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CAP Critique Ignores Facts, Obscures Reality on Energy and Taxes

It’s becoming a quarterly tradition as reliable as the seasons: the oil sector releases its earnings, and the Center for American Progress contorts itself into a misleading critique of the industry, its tax treatment, and its outsized role in the American economy.

Unfortunately, repetition has not made CAP’s argument any more factual, any more persuasive, or any more founded in the common sense tenets that make for sound energy and tax policy.

The crux of CAP’s argument is, as ever, that the oil and gas industry’s earnings are too high. And because of these high earnings, the oil and gas industry should be taxed more heavily. They assert that the oil sector fails to carry its share of the burden, that it is a drain on the economy, and that policymakers should act in a manner that artificially shifts the American energy portfolio away from traditional fossil energy and toward preferred, “green” energy projects.

Not a single aspect of this line of reasoning holds water.

Earnings, Expenses, and Returns

Let’s start with the earnings. Earnings in 2013 for the “Big Five” oil companies clocked in at $93 billion – an objectively large number, but around thirty percent lower than last year. How does that figure stack up against the level of investment required? And how profitable is the sector?

Among the most capital intensive enterprises in the modern economy, oil and gas production occurs on a global scale and requires immense investment. And the cost of conducting this business is growing even more imposing as recoverable reserves grow more difficult to reach, and supply becomes more difficult to replace. A recent Wall Street Journal analysis found that three of the largest oil and gas companies – ExxonMobil, Shell, and Chevron – spent more than $120 billion in 2013 in their efforts to boost output. More, the Journal notes, than it cost to put a man on the moon – and around a half trillion dollars in capital investment in the last five years.

Indeed, as the oil and gas industry endeavors to keep providing the low-cost energy that our economy and every economy worldwide relies upon, cost recovery measures such as those bemoaned by CAP are more important than ever. Calling for the repeal of provisions like the Section 199 manufacturing deduction or protections for dual capacity taxpayers intentionally ignores the realities of today’s energy sector.

The topline earnings numbers reported by the industry, moreover, are not a reflection of excessive profit margins or inflated returns. Rather, as we recently chronicled, return on investment in integrated petroleum companies is 11.7 percent, and 12.8 percent for producing companies. For all industrials, returns average 12.5 percent. The oil industry, then, is in line with all other sectors.

“Special” Tax Treatment: Section 199 and Dual Capacity

CAP’s line of attack – much like its allies in Congress and the White House – points to provisions like the Section 199 deduction and dual capacity protections as evidence of special tax treatment for the oil and gas industry. Ironically, their selection of these two provisions serves as evidence of quite the opposite: a proclivity on the part of a misinformed Beltway contingent to seek to single out this industry with punitive tax treatment.

Section 199 is not a taxpayer handout, and CAP’s assertion that the industry and its refiners don’t deserve the deduction is a rhetorical stretch. The deduction is freely applied to nearly 1/3 of all corporate activity in the United States. Film producers, software companies, renewable energy producers: they all take Section 199. But CAP rarely labels these groups as tax scofflaws, despite the fact that they take the deduction at a rate of 9 percent, while oil and gas companies are limited to a 6 percent deduction.

Far from an example of the industry’s preferential treatment, the domestic manufacturing deduction is an example of a tax policy that has already punitively singled out the oil sector in a negative and costly manner.

Proposals to alter dual capacity rules, meanwhile, are similarly and terminally flawed. CAP – along with the President – would seek to disallow oil and gas companies from taking a credit for taxes paid to a foreign government. Without this credit, American oil companies producing overseas would face a tremendous financial disadvantage, and a drastically higher tax rate.

Until the United States reforms its outdated “worldwide” system of international taxation, protections for dual capacity taxpayers are essential to American competitiveness. Dual capacity protections do not amount to a subsidy for American producers operating overseas. They serve to even the playing field for American companies seeking to keep pace with  foreign – often state-owned – competitors that do not face the same onerous international taxation regime as American companies.

The rules as written have helped American producers grow and create jobs – but they are far from a subsidy. Repealing or modifying them, however, would simply make it easier   for  foreign competitors to gain access to the resources at the expense of U.S. companies.

