the impact of price increases:

 “Across all these scenarios, the U.S. was projected to gain net economic benefits from allowing LNG exports. Moreover, for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased. In particular, scenarios with unlimited exports always had higher net economic benefits than corresponding cases with limited exports.  In all of these cases, benefits that come from export expansion more than outweigh the losses from reduced capital and wage income to U.S. consumers, and hence LNG exports have net economic benefits in spite of higher domestic natural gas prices. This is exactly the outcome that economic theory describes when barriers to trade are removed.”

It’s important to note that the drop in U.S. natural gas prices in the past three years has caused the number of rigs drilling for gas to fall sharply, for example there were 811 rigs drilling for gas in 2011 but only 439 at the beginning of 2013. At current natural gas price levels, employment and output of the U.S natural gas industry will continue to decline.

Increasing natural gas exports will provide domestic producers with market-based incentives to increase their production and expand trade to support our economic recovery. :

• According to Brookings Institute, Liquid Markets: Assessing the Case for U.S. Exports of Liquefied Natural Gas: “both Deloitte and EIA found that the majority—63 percent, according to both studies— of the exported natural gas will come from new production as opposed to displaced consumption from other sectors.” (See page 33)
  

• Opponents of LNG exports contend that investments in  U.S. petrochemical and plastics plants  would be deterred in the future as a result of increases in the price of natural gas. “However, the evidence suggests that the competitive advantage of U.S. industrial producers relative to its competitors in Western Europe and Asia is not likely to be affected significantly by the projected increase in natural gas prices resulting from LNG exports. As European and many Asian petrochemical producers use oil-based products such as naphtha and fuel oil as feedstock, U.S. companies are more likely to enjoy a significant cost advantage over their overseas competitors. Even a one-third decline in the estimated price of crude oil in 2035 would result in an oil-to-gas ratio of 14:1.” (see page 35)

• “There is also the potential for increased exports to help industrial consumers. Ethane, a liquid byproduct of natural gas production at several U.S. gas plays, is the primary feedstock of ethylene, a petrochemical product used to create a wide variety of products. According to a study by the American Chemistry Council, an industry trade body, a 25 percent increase in ethane production would yield a $32.8 billion increase in U.S. chemical production. By providing another market for cheap dry gas, LNG exports will encourage additional production of natural gas liquids (NGL) that are produced in association with dry gas. According to the EIA, ethane production increased by nearly 30 percent between 2009 and 2011 as natural gas production from shale started to grow substantially.” (see page 35)

• The Baker Institute’s “U.S. LNG Exports: Truth and Consequence” notes: “To begin, we must comment on the shapes of the supply curves in the U.S. and abroad, in other words, what is the appropriate elasticity of supply to inform our analysis. Without a doubt, the elasticity of supply in the North American gas market is substantially larger since the emergence of shale. Using the data from the recently completed Baker Institute study, “Shale Gas and U.S. National Security,” we estimate that the elasticity of supply in the U.S. post shale has risen over five-fold, from 0.29 to 1.52.”…This in turn has effectively stretched the domestic supply curve, rendering it relatively flat at a price between $4 and $6 per mcf.” pg 14-15 

It is unfortunate that industries with a clear agenda are attempting to restrict LNG exports due to possible price impacts.  It is analogous to the cereal industry attempting to curtail grain exports by U.S. farmers in order to hold down grain prices.

We have long since understood the tremendous benefits of free trade, regardless of the commodity or produce being traded.  Expanded trade will yield very large benefits to the U.S economy, ranging from increased jobs and economic growth to increased governmental revenues.  History shows, in contrast, the very harmful consequences of protectionist policies, which attempt to shield the interests of a narrow industrial sector at the expense of the larger economy.

From corn to cars to wheat, exports have proven to be a net positive boost for the U.S. economy and LNG exports shouldn’t be treated differently.

LNG Export Study Released

The Long awaited LNG export study commissioned by U.S. Department of Energy was released yesterday (http://www.fossil.energy.gov/programs/gasregulation/reports/nera_lng_report.pdf). The results  were not surprising, LNG exports will benefit  the overall U.S. economy:

“Across all these scenarios, the U.S. was projected to gain net economic benefits from allowing LNG exports. Moreover, for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased. In particular, scenarios with unlimited exports always had higher net economic benefits than corresponding cases with limited exports.

