After much debate, the U.S. is moving ahead with liquid natural gas exports, but it might want to study Australia’s experience to understand the possible consequences.
Rapid growth in East Asia has been feeding demand for liquid natural gas (LNG) for several years, but the shutdown of almost all of Japan’s nuclear reactors in 2011 super-charged LNG demand in the region. As a result, LNG prices skyrocketed, and major natural gas producers across the globe have rushed to take advantage of high prices.
Australia has been particularly aggressive. It is set to pass Qatar as the world’s largest exporter of LNG thanks to the massive amount of export capacity currently under construction. When the slew of LNG export terminals are completed over the next four to five years, Australia’s LNG export capacity could jump from 22 million tonnes per year (mtpa) to well over 80 mtpa.
The logic behind the export campaign is that exporting commodities can boost trade balance, create jobs, and incentivize production.
The same arguments have been used in the United States to justify exporting the abundant shale gas from places like the Marcellus and Eagle Ford shale plays. But lost amid the debate is the effect on domestic prices.
The Wall Street Journal has outlined the unintended consequences of exporting LNG from Australia. The export push has caused Australia’s domestic natural gas prices to triple over the last several years. The average household in New South Wales, Australia’s most populous state, could see its gas bill spike by US$200 this year. And one study suggests that the bills could keep adding up as more natural gas is diverted for exports.
Behind the phenomenon is some basic math. Natural gas producers can fetch a higher price by exporting their product rather than selling it domestically. As a result, there is a corresponding increase in domestic prices as supplies tighten. In other words, natural gas goes to the highest bidder, and when opening up to exports, there is a much broader pool of bidders.
There is good reason to believe that the experience is not translatable to the situation in the United States because of the enormous differences between the two countries. For example, the U.S. is the largest natural gas producer in the world, and it extracts more than 15 times the rate of Australia.
More importantly, the proportion of exports to production is wildly different between the two countries. By the end of the decade Australia will be exporting three times more natural gas than what it consumes. By comparison, when construction is completed, the U.S. may end up exporting only 10 percent of today’s domestic consumption levels.
Nevertheless, even if the price impact will be a difference of magnitude, the U.S. still could see domestic natural gas prices rise. That is because exports will also be competing with very strong domestic demand. Coal plants are going the way of the dinosaur, and natural gas-fired power plants are quickly replacing them. Natural gas is also increasingly being used as a feedstock for plastics, fertilizers, and other petrochemical products.
Natural gas demand tends to hit seasonal peaks in the winter, and winter peaks have gotten bigger, as the EIA chart below demonstrates.
The last winter in particular highlighted the increasingly importance of natural gas in America’s energy balance. The cold freeze on the east coast sent prices rocketing upwards as homes and businesses tried to stay warm.
U.S. vulnerability to price spikes will increase in the future for two reasons: we will be relying more and more on natural gas, and at the same time, more natural gas will be sent overseas. This could lead to temporary shortages, and as a result, potentially worse price spikes than what we saw in early 2014.
Proponents of exports often argue that the benefits – improved trade balance, jobs, more production – outweigh the costs. That may be true when benefits and costs are balanced out in the aggregate. But the benefits accrue to only certain constituencies, while the costs are borne by others.
This is all not to say that exports are a bad idea. But it is important to keep in mind Australia’s experience. LNG exporters and natural gas producers will profit, but individual households could pick up the tab for higher gas prices.
By Nick Cunningham of Oilprice.com
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