An Attack on Exports

Also buried in the CAP piece is an attack on energy exports – an attack that is rooted in the claim that exports “could raise gasoline prices.” Exports and taxes are two very different policy debates, but CAP’s line of reasoning concerning this issue is no less misguided. Consensus is growing – on both sides of the aisle – regarding the prospect of American crude oil and LNG exports. From the Department of Energy to leaders on Capitol Hill, there is a recognition of the benefits that global exports can provide to our economy – from stabilized domestic production to job creation. As for the impact on gas prices? On the very same day that CAP posted their piece, Resources for the Future released a study indicating that lifting the export ban may in fact reduce prices at the pump.

CAP references data from Barclays in asserting that exports would press consumer prices upward. But their data is outdated and not reflective of the opinion of Barclays at large. Analysts from elsewhere within Barclays released a new assessment just yesterday indicating that, in fact, they expect that the consumer will benefit from lifting of export bans thanks to enhanced refinery efficiencies.

Conclusion

The latest CAP attack is, regrettably, more of the same politically charged venom that we have come to expect in recent years. But while the CAP message has stagnated, the energy debate has evolved. The oil and gas industry sports the highest average effective tax rate on the S&P index. The sector supports 10 million jobs, and continues to create new jobs at a breakneck pace.

It’s time to move past talking points and start dealing in facts.

 

 

 

Oil Industry Profitability, Investment and Tax Policy: What are the Facts?

Background:

A recent article by Daniel Weiss of the Center for American Progress tries to make the case that because the net income of large, integrated U.S. oil companies has risen in recent years, these companies should lose the federal income tax provisions they currently use.  A quick look at Weiss’s article reveals several serious analytical and methodological flaws which make his conclusions about how tax reform should impact the oil and gas industry inappropriate and, in fact, harmful to U.S. job and economic growth.

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Stunning New Propaganda From Anti-LNG Exports Group

The Industrial Energy Consumers of America circulated to Capitol Hill this week a document entitled, “Five LNG Export Facilities; Natural Gas Prices Up 35.6 Percent; Cost of $25.8 billion”.  The document contained talking points built on cherry-picked data that is so misleading you have to see it to believe it…

ANTI-LNG MYTH #1: Natural gas prices are on the rise and therefore the department of Energy must delay LNG export applications.  Pasted below is ICEA’s graph it uses to justify further delay of LNG export approvals.  It looks like gas prices are on the rise… right?

LNG1

Wrong!  Natural gas prices often reflect short-term seasonal and political changes; however, the huge increase in supply in recent years has brought natural gas prices down to the low levels of the early 2000’s as shown in the  graph below:

LNG2

Source: http://www.eia.gov/dnav/ng/hist/rngwhhdd.htm

ANTI-LNG Myth #2: The Department of Energy must redo its study.  ICEA writes, “DOE is basing its LNG export decisions on domestic demand assumptions that are now three years old, and do not take into consideration that the EPA GHG rule will restrict use of coal in the power generation sector.”  This statement is misleading; according to data from the EIA, even if a large number of coal fired plants are retired, there will be only very small impacts on domestic natural gas prices. EIA also notes that future levels of natural gas prices depend on many factors, including macroeconomic growth rates and expected rates of resource recovery from natural gas wells.”  And in the 2013 Annual Energy Outlook, the Department of Energy projected that natural gas prices will not rise above $5.00 until 2030.

LNG3

Source: Annual Energy Outlook 2013

America has a plentiful supply of natural gas, enabling exports and more than enough supply to fuel our chemical, manufacturing and residential demands. And natural gas reserves are at record levels, surpassing the global leader Russia for the first time ever.

Consequently, there are no circumstances under which the Department of Energy should delay natural gas exports.  To do so would be in violation of the World Trade Organization and at-odds with the best economic interests of our country.

 

 

Pass the Cost/Benefit Test to Determine if the Price is Right

This week, National Journal posed the question about determining the right price for energy, whether it’s powering your car or house or weighing diverse issues like the renewable-fuel standard and forthcoming regulations controlling greenhouse-gas emissions from electric power plants.

My thoughts: cost/Benefit analysis should be the test by which policymakers craft sound energy policies.  Regulating GHGs through the Clean Air Act fails that standard. As I noted in my testimony before the Senate EPW Subcommittee on Clean Energy and Nuclear Safety, “In sharp contrast to EPA’s $2 trillion estimate of the ‘economic value’ of the CAAA, EPA’s own simulations with its macroeconomic model show that the CAAA has significant negative impacts on U.S. GDP growth over the 2010- 2020 period GDP declines by $79 billion in 2010 and by $110 billion in 2020 relative to the baseline forecast. In other words, the already implemented CAAA regulations have real, quantifiable costs to the economy.”

