New EIA Study Says Exporting Shale Gas Raises Prices at Home

In August 2011, the U.S. Department of Energy’s Office of Fossil Energy (DOE/FE) requested from the U.S. Energy Information Administration (EIA) an analysis of what exporting natural gas will do to the domestic market and consumers. The DOE is responsible for reviewing and approving applications to export oil and natural gas, hence the request.

Yesterday the EIA delivered their analysis (a copy of the 43-page report is embedded below). Their conclusions? Increased natural gas exports lead to higher domestic natural gas prices, increased domestic natural gas production, reduced domestic natural gas consumption, and increased natural gas imports from Canada via pipeline.

The issue of exporting natural gas from the United States is hotly debated. On one hand, energy producers argue that an overabundance of natural gas in the U.S. domestic market has led to the lowest prices for natural gas in a decade, and has made natural gas drilling unprofitable in some locations. They argue if some of the gas could be exported, they would get higher prices abroad, benefiting the U.S. by making this country a net-exporter of energy. When a country exports more than it imports (for any product or service), it’s an economic boom for that country. Why do you think China is doing so well economically?! Exports theoretically benefit everyone—a rising tide lifts all boats.

On the other hand, basic economics predicts that the less supply you have in a market, the higher the price, given a steady demand. If we start exporting a good portion of the bountiful shale gas we have, it would mean higher prices here at home. And one of the main arguments pro-drillers make is that drilling for shale gas will mean lower prices for consumers.

Sprinkle in politics and you have the makings of another major issue that will be endlessly debated.

Here is a summary of the impacts the EIA foresees with an increase in natural gas exports:

Increased natural gas exports lead to increased natural gas prices. Larger export levels lead to larger domestic price increases, while rapid increases in export levels lead to large initial price increases that moderate somewhat in a few years. Slower increases in export levels lead to more gradual price increases but eventually produce higher average prices during the decade between 2025 and 2035.

Natural gas markets in the United States balance in response to increased natural gas exports largely through increased natural gas production. Increased natural gas production satisfies about 60 to 70 percent of the increase in natural gas exports, with a minor additional contribution from increased imports from Canada. Across most cases, about three-quarters of this increased production is from shale sources.

The remaining portion is supplied by natural gas that would have been consumed domestically if not for the higher prices. The electric power sector accounts for the majority of the decrease in delivered natural gas. Due to higher prices, the electric power sector primarily shifts to coal-fired generation, and secondarily to renewable sources, though there is some decrease in total generation due to the higher price of natural gas. There is also a small reduction in natural gas use in all sectors from efficiency improvements and conservation.

Even while consuming less, on average, consumers will see an increase in their natural gas and electricity expenditures. On average, from 2015 to 2035, natural gas bills paid by end-use consumers in the residential, commercial, and industrial sectors combined increase 3 to 9 percent over a comparable baseline case with no exports, depending on the export scenario and case, while increases in electricity bills paid by end-use customers range from 1 to 3 percent. In the rapid growth cases, the increase is notably greater in the early years relative to the later years. The slower export growth cases tend to show natural gas bills increasing more towards the end of the projection period.*

*U.S. Energy Information Administration (Jan 19, 2012) – Effect of Increased Natural Gas Exports on Domestic Energy Markets as requested by the Office of Fossil Energy