Blog Post

Is There a Case for Export Restrictions on US Liquefied Natural Gas?

Apr 22, 2013 | Roger A. Sedjo

As noted in earlier posts, in an amazingly rapid turn of events, concerns in the United States over controlling natural gas imports have shifted to anxieties over limiting gas exports. This “reversal of fortunes” is the result of development of a commercially viable system of extracting natural gas from deep shale, of which the US has vast quantities. But what might the benefits and costs of restricting gas exports be?

Economists have long argued that in most cases unrestricted trade, including unrestricted exports, will generate the maximum benefits to the exporting country. Economic analysis shows that the benefits to the resource-exporting sector will typically exceed the costs to the domestic resource-using sector, thereby generating positive net benefits to the country as a whole.

Of course, this does not imply that each sector within the country will benefit. Rather, there will be domestic winners and losers. In this case the benefits to gas exporters will exceed the relative losses to the domestic gas users. This net benefit is the case for free trade. Note here that the domestic interests may not be net long-term losers when utilizing a newly developed resource such as shale gas. For example, if the domestic price, after the market has reached its equilibrium, is lower than it was before the onset of new supplies, e.g., due to fracking, domestic users are still ahead. But, they are relative losers to the extent that exports result in gas prices higher than they would otherwise be without exports.

There are, however, well recognized cases where an export restriction might be advantageous to the country as a whole. Suppose a country, or group of countries, is a dominant worldwide producer of a product. The classic case is OPEC with its dominance in the export of oil. In this case the countries have monopoly power and can manipulate export prices with an export tax or, more often, by restricting their exports. If the higher prices increase their export earnings (and profits) more than the lost earnings associated with the decrease in exports, the country as a whole will benefit. Hence, monopoly power in the export market has generated net benefits.

However, individual countries rarely possess significant market power, particularly in the longer term. In most cases single counties provide only a small fraction of world market supply and thus have merely a negligible impact of world prices. This is likely the case for the US with respect to natural gas. Note that even with substantial production expansion, the US is unlikely to export anywhere near the volumes necessary to dominant the world market. This is because world supplies are likely to be influenced by a variety of suppliers, both existing suppliers and also newly emerging supply sources. In this case the US, even as it is moving from a net importer to an exporter, will only be a relatively marginal supplier to the total world market and thereby have only negligible power to affect prices.

Overall, however, the US now finds itself in a very favorable position. In the shorter term, due to the fragmentation of natural gas transport infrastructure, the US may be a major temporary supplier in some markets and benefit on a temporary basis from the very high prices. In the longer term, as an exporter the US can benefit from the normal gains from trade. Additionally, high transport costs give US gas users a significant cost advantage over gas-importing for producing energy intensive goods, even when international gas markets clear.

What are the implications for US gas trade policy? The US may be able to have the best of both worlds. Exporters will have the advantage of higher prices in foreign markets while domestic users will have a competitive advantage via lower gas costs than many of their foreign competitors. Wise policy, then, ought to take advantage of this situation by not interfering with gas usage - domestic or foreign. Let the market do its job and sort out flows and usage. Policy’s primary role should be to focus on minimizing negative environmental impacts associated with the resource’s development.