 Also failing the cost/benefit test is the use of tax credits and subsidies to promote the use of renewable and alternative energy in the U.S. This misguided policy adds costs to business, households and the government without delivering commensurate economic or environmental benefits. Data from DOE’s EIA show that new electric generating capacity using wind and solar power tends to be considerably more expensive than conventional, available and secure natural gas and coal resources. In 2012, an 81% of the $16.6 billion in federal tax incentives went to renewables for energy efficiency, conservation and for alternative technology vehicles.  Conversely, only 19% went to fossil fuels according to the Congressional Research Service (CRS). The tax credit structure is so lopsided that some renewable electricity sources enjoy negative tax rates: solar thermal’s effective tax rate is -245% and wind power’s is -164%.

Environmental regulations and policy guidelines such as the Social Cost of Carbon, the Renewable Fuel Standard and the regulation of GHGs under the Clean Air Act can raise the hurdle rate for new investment and slow new development and job growth just as can taxes. All regulations should be subject to a transparent cost/benefit analysis with broad stakeholder involvement and the market should determine energy prices.

The U.S. Has a Shortage of Jobs, Not Energy

Despite what some policymakers may assert, the U.S. is not facing a shortage of energy.  Domestic oil production has increased by 25 percent over the 2005-2012 period and oil imports are down sharply. Natural gas production has increased even faster, rising by 33 percent over the same period. Wind and solar power have also made strong gains as well thanks to renewable portfolio standards in 30 states as well as subsidies like the production tax credit (PTC) and investment tax credits for renewable energy. As policymakers confront the sluggish U.S. economic recovery and slow job growth, they need to consider the impact of tax, budget and regulatory decisions that promote the use of costly renewable energy compared to the expansion of conventional fossil fuels or nuclear power for electricity generation and for transportation. Another factor to consider as policymakers debate subsidies for new energy technology deployment is that, as is widely understood, the impact of U.S. reductions in GHGs will have almost no impact on the growth in global GHG concentrations since most emission growth is in developing countries like China, India, Indonesia and in Latin America (see Figures 1 and 2).

Furthermore, according to recent EIA data, new electric generating capacity using wind and solar power tends to be considerably more expensive than conventional natural gas and coal. For example, the total cost of offshore wind, at $222 dollars per mega watt hour (MWH) is almost 240% higher than for advanced combined cycle natural gas–fired plants which cost only $66 per MWH. The cost of solar thermal, at $261 MWH, is almost 300% higher than natural gas-fired electricity production. Similarly, advanced nuclear costs an estimated $108 per MWH and advanced coal costs only $123 per MWH.[1]

Thus, especially in times of tight budgets, careful cost/benefit analysis should be applied before taxpayer dollars are spent on incentivizing the deployment of renewable technologies. The recent federal government technology deployment failures of many projects like Solyndra and Fisker Automotive demonstrate that government project managers are generally not very good at picking technologies that will succeed in the market place. According to a report by the Congressional Research Service, the U.S. Department of Energy has spent $39.9 billion dollars on energy technology development 2003-2012 period.[2] Approximately half of that amount was spent on renewables; energy efficiency and electric systems technology development (see Figure 3).

According to a new CRS report, “Energy Tax Policy: Issues in the 113th Congress, energy related tax expenditures and tax provisions for fossil and renewable energy and energy efficiency total $84.5 billion dollars over the 2013-2017 period. [3] Reducing federal spending and the deficit will require going over these expenditures and eliminating the ones that do not meet the cost benefit test. For example, the cost of the 2.3 cents production tax credit (PTC) for wind, closed-loop biomass and geothermal energy is $9.7 billion over the five year period.[4] In addition, according to a recent report by the National Academy of Sciences, “Effects of U.S. tax Policy on Greenhouse Gas Emissions,” the tax system is an ineffective mechanism for combating climate change.[5] As a result, “current tax expenditures and subsidies are a poor tool for reducing greenhouse gases and achieving climate-change objectives.” The NAS study, which assumed that all tax policies in place or expiring in 2011 would be renewed through 2035, found that the PTC actually has very little impact on U.S. greenhouse gas emissions. Over the last several years, production tax credits for renewables have greatly increased the rate of wind and solar energy deployment, but for greenhouse gases, “the impact is small.”

