Photo credit: Tennen-Gas

Last week, DOE released its much-anticipated report examining the impact of U.S. liquefied natural gas (LNG) exports on the global and national markets.  The “Macroeconomic Impacts of LNG Exports from the United States,” written by NERA Economic Consulting, used a series of scenarios with a wide range of different assumptions about production costs, export levels, and market conditions, to assess the economic impacts of different limits on U.S. LNG exports. The main takeaway from the report was that America received modest net economic benefits from allowing LNG exports.

The report itself is a lengthy two hundred and thirty pages, but, in particular, it highlighted several key findings resulting from the scenarios.

The report finds that while allowing natural gas exports will push up prices, the global market will limit how high American natural gas prices can rise due to LNG export pressure. In other words, other countries will not purchase American LNG if it becomes more expensive than LNG from other places, thus putting a cap on how high natural gas prices will rise. This finding is particularly pertinent to the ongoing debate in the U.S. over whether or not to allow exports for fears of impacts on domestic consumers and manufacturing.

The second overall finding is that increasing American LNG exports raised energy costs and depressed real wages and the return on capital in all other industries. As natural gas exports rise, so do the prices for natural gas as they converge to the world price. This makes domestic users of natural gas worse off.

However, the third significant finding is that across all scenarios American economic welfare improved as LNG exports increased. The costs of allowing exports to move forward – higher natural gas prices for American consumers; reduced manufacturing competitiveness – would be more than offset by revenues from exports. Only roughly 10% of the American manufacturing industry (0.5% of total U.S. employment) has energy expenditures larger than 5% of the value of their outputs. Thus, while there will certainly be distributional effects of expanding natural gas exports, net welfare to the U.S. as a whole is positive as exports increase. As the report notes, this is consistent with accepted economic trade theory when barriers to trade are removed.

While these findings are interesting, what is more intriguing is how companies and organizations are responding to the report. Many LNG producers view NERA’s report as a green light to ramp up American LNG exports. With only modest negative effects projected, an overall American economic gain, and less fear of a domestic price explosion, drillers are eager to expand their market.

On the other side, domestic manufacturers, in particular chemical manufacturing companies, have viewed this report with unease. Many believe that exporting natural gas would increase the domestic price, harming their businesses. Dow Chemical has been particularly critical of the DOE report, suggesting that it failed to appropriately measure the damage that will be done to American manufacturing. Environmentalists are also hesitant about the report, as they believe it will lead to more domestic fracking and drilling.

Some, like ASP’s Nick Cunningham, view the LNG export issue as being “overblown” and argue that, in reality, the impact of increasing American LNG exports will only be marginal, both for LNG producers and domestic manufacturers. Also, Steve LeVine of Quartz suggested that the opportunity to make money by exporting U.S. LNG to Asia may be smaller than some think because “the math doesn’t add up.” ASP’s Andrew Holland argues in the Consumer Energy Report that the issue should be left to the open market. To this end, he suggests that the government deregulate LNG exports so that it is treated like other tradable goods.

As it stands, however, exporters must obtain a permit from the Federal Energy Regulatory Commission (FERC) if they are exporting to countries with which the U.S. does not have a free trade agreement. Currently, FERC is processing 18 such permit applications. Without their approval, exporters may not be able to get their product to the global market, but the latest LNG report is a positive sign for opening up America’s LNG market.

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