Restricting Trade: No Bad Deed will Go Unpunished

The US exports about $1.5 trillion dollars in good each year.  These exports include machinery, electronics, vehicles, aircraft, medical equipment, precious metals, chemicals, pharmaceuticals and agricultural products.  In recent years, exports have represented 10% of our gross domestic product.  According to the Department of Commerce, they support over 10 million jobs.  So, why would politicians and some businesses advocate export restrictions?

The short answer is short sighted, politics.  Earlier this year, exports of crude oil and products exceeded for the first time in decades crude oil and product imports.  The fact that we were able to export gasoline and diesel to Latin America, for example, meant that refineries were able to keep running and maintain the good paying jobs that they provide.  That has not been the case in recent years as refineries on the east coast and Caribbean closed because they could not be profitable with demand falling and operating costs rising.  Although these exports benefited the economy, a number of politicians claimed that they were the cause of high gasoline prices.

Now, those same politicians want to limit exports of natural gas as a way of maintaining low prices.  In the last several years, advances in drilling technology and access to private lands have led to a boom in natural gas production, primarily shale gas.  As a result of a tremendous growth in supply, prices have fallen from almost $14   mcf in 2008 to about $3mcf today.  As a result of an abundance of supply and relatively low prices, utilities are switching from coal, petro-chemical plants are increasing their domestic investment as are other companies that either consume natural gas directly or use it as a feedstock.  Some estimate that this natural gas boom has created about 500,000 jobs.  Clearly, natural gas production has been a bright spot in an otherwise dismal economic picture.

Since supply has been increasing faster than demand, producers are looking for new markets and the export market is potentially a big one.  But, some politicians want to limit export potential as a way of keeping prices at current levels.  That simply is not going to happen.  Today’s low prices reflect an excess of supply relative to demand.  As demand begins to catch up with supply, prices will move to a higher level, one that will justify the cost of exploration and production.  Today’s low price doesn’t do that and as a result drilling is being reduced.  Baker Hughes reports that gas rig activity has declined by half from just a year ago.  Exports open up new markets and that will encourage investment and job creation.

Companies are beginning to explore the feasibility of constructing liquefied natural gas (LNG) facilities to export gas to other countries where natural gas prices are higher.  These include Britain, South Korea, Spain, and India according to Robert Samuelson, economic writer for the Washington Post.

Samuelson points out that markets for LNG are not assured because the cost of building liquefying facilities and refrigerator tankers is expensive.  One project in Louisiana is estimated to cost $11 billion dollars.  However, a recent study sponsored by DOE on natural gas exports concluded that the impact on domestic prices would be modest and that the economic benefits would be substantial.  That is not surprising since we live in a global economy and exports of all sorts of goods has been shown to improve our economic well being.

Attempts to restrict trade and control prices always fail and cause unintended consequences that are usually greater than assumed benefits. Today’s price of natural gas is not going to continue indefinitely.  A long term equilibrium price that balances supply and demand is higher but not as high as the price if the market for natural gas is constrained by government restrictions that make production uneconomic.