Also, provisions in the tax code which allow oil and gas companies to deduct items like intangible drilling costs, geophysical and geologic expenses and percentage depletion should not be called subsidies but should be considered the same as the tax code provisions that allow a fast food chain to deduct its labor cost and using LIFO for inventory expenses. When companies drill for oil or gas, they incur IDCs which are largely the labor costs of locating and drilling wells. IDCs are costs that cannot be recovered as they have no salvage value (in contrast to the drill pipe and casing itself, which is a “tangible asset” and is subject to depreciation). It is noteworthy that all other natural resource industries (e.g., minerals and coal production) have almost precisely the same rules as apply to oil and gas and other industries, such as software development and pharmaceuticals, are able to expense research and development costs. Similarly, geological and geophysical costs are expenses that include the costs incurred for geologists, seismic surveys, and the drilling of core holes; like IDCs, they have no salvage value. Further, percentage depletion, available only to small, marginal independent oil and gas companies, is analogous to a fast food chain using LIFO (last in first out) accounting for the cost of hamburger meat since if the price of oil or gas rises the producer will have to pay more to replace its reserves and maintain production levels once the marginal well is exhausted.

Finally, the best way to provide a level playing field for the deployment of all types of energy technology, both conventional as well as renewable and alternative technologies is to allow expensing of all new investment. Research comparing the impact of a consumption tax under which all investment is expensed shows that it would provide the strongest boost to economic and job growth.[6] If that type of tax reform cannot be implemented at present, many public finance experts suggest that the tax code should provide the same provisions for all types of industries and activities so as to avoid advantaging one industry over another. If markets are allowed to select the energy technologies that are deployed rather than government officials using tax incentives, subsidies or a clean energy standard mandate, costs to consumers and the federal government’s budget will be reduced.



[4] Ibid.

[6] See http://accf.org/news/publication/switching-to-a-consumption-based-tax-from-the-current-income-tax and Joint Committee on Taxation, “Tax Modeling Project and 1997 Tax Symposium Papers,” November 20, 1997. https://www.jct.gov/publications.html?func=startdown&id=2940

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Regulatory Uncertainty Keeping Capital Investment on Sidelines

In today’s Washington Post, Robert Samuelson discusses sluggish capital spending and the recovering economy:

In the struggle between capital and labor, capital is winning — and that’s hurting the feeble economic recovery. To simplify slightly: Labor (wage-earners and consumers) can’t spend, and capital (businesses and shareholders) won’t spend. Without a powerful growth engine, the economy advances haltingly.

Samuelson highlights a number of reasons for sidelined capital spending: globalization, new technologies, weaker unions, financial market pressures and more.  Read Samuelson’s entire column here.

But, there are some critical explanations overlooked by Samuelson on why U.S. investment is still sluggish four years after the recession.

Uncertainty about key policy issues has made business cautious about investing and raises the hurdle rate that new investment must achieve. Real non-residential fixed investment is still almost $30 billion below the fourth quarter of 2007 when the recession began. The primary drivers of corporate uncertainty today include Dodd/Frank implementation, the Affordable Care Act, reform of the federal tax code, as well as fiscal and monetary policy.

Top at the list of uncertainty for many corporations is environmental and energy policy regulations from agencies such as EPA and DOE.

Until the federal government offers a clearer regulatory path, corporations will rightly continue to be cautious and keep capital investments on the sidelines.

LNG Export Permit Delays: What’s At Stake?

Last week the U.S. Department of energy approved a third application to export LNG after two years of regulatory limbo.  With the approval of Lake Charles LLC’s LNG exports to non-FTA countries, the U.S. will now have the ability to export up to 5.6 billion cubic feet per day of natural gas.

 Opponents to natural gas exports claim this export capacity represents a  “sweet spot”  for natural gas exports – although a government study concluded no such sweet spot exists.  To the contrary, every major study has found that the more LNG is exported, the better for America. In fact, expanding natural gas exports will be an economic “win” for the United States.

 “Across all these scenarios, the U.S. was projected to gain net economic benefits from allowing [liquefied natural gas] exports. Moreover, for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased,” concluded a 2012 major study commissioned by the Energy Department (DOE).

