Monday, January 14, 2013

LNG Exports and Consuming Industries in the United States

A Big Benefit for the US and Global Economy

Natural gas users have taken a keen interest in recent requests for authorization to export liquefied natural gas (LNG) from the U.S.  In December, the DOE released a long-awaited study on natural gas exports.  Under the Natural Gas Act, the Department of Energy is authorized to restrict exports of natural gas by time period or quantity, except to Free Trade Agreement countries that extend non-discriminatory treatment to US exports.  One LNG license has already been approved without volume restriction. 

Several large industrial users of natural gas have advocated limits on LNG exports to keep natural gas prices low in the US market.  Low prices, they claim, would make U.S. manufacturers more globally competitive.  However, the DOE-commissioned study found that increased exports of natural gas would benefit the U.S. economy as a whole, creating jobs in export-related industries as well as income from exports.  Who’s right?

Economic theory (and, to be fair, most observation) indicates that restrictions on exports create similar inefficiencies as import protectionism.  Export restrictions reduce the incentive to invest in production of products and services whose prices are held down, just as restrictions on import trade reduce the incentive to invest in the protected market in favor of other markets.  In time, the price of natural gas would approach world price levels, but at a higher price in the US than if production were not constrained. 

International trade agreements also discourage export restrictions, but allow them in certain circumstances.  The General Agreement on Tariffs and Trade (GATT) provides that a country may not restrict exports (with exceptions not relevant here) except by means of export duties and taxes, which are open and transparent.  Perhaps because the US always discouraged export restrictions for economic reasons, the US agreed to this condition. 

But the U.S. Constitution prohibits export duties and taxes.  So, any quantitative restrictions on LNG exports from the U.S. would face tough sledding and potential condemnation in the World Trade Organization. 

The Commerce Department examines alleged subsidies by foreign governments in countervailing duty cases.  Commerce has found that they amount to government subsidies to overseas producers, because they provide inputs at lower than commercial prices.  If other countries examined LNG export restrictions, they might well find that these restrictions provide subsidies to production of natural gas-intensive manufacturing. 

As advocates for consuming industries, CITAC believes that open access to raw materials creates the maximum benefit for all manufacturing.  While the export restraint picture is more complex than import restraints, economic freedom creates more winners than restrictions do. 

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