Guest Viewpoint: Why the APGA is Wrong on LNG Exports

MDN reader and friend Chris Acker, who splits his time between northeast Pennsylvania and Savannah, Georgia, recently sent MDN a note about the American Public Gas Association (APGA) and their call to ban the export of natural gas from the U.S. The APGA has over 700 members in 36 states and is the only nonprofit trade organization that represents America’s publicly owned natural gas local distribution companies (LDCs).

In February, the APGA sent a letter to Congressman Edward Markey (D) supporting his legislation that would ban the export of domestically produced liquefied natural gas (see the letter here). Chris points out what he perceives are the fallacies in the APGA’s arguments to ban LNG exports. MDN has had mixed emotions on the topic of exporting natural gas, but Chris makes some compelling arguments.

Christopher Acker on LNG Exports and the APGA proposed ban:

The APGA advocates an LPG export ban. With that logic, why not prohibit exports of all US-produced commodities—what’s so sacred about natural gas? Fair is fair. If the export of wheat were made illegal, surely the price of bread would decline. Same for corn and Doritos, milk and ice cream.

Moreover, the APGA does not provide one shred of quantitative evidence to bolster their vague claims. Basically, they want to keep natural gas “cheap” for their domestic consumers. Over time, however, prices would rise as investment and subsequent production declined. Exports indeed would tie into higher-priced international markets, but the large profits to be made would likely be reinvested, providing jobs for Americans and mitigating any domestic price spikes as production increased.

What central market planners (i.e. communists, whether domestic or foreign) always fail to understand, is that market restrictions come with unintended consequences. Many are foreseen by the enlightened, but few if any by the planners or politicians.

Playing Chicken

Here’s an analogy. I live in Savannah and the ports here serve as the largest exporter of frozen, containerized poultry in the country—to the tune of billions of dollars. The product is shipped worldwide, where demand and otherwise higher poultry prices allow for economic importation of efficiently produced US product.

Let’s suppose that the trade group “Chicken Eaters of America” are unhappy with high fryer prices in the U.S. and convince Congress to ban the exportation of poultry with the logic that this would drive down domestic prices since it would increase supply and decouple chicken from the volatile world market. What would happen?

First, chicken prices would indeed plummet in the short term. Next, since the folks can eat only so much chicken, low prices would drive some chicken farmers out of business while concurrently those still in business would have to reduce output. Once supply is reduced to reflect only domestic demand, chicken prices would necessarily have to reflect the cost of production, capital and profit. The new prices would very likely be close to prices before the ban since the industry is so competitive.

So what would be accomplished? First, chicken prices over time would not likely be much lower, if at all, than pre-export ban prices. Next, some chicken farmers would be driven out of business and those remaining would have less volume. This would additionally harm feed suppliers, equipment providers and all the ancillary enterprises that serve the poultry business. A certain amount of dockworkers would be laid off and associated maritime businesses would be damaged. So in the U.S., unemployment increases. Lastly, the overseas chicken demand would not go away. Foreign countries would be forced to buy product for more money from other less efficient chicken-producing countries or rely on more expensive domestic production. Moreover, these countries, spending more on chicken, would have in the aggregate, less to spend on other U.S. products, further injuring the U.S. economy.

So, it is difficult to argue that prohibiting chicken exports would be good for the U.S. consumer or economy.

Now, please explain why LNG exports are different?

Beyond Chicken

Let’s look at another trade example involving petroleum. Most of you know that the U.S. imports a significant amount of crude oil. In fact, the U.S. is the world’s single largest importer of this commodity, with a volume of about 9 million barrels daily (MMbd). This currently represents around half of total U.S. oil consumption. Less well-known is the identity of our largest foreign supplier. That country is Canada—and at near 2.5 MMbd—accounts for over one-quarter of U.S. crude oil imports. Our next largest suppliers are Saudi Arabia (1.5 MMbd), Mexico (860 Mbd), Venezuela (750 Mbd), and Iraq (650 Mbd).

Now let’s suppose our neighbors to the north make the argument that petroleum resources are limited, and that domestic oil should be preserved for future Canadian generations. Parliament subsequently imposes a crude oil export ban. What would happen? In essence, this would remove 2.5 MMbd of crude from world production. The U.S. would have to purchase this lost volume on world markets, and with supply tight, global prices would rise significantly. Moreover, the only country considered to have much upward production capacity is Saudi Arabia, and even they might not be able to meet the additional need. Our gasoline prices could very well spike another dollar—likely more.

Who would be hurt? Pretty much everyone, except perhaps a few OPEC nations, and even they do not relish disruption chaos. Oil prices would be higher worldwide, dampening economic activity. In Canada, thousands of oil workers would be out of jobs due to shut-in production. In a final irony, Canada would not be immune from soaring oil costs since they import about 1 MMbd of crude from overseas for their East Coast refineries—as nearly all the pipelines in the producing areas of Alberta go directly south to the U.S.

Fortunately, this Canadian scenario could never happen due to a myriad of legal issues and the clearly predictable massive economic disruptions that such an export ban would precipitate.

But here’s the big point: U.S. exports of LNG can go a long way in helping stabilize a currently precarious and volatile world energy market with future prospects even more unsettling. Europe, China, India and Japan are currently paying three to five times more for natural gas than prices in the U.S. They are hungry for energy. We can provide them with LNG at lower cost—good for their economies—and make substantial profits for U.S. producers. The producers reinvest and deliver more gas, thereby boosting our economy, while international sales help reduce our chronic trade deficit with these areas.  Granted, it could be argued that domestic natural gas prices would be somewhat higher, but even if they were, increases would be more than offset by the overall economic gain, hundreds of thousands of industry jobs, and the fact that international energy markets would be relieved of some stress that could lead to catastrophic disruption and global depression.  [Omit mom, apple pie reference here.]

What policy makers need to realize, and for that matter, the populace at large, is that the poultry and Canadian ban scenarios are relatively easy to understand and quantify since they are established industries. Damage from these export bans would be rapid and eminently visible. What is insidious is the unseen and difficult-to-quantify damage done by inaction. By saying no to LNG exports, how many jobs do we not create? By saying no to LNG exports, how is our balance of trade adversely affected. By saying no to LNG exports, might we be subject to a damaging global energy disruption that could have been averted? Can we really afford to say no to LNG exports?

MDN Note: A huge thank you to Chris for his insightful contribution, giving us all a lot to consider when it comes to LNG exports.