The U.S. produced an average of 65.9 billion cubic feet of natural gas per day in 2012, and the global market for natural gas expected to grow over the next decade.    With 19 applications still under consideration, the slow permitting process at the Energy Department is undermining the America’s ability to develop and export our natural gas on the global market. The infographic below highlights the high stakes of prolonged permitting delay:

LNGInfoGraphic_d2

Long term, the biggest challenge for U.S. LNG markets is competition from the 63 international projects to export gas.  The Energy Department’s fragmented approach to approving applications risks ceding America’s natural gas energy advantage to other exporting nations.

 To learn more about the status of the outstanding LNG export applications, visit www.actonlng.org.

How Federal Energy Policies Can Support U.S Economic Recovery

Today the Senate Energy and Natural Resources Committee, chaired by Senator Ron Wyden (D-Oregon), holds yet another hearing to investigate the pricing of oil and gas commodities in the U.S. and the restructuring of the U.S. refining industry and distribution system.

While the hearing will be a platform for some Members of Congress to point fingers, it’s important to review federal policies that should be adopted to put downward pressure on prices, those which could increase prices and should be abandoned, and the contributions of the energy industry to the U.S. economy.

Expanded Access to Onshore and Offshore Reserves Will Positively Impact U.S. Growth

Several recent economic analyses suggest that increased access to domestic onshore and offshore oil and gas reserves (including shale gas) could strongly boost U.S. economic recovery, manufacturing and job growth. Fossil fuels, which provide 78% of U.S. primary energy production, can have a positive impact in restoring strong economic growth.

A recent Global Insight/CERA analysis, “Restarting the Engine-Securing American Jobs, Investment and Energy Security” finds that allowing exploration and development in the Gulf of Mexico in 2012 could create more 230,000 jobs, a $44 billion increase in GDP and $12 billion in additional tax receipts to federal and state treasuries. In another recent analysis, “The Economic and Employment Contributions of Shale Gas in the United States” the consulting firm Global Insight documents the significant contributions that shale gas is making to the U.S. economy. The report finds that in 2010, the industry supported 600,000 jobs and contributed more than $76 billion to GDP. Capital expenditures were $33 billion in 2010 and will grow to $48 billion in 2015. The current low and stable gas prices will contribute to a 10% reduction in electricity prices in the near term and to a 1.1% increase in the level of GDP by 2013.

LNG Exports Will Also Enhance U.S. Jobs and Economic Opportunity

Multiple economic analyses over the past two years demonstrate the power of allowing U.S. producers to export LNG.  Using various assumptions regarding export levels, global market conditions, and the costs of producing natural gas within the U.S. and also examining alternative scenarios that might affect natural gas supply and demand, the vast majority of these analyses have reached the same fundamental conclusion: the more LNG exported, the greater the domestic economic benefit. See ACCF’s recent paper “LNG: Why Rapid Approval of the Backlog of Export Applications is Important for U.S. Prosperity” for more detail on enabling LNG exports.

A recent macroeconomic analysis by ICF International finds that expanded LNG exports would spur significant gains in nationwide employment. The net effects on U.S. employment are anticipated to be positive with net job growth of between 73,100 to 452,300 jobs on average between 2016 and 2035, including all economic multiplier effects. The net effect on U.S. GDP is expected to be positive at about $15.6 to $73.6 billion per year on average between 2016 and 2035, including the impacts of associated liquids production, increases in the petrochemical manufacturing of olefins, and all economic multiplier effects.

In addition, the ICF analysis predicts that LNG exports would have only moderate impacts on domestic natural gas prices. Over the 2016-2035 period, price increases would range from about $0.32 to $1.02 per million British Thermal Units (MMBtu) on average. Given the sharp increases in shale gas production predicted in EIA’s 2013 Annual Energy Outlook, it seems quite likely that price changes for natural gas in the U.S. would be small (see www.actonlng.org for more details).

Tax Policy Can Encourage Continued Strong Investment in the U.S. Oil and Gas Industry

A recent analysis by the Progressive Policy Institute, Investment Heroes: Who’s Betting on America’s Future notes that most of the U.S. capital expenditures by energy companies consisted of production and exploration costs, which includes building out oil and natural gas pipelines and exploratory costs for new drilling sites. In 2011, four of the top ten non-financial companies investing in the U.S. were oil and gas companies, according to PPI, and these four companies, Exxon Mobil, Occidental Petroleum, ConocoPhillips and Chevron, invested a total of $28.3 billion domestically in 2011.

