The case for natural gas exports

When life gives you lemons, you don’t have to make lemonade. Sometimes, you’d do better just to sell the lemons. The same logic holds for natural gas export policy.

In a stunning reversal of trend, the U.S. now finds itself in a position to export both natural gas and petroleum. Yes, we are projected to remain a net importer of petroleum for some decades. But the location of production and refining capacity, combined with the mismatch of distribution infrastructure, suggest that the most efficient use of oil will require exports from some regions and imports to others.

{mosads}Natural gas production, on the other hand, is growing so rapidly that the U.S. can soon be a major world net-exporter. Though domestic gas users love the increased production, some, such as Dow Chemical, want to rein in natural gas exports. The supposedly selfless logic is that it makes more sense to export higher-valued products made from gas than to just export the gas. Maybe or maybe not.

Imagine a child whose backyard has a lemon tree. She sets up a stand on the sidewalk and successfully sells the lemons for $0.75 each. Her next-door neighbor finds that by adding sugar, water, ice and a paper cup, he can sell a lemon’s worth of lemonade for a dollar. Should the neighbor buy the lemons and turn them into lemonade? Our budding manufacturer should sell lemonade only when the cost of the additional ingredients cost less than a quarter. For example, if the sugar, water, ice and cup cost $0.40, then he loses $0.15 per lemon and the two kids combined make only $0.60. Forcing the girl to sell him lemons for $0.50 will help the boy make money, but overall it makes no economic sense.

To be sure, our manufacturing industry is more complicated than a sidewalk citrus stand, but the basics still hold. Selling a higher-valued product instead of the raw materials only makes sense if the added value is greater than the added cost. If it costs five dollars to turn three dollars’ worth of gas into seven dollars’ worth of plastic, it is better just to sell the gas. If the resulting plastic is worth nine dollars, then making plastic is a good idea. Which brings up the question: How do we know? How can we tell whether the value Dow (or another manufacturer) adds by turning the gas into plastics or other products is more than the cost of doing so?

Simple. Are they willing to pay at least as much for the gas as anybody else, foreign or domestic? If the manufacturers are serious that they will actually add value to the gas, then this increase in value will be sufficient to allow them to buy the gas. If not, their argument is like that of a bully who makes money only by forcing a bad deal on his neighbor.

The combination of smart-drilling technology and hydraulic fracturing has dramatically expanded the supply of domestic natural gas. As a result, the inflation-adjusted price went down by more than 50 percent between 2006 and 2013. This expanded production and lower price has helped pull manufacturing back to the United States. However, exporting gas will also create value, investment and jobs.

The mix of domestic use vs. exports that gives the greatest boost to the economy will not be determined by lobbyists and bureaucrats but, instead, by active competition among buyers and sellers.

Kreutzer, Ph.D., is a research fellow specializing in energy economics and climate change at the Heritage Foundation’s Center for Data Analysis.