US Oil and Gas Exports and National Power

Earlier this month, the US Senate Committee on Energy and Natural Resources held a hearing on US natural gas exports. Republicans championing exports say LNG exports will create jobs and raise revenue for the federal government. Democrats worry that exports will undercut the resurgence in US manufacturing. Senator Ron Wyden (D-Ore) led the charge arguing that major gas consumers could find themselves “hard hit with energy price hikes.” A recent Baker Institute study concludes the opposite, suggesting that the demand pull over time from Asia for US LNG will not be “in large quantities.” Indeed, US LNG exporters will face stiff competition from other suppliers in Australia, Canada, Mozambique, Russia and possibly even Argentina, to name a few.

This debate, however, by focusing solely on the impact of US energy exports on US domestic natural gas prices, misses a key aspect of the factors that should be considered. The United States’ ability to be an energy exporter could do much to enhance American power and influence. It is easy to imagine the expansion of American power if its natural gas companies could gear up to supply LNG to a European country cut off by Russia, for example, such as happened in the winter of 2006. If the US can become an energy supplier of last resort, its geopolitical importance will rise significantly along with its diplomatic freedom of movement.

US shale gas has already played a key role in weakening Russia’s ability to wield an energy weapon over its European customers by displacement. By significantly reducing US requirements for imported liquefied natural gas (LNG), rising US shale gas production has increased alternative LNG supplies to Europe in the form of LNG displaced from the US market. The geopolitical role of US natural gas surpluses in constraining Russia’s ability to use its energy supplier role as a wedge between the US and its European allies could further weaken over time, to the extent that the current Administration stays the course with approvals of US LNG export terminals.

US LNG exports from the Gulf coast could be an important strategic back-up role to shaky Russian gas supplies with their potentially political strings attached, much the way the US served as an oil swing producer back in the 1960s, rendering an Arab oil boycott during the 1967 Arab-Israeli war infeasible. US Asian allies Japan and South Korea also are seeking flexible US Gulf coast LNG contracts for reasons of economic and geopolitical leverage.

As American shale production expands from natural gas to oil, the geopolitical fall out will also mushroom both by improving US financial strength and by eliminating US vulnerability to economic blackmail. The upshot of shale oil will be to reverse the course of history and roll back the clock to pre-1973. Oil producing states will no longer be able to use the lever of a possible energy supply cut-off to America to pressure Washington to adjust its foreign policy.  There has even been talk that the US could become an oil exporter. The idea of crude exports “should not automatically be taken off the table,” US Energy Information Administration director Adam Sieminski told a Washington DC-based conference last summer.

Even if crude oil exports never come to fruition, a self-sufficient United States will have more flexibility in how it manages the roughly 700 million barrels in the Strategic Petroleum Reserve (SPR). Although many think of the SPR as a wartime stash, it was in fact created to be a tool of statecraft to be used to redress the bargaining imbalance to allow the United States as a major oil importer greater maneuver in its foreign policy and to prevent global economic damage from undue manipulation of oil markets. The size of the SPR was determined by the premise that the US would have to replace some or all of its oil imports during a crisis. But if the US has no imports to replace, then it will have more discretion on when to use the SPR to either loan oil to other countries for geopolitical aims or to provide extra oil into the market to influence global prices during a supply disruption, should they be negatively affecting the wellbeing of the global economy. The United States could even decide to sell off some of the SPR to reduce its deficit, given that the average purchase price for the stockpile is $29.76, potentially leaving a lot of room for profit-taking. At a minimum, over time the US will need to review its SPR policy, which already lacks a clear mandate for when a release is triggered.

Politicians and experts alike will undoubtedly point out that if the US becomes an exporter, such exports could put US consumers and industry at risk during times of a supply outage or crisis. But such risks are easily remedied as a recent Citibank report notes. “Citi GPS Energy 2020: Independence Day” argues “…in case of an international emergency or a supply disruption, exports can be curtailed and domestic prices in theory be significantly cushioned from international shocks. Indeed, the government could restrict or even ban exports in times of emergency…” While Citi notes that the latter is an extreme that “would likely violate international trade treaty obligations,” it is certainly a safeguard that could be used in extreme circumstances such as time of war. Moreover, any US policy to temporarily end exports would, except in times of war, likely be made in the context of US participation in a global response to supply outages and therefore would be just one element to an organized international response to protect the US economy and those of our allies.

All in all, we need a fuller debate on the subject of US energy exports, and it must include all aspects of the implications for US foreign policy. To focus only on the uncertain impact that exports might have on global energy pricing is foolhardy, given the complexity of interactive forces that will influence prices over the long run. Was the industry now testifying about natural gas prices able to project long term LNG markets correctly, we would currently have no empty LNG receiving terminals on the US Gulf coast and Dow Chemical and others wouldn’t have offshored plants when US natural gas prices rose in the early 2000s. Rather than second guessing price impacts, we should widen the export debate to consider US global priorities as well as domestic economic concerns.