Outside View: The strange debate over LNG exports

By RICHARD SCHMALENSEE and MARGO THORNING, UPI Outside View Commentator  |  Nov. 21, 2013 at 12:14 AM
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WASHINGTON, Nov. 21 (UPI) -- The debate over exports of U.S. liquefied natural gas is exceedingly strange. In Washington one sometimes hears calls to limit imports of given goods or services but limits on exports?

When U.S. President Barack Obama talked of doubling U.S. exports in five years in his 2010 State of the Union Address, some said this was an unrealistic objective but nobody said it wasn't a worthy goal, particularly to support the United States' economic recovery.

Since Adam Smith, of course, economists have understood that restrictions on imports or exports reduce overall national welfare. But the politics of imports and exports are different.

The costs of allowing imports are generally borne by identifiable firms and their workers but the benefits of imports are typically widely dispersed and thus effectively invisible.

Exports have an opposite dynamic. Increased export sales directly benefit identifiable firms and their workers. Any costs are typically spread thinly and invisibly over the whole economy.

Since World War II, U.S. trade policy has reflected Adam Smith's teachings, somewhat modified by a political tilt toward exports and against imports. Beginning with the first General Agreement on Tariffs and Trade, signed in 1947, the United States has been a leader in the effort to dismantle trade restrictions. NAFTA and other free trade agreements have benefitted both the United States and its trading partners.

And while the United States has tariffs on many imported goods and services, exports have been limited only for national security reasons or to implement country-specific sanctions.

In fact, the United States has used international law to attack other nations' export restrictions. Most notably, in 2009 the United States joined others in successfully challenging Chinese restrictions on exports of rare earths, invoking the provision in the GATT that explicitly outlaws export bans and restrictions.

When it comes to LNG exports, however, the law says the U.S. Department of Energy needs to determine whether LNG exports to countries with which the United States doesn't have a free trade agreement are in the "public interest."

LNG export projects must file an application for an export license. In some cases, the applications have been awaiting approval for close to two years. One application has been approved; three have been granted contingent approval.

So why, despite the clear lessons of economics and the history of U.S. trade policy, would the Energy Department take an approach to export licenses that effectively serves as an export restriction?

Organized special interests think they stand to lose if LNG exports were to raise domestic natural gas prices. These special interests comprise mainly a few manufacturing companies, for which natural gas is an important input. They hold this view despite the soundest economic studies indicating that allowing LNG exports would cause only small domestic price increases.

So we're having this debate because of a 75-year-old law and organized special interests -- not because of anything economically harmful about LNG exports.

Increasing U.S. natural gas production in recent years has generated both jobs and profits. Because the costs of liquefaction and transportation to Asia and Europe are substantial compared to plausible future U.S. natural gas prices, U.S. natural gas users will likely enjoy a long-term price advantage over countries in Asia and Europe that rely on LNG imports.

These costs also imply that competition from established low-cost foreign producers -- including Qatar, Indonesia, and Australia -- would dampen the volume of LNG that could profitably be exported from the United States. And export volume from the United States would tighten over time as other countries began to exploit their own shale resources.

De facto limits on LNG exports resulting from a halting export-license approval process would harm the U.S. economy as surely as restrictions on the exports of soybeans, lumber or software. U.S. natural gas prices are low by historic and international standards; small export-induced price increases would impose few costs.

Holding back exports of LNG could slow U.S. economic growth and would surely make it much harder for the country to challenge others' export restrictions that harm the U.S. economy.

It's time to end the silly debate over LNG exports. The Department of Energy should approve LNG export license applications and give market forces a chance to work.


(Margo Thorning is senior vice president and chief economist with the American Council for Capital Formation and director of research for its public policy think tank. She is also director of the Act On LNG Campaign (www.actonlng.org).

(Richard Schmalensee is the Howard W. Johnson Professor of Management and Economics Emeritus, Massachusetts Institute of Technology, and former member of the White House Council of Economic Advisers.


(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)

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