This strong domestic investment by U.S. oil and gas companies in 2011 was due in part to outlays that would be classified as intangible drilling costs (IDCs) and G&G. However, President Obama’s 2012 Framework for Business Tax Reform calls for eliminating expensing for IDCs, requiring such costs to be depreciated over time. Yet when companies drill for oil or gas, they incur IDCs which are largely the labor costs of locating and drilling wells and cannot be recovered as they have no salvage value (in contrast to the drill pipe and casing itself, which is a “tangible asset” and is subject to depreciation).  If IDCs had to be depreciated rather than deducted or, in the case of geological and geophysical costs, amortized over longer periods, it is likely that less investment will occur in the oil and gas industry and fewer new jobs will be created in the U.S.   Given the importance of cash flow to investment spending, policymakers need to weigh carefully the impact of repealing current law provisions that reduce the cost of capital for new investment.

Conclusions

The economic impact of the U.S. oil and gas industry is significant..  Given the industry’s strong job creation and significant U.S. investments, lawmakers would be best served promoting policies that enable the production of more North American energy both onshore and offshore, thereby helping put downward pressure on prices.. In addition, policymakers should grant permits for exporting LNG on an expedited basis and current federal tax provisions for new investment  should be maintained. Lawmakers should also focus on removing barriers to U.S. investment, including a host of EPA mandates under consideration.  Policymakers must realize their role in creating a welcoming environment for industry investments, which will enable more production and lower prices.

 

Capitalize on Robust U.S. Natural Gas Supply

DOE’s decision to allow Freeport LNG to export liquefied natural gas  to countries that do not have a Free Trade Agreement(FTA) with the U.S. is to be commended.   However, in order to ensure that the U.S. receives the maximum benefit from our vast supplies of natural gas, DOE and FERC should rapidly approve the remaining 20 export applications.

New research shows that allowing larger amounts of LNG to be exported will generate an average of 73,100 to as many as 452,300 new jobs in the U.S. over the 2016-2035 period, thus a slow DOE/FERC approval process will hinder economic recovery (see http://www.api.org/news-and-media/news/newsitems/2013/may-2013/~/media/Files/Policy/LNG-Exports/API-LNG-Export-Report-by-ICF.pdf

Furthermore, by moving slowly in reviewing permit applications, the U.S. is likely to reduce its global influence and share of natural gas markets since our potential customers abroad may seek other suppliers.  In addition, U.S. companies seeking export permits face increased uncertainty and higher hurdle rates for the  large investments in export facilities required if permits are not approved expeditiously since global natural gas markets can change rapidly.   Finally, the language of the DOE order (see page 7 at http://energy.gov/fe/downloads/fe-docket-no-10-161-lng) suggests that DOE may monitor natural gas prices as it considers export applications rather than letting markets determine how much LNG is exported. Such a policy would interfere with the ability of market forces to efficiently allocate resources and negatively impact GDP and job growth.

The Obama administration should capitalize on our abundant supply of natural gas and the increased global demand for it.  Estimates show that approval of liquefied natural gas could grow our economy by nearly $74 billion annually from 2016-2035

While some express concerns over what exports could mean for pricing and supply for domestic users of natural gas, DOE notes that the U.S. has a robust 100-year supply of the resource at today’s consumption level, which is more than adequate to meet the needs of manufacturers and utilities.  Our supply of recoverable shale gas is thought to be over 2.2 trillion cubic feet, and by some estimates, could meet energy demands for the next century.

These vast new reserves have pushed gas prices here down to a 10-year low.

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.

The ACCF Center for Policy Research recently released a special report with highlights from a roundtable discussion on Free Trade and LNG Exports.   Columbia University’s Jagdish Bhaghwati, Ph.D., MIT’s Richard Schmalensee and Michael Levi of the Council on Foreign Relations offer their expert views at this critical time as DOE finalizes review of nearly 200,000 comments on its own LNG study and congressional LNG hearings are also taking place. The ACCF Special Report can be downloaded here.

The Administration and Congress should allow free markets to determine how much LNG is exported and allow free trade of this valuable resource to aid our recovering 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.

What People Really Want When It Comes to Natural Gas Exports

image005The 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”.

Energy_Poll_01_Fracking_Large_600px

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.

Energy_Poll_02_Policies_Large_600px

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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