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June 6, 2013

No More Energy Protectionism

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At current consumption rates, the United States has more than a century’s worth of natural gas beneath its soil, and new drilling methods are making it much easier to extract. The shale-gas boom has created jobs, generated economic growth, and produced consistently low prices in a historically volatile market.

In fact, the current price of natural gas may be too low to sustain the current rate of development. Some producers are flaring gas and passing up opportunities to drill new wells until they can get a better price. As a result, many in the industry are looking to expand to foreign markets where prices are much higher.

Exporting natural gas is no easy task. An exporter must first liquefy it at extremely low temperatures, then send the liquefied natural gas (LNG) overseas from a purpose-built export terminal and deliver it to a specialized import terminal for storage or distribution via pipeline. It’s a huge investment of time and money — yet sometimes the hardest step of all is getting the government’s permission.

Of course applicants have to undergo the normal environmental review and permitting process conducted by the Federal Energy Regulatory Commission, as would anyone building such huge facilities. But Section 3 of the Natural Gas Act of 1938 also gives the Department of Energy’s Office of Fossil Energy a say in the decision — and not on health or safety grounds, but based on whether DOE thinks it’s good for the economy.

DOE automatically authorizes a permit for exports if the importing nation has a free-trade agreement (FTA) with the U.S. Unfortunately, many of the countries that want our natural gas and will pay high prices do not have such an agreement. If there’s no FTA, the Energy Department must publish a notice of the application in the Federal Register. Then there’s an extended comment period, and eventually DOE will issue a ruling that decrees whether the desired facility is in the public interest.

The initial motivation behind this process was to keep natural gas, in times of scarcity, from being sold abroad when it was needed at home. Whatever the wisdom of that policy, today there is no possibility of a shortage developing, and with all the jobs and money flowing from natural-gas wells, it might seem obvious that selling more gas at higher prices will benefit the economy. Yet the DOE still thinks long and hard before approving permits (a second one was just granted, leaving 19 under consideration), under pressure from hard-core environmentalists who oppose all fossil fuels and manufacturers who benefit from cheap gas.

The Obama administration has been saying most of the right things about these permits. Now it’s time to walk the walk by allowing the market, instead of politics, to determine how much natural gas the U.S. will export. If the administration continues to drag its feet on approving the other 19 licenses, Congress should step in.

The benefits of exporting LNG are clear — not least to the Department of Energy itself, which recently released its second study on the macroeconomic effects of LNG exports. The analysis, produced by National Economic Research Associates, projects annual increases in export revenue as high as $30 billion. By 2020, the report concluded, LNG exports could increase gross domestic product by up to $47 billion: “Across the scenarios, U.S. economic welfare consistently increases as the volume of natural gas exports increase. This includes scenarios in which there are unlimited exports.”

Sure sounds like shipping out more LNG would be in the public’s interest, especially for a president who wants to double American export growth. But the longer the administration waits to approve licenses, the greater the likelihood of squandering this growth opportunity. Australia alone has eight export terminals under construction. If a slow permitting process needlessly delays America’s terminals, the economics could change, as the arrival of exports from other countries lowers prices in areas where U.S. companies wish to export.

President Obama has spoken favorably about natural gas and the possibility of America’s being an energy exporter. So, too, has newly confirmed energy secretary Ernest Moniz. In fact, Moniz chaired a 2011 MIT study that recommended: “The U.S. should sustain North American energy market integration and support development of a global ‘liquid’ natural gas market with diversity of supply. A corollary is that the U.S. should not erect barriers to natural gas imports or exports.”

Ironically, the federal agency that Moniz heads up now poses the greatest unnecessary barrier to more natural-gas exports. Some advocate a go-slow policy, worried that an unrestricted natural-gas boom will lead to a bust. But it’s unlikely that all the companies that have applied to build export facilities will actually build them, because changes in prices would make it no longer profitable. In any case, those decisions should be made by the private sector, not the federal government.

If the administration isn’t going to walk the walk by approving natural-gas-export licenses to non-FTA countries, Congress should work to lift those restrictions. In a free economy, goods and services go to their highest valued use. Natural gas is no different, and it should be treated the same as any other good the U.S. trades around the world.

— Nicolas D. Loris is the Herbert and Joyce Morgan Fellow in the Heritage Foundation’s Roe Institute for Economic Policy Studies.

First appeared in National Review Online.

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