In all of these cases, benefits that come from export expansion more than outweigh the losses from reduced capital and wage income to U.S. consumers, and hence LNG exports have net economic benefits in spite of higher domestic natural gas prices. This is exactly the outcome that
economic theory describes when barriers to trade are removed.” (page 1)

LNG or other energy product exports should not be seen any different than exporting cars or corn. Wall Street Journal’s December 7 editorial (http://online.wsj.com/article/SB10001424127887324001104578163491822943984.html?user=welcome) was right on point:

“Not that the report will mute the critics, who include Massachusetts Congressman Ed Markey and Oregon Senator Ron Wyden. Mr. Markey worries that exports will allow a “massive wealth transfer from working Americans to oil and gas companies.” His economic logic seems to be that broadening the market for natural gas will raise prices for American consumers, never mind the other economic gains.

By such logic, the U.S. should never export anything because foreign buyers might bid up the price. Thus Iowa farmers should limit their corn sales to the 50 states because Chinese demand has raised corn prices. Try selling that one in Des Moines. Mr. Markey is arguing for economic autarky, which didn’t work in the Middle Ages, much less in a modern global economy in which trade has lifted tens of millions out of poverty.”

A multitude of  previous economic analyses show the benefits of open borders and free trade to country’s  economic prosperity, lets hope policy makers give serious consideration to the new DOE report’s finding.

Promoting Sound Energy Policy at the DNC Convention

Last week, I was a panelist at a Washington Post sponsored forum on energy policy at the DNC Convention.  In the video clip below I debate renewable energy policy with Third Way’s Joshua Freed and highlight the government’s poor track record in selecting winning market investments with taxpayer dollars.

Cash Flow Matters

Investment in energy production driving economic growth in Midwest and Great Plains states. So why would lawmakers consider dimming this one this one bright spot in the economy by targeting and eliminating many of the tax code provisions that have facilitated investment and jobs? Accelerated depreciation, deductions for interest expense, LIFO for inventory accounting should not be a trade off for corporate income tax rate cuts.

America’s energy seen adding 3.6 million jobs, 3 percent GDP

Daily Herald – August 19, 2012

On the eastern bank of the Mississippi River, about an hour upstream from New Orleans, the outline of Nucor Corp.’s new $750 million iron-processing plant is rising between fields of sugar cane and sweet gum trees.

Surveying the facility from the road, Michael Eades, president of Ascension Economic Development Corp., says it’s part of a wave of investment lured by low natural gas prices to this stretch of Louisiana’s industrial riverfront. Companies such as Westlake Chemical Corp., Potash Corp. of Saskatchewan Inc. and Methanex Corp. have projects in the works. Ormet Corp. reopened an alumina refinery last year, bringing back 250 jobs.

“We’re just seeing an incredible amount of activity,” said Eades, who tallied $1.1 billion in new projects last year in Ascension Parish alone, where his private, nonprofit group promotes development. He expects twice that this year…

Continue Reading…

 

 

Pro-Growth Tax Code, Regulatory Certainty Best Tools for Businesses to Implement Climate Change Adaptations

At a hearing today of the Senate Environment & Public Works Committee, I testified that businesses seeking to adapt to changing climate and weather models are best served by a tax code that retains robust capital cost recovery, coupled with reductions in regulatory and permitting barriers.  Business investments are judged on the basis of their costs and benefits and until there is more convergence on the wide range of climate modeling, businesses are unlikely to make any adaptations beyond “no regrets” steps (or changes that would be undertaken in the normal course of business).

Read more about the hearing and see my full testimony here.

Cash Flow Matters

In testimony submitted to House Ways & Means Committee this week, I made the case that tax provisions like accelerated depreciation are helping spur investment, income and job growth, particularly in the Midwest and Great Plains states. They should not be sacrificed in the coming tax reform battle.

Read the Executive Summary and Full Testimony here.

Forbes: The Horrific Accident Awaiting Us Over the Fiscal Cliff

See the op-ed I co-authored with Dr. Allen Sinai in Forbes today.  We highlight the dangers that lie ahead if lawmakers allow the Bush-era tax cuts to expire.

The Horrific Accident Awaiting Us Over The Fiscal Cliff

With the U.S. elections rapidly approaching, only to be quickly followed by the “Bush tax cuts” expiring at the end of the year in the absence of action by the President and a soon-to-be lame duck Congress, the reality is that failure to confront this deadline will result in a wave of tax spikes that will cause heavy job losses, reduce economic activity significantly, and produce a hit to financial markets that could set the economy off into another recessionary tailspin.  Our focus is on the tax piece of the “Fiscal Cliff.”

Stark political lines have been drawn.  Republicans have called for a quick, temporary across-the-board extension for all tax cuts until real tax reform can be undertaken.  President Obama and Democratic leaders are amenable to temporary extensions but are standing firm against extending any tax cuts for the wealthy.

The stakes are extremely high in this game of political poker, so it is important to know the ramifications of the bets, particularly when it comes to the potential substantial costs of inaction.  Decision Economics, Inc. (DE) undertook an economic study to examine the potential effects of various scenarios where the legislated tax-rate increases on income, dividends, capital gains and social security take place.  If policymakers cannot come to an agreement and the country wakes up on January 1, 2013 to large tax increases, the impacts would be dramatic and sobering; indeed, perhaps even before as financial markets anticipate the deadly possibility.
Job Losses:  Large declines in persons working, over 1 million estimated in 2013 and in excess of 3.5 million in 2014.  The unemployment rate would rise 0.4 percentage points in 2013 and an extremely large 1.5 percentage points in each of 2014 and 2015.

This would move the unemployment rate toward 9%, reversing its intended direction of movement and worsening the already negative economic, political and societal consequences of a continuing depressed jobs market.

Declines in Economic Growth:  Significant declines in real economic growth of 2.6, 3.3, and 0.5 percentage points over 2013 to 2015—up to $855 billion of lost output, which would take the economy into negative territory and another recession.

Lower Consumption Spending:  Lower consumption spending, down about $1 trillion per year, on average, over 2013-17, beginning with a relatively small decline of $343 billion in 2013 and jumping to $1.2 trillion in 2015.

Reduced Capital Spending:  Substantial hits to business capital spending with losses of $13.4 billion in 2013, $68.5 billion in 2014, and $95.2 billion in 2015.

Financial Market Disarray:  Reduced employment, reduced consumer spending and reduced capital spending with major negative effects on corporate earnings.  The stock market very likely would sell off sharply, estimated at nearly 18% per year over 2013 to 2017.  This represents real money being lost in the retirement and pension accounts of ordinary Americans.

Deficits and Debt:  Even worse, the intended aim of the tax increases to reduce deficits and debt relative-to-GDP would be overwhelmed by the losses of real GDP and much lower prices, after the first year, ex-post, with higher deficits and higher debt-to-GDP ratios, not lower.  This austerity program of tax increases, like the now-discredited austerity used in the Eurozone, would prove totally counterproductive just as it has there.  Rather than improve the federal budget position, it would worsen, with the same negative interaction of fiscal restraint on economic activity than GDP with fewer tax receipts than originally expected, along with problems for financial institutions and a need to consolidate balance sheets in a collapsing world.
If policymakers allow lower tax rates on capital gains and dividends to expire, the economic consequences will be substantial.

A return to the 20% capital gains tax rate and taxing dividends at ordinary income tax rates (a maximum of 39.6% from the current 15%) would cause a reduction in real GDP by 1.3 percent and over 1 million fewer jobs in 2015 compared to the baseline forecast.  Savings would weaken considerably and, of course, higher taxes on capital gains and dividends would have large negative impacts on the stock market, which, in turn, will raise the cost of capital for business.

It is important to understand the role of capital gains and dividend taxes and their significance in the U.S. economy. Higher taxes on capital gains and dividends, abstracting from issues of equity and fairness, reduce real economic growth, cause weaker consumption and decreases in business capital spending, reduce employment, and labor force growth, and help bring about less potential output.

Driving over the Fiscal Cliff is an unthinkable option.  Across-the-board extensions of the tax cuts, even if only for a year or two, are the best way to sustain the U.S. economic upturn and to avoid a European-style crisis.  Policymakers concerned about the political ramifications of this monumental debate would be wise to heed the words of income and capital gains tax-cutting former President John F. Kennedy, who noted, “There are risks and costs to a program of action, but they are far less than the long-range risks and costs of comfortable inaction.”

Allen Sinai is Chief Global Economist and President, Decision Economics, Inc. (DE); New York, London, Boston, Chicago.  Margo Thorning is Senior Vice President and Chief Economist for the American Council for Capital Formation (ACCF), a nonprofit, nonpartisan organization advocating tax, energy, regulatory and environment policies that facilitate saving and investment, economic growth and job creation.

Senate Committee Sinks Navy’s Renewable Energy Plans

The Navy’s renewable energy plan seems to be fading into the distance.  Yesterday, the Senate Armed Services Committee voted to strip much of its buying power of alternative fuels.  The Senate appears to be nearly in lock-step with the House who are also skeptical of the “Great Green Fleet.”

As I noted on National Journal’s Energy & Environment Experts Blog this week, the high cost of renewable energy sources like wind, solar and biofuels will be extremely costly to taxpayers and inefficient for our troops–ultimately weakening our military forces.  You can read my full response here: