“We’re for Import free trade, just not Export free trade”

• For much of the last 40 years US politicians have railed against the countries of OPEC for restricting exports of oil for their own economic gain. Just 7 years ago, more than a dozen Senators, from both parties, introduced a bill calling for prosecution of OPEC on antitrust grounds.

• Last summer, the media ran a blitz of stories about China impeding exports of rare earth metals in order to benefit its domestic industries that use rare earths. The US joined with Japan and the European Union to file a complaint against China’s rare earth export restrictions.

• Six years ago, the US was looking at rapid acceleration of liquefied natural gas imports to satisfy our growing demand for gas-fired generation and industrial natural gas uses.  American diplomats and business people were pushing to open up new sources of LNG imports from South America and the Middle East.

And yet….

with American natural gas production now taking off and prices declining, many domestic businesses and politicians are lobbying to abandon those same principles of free trade. In fact, some of the same companies that just a few years ago were clamoring for LNG import terminals in the US and more LNG trade worldwide are now leading the charge to limit US exports of our newfound natural gas abundance.

Exporting LNG benefits the US economy by selling gas where it can be put to its highest value use and capturing some of that value.  The price of natural gas in Japan – our resource-poor ally and friend — is more than 3 times higher than in the US, and that difference is much greater than the cost of shipping them LNG.  Locking the gas into the US directs it to uses that the advocates admit are only economic when gas is cheap, while the value of that gas is far higher in Japan and other countries that rely on international energy trade to fuel their economies.  When we create value by exporting natural gas, some of the value is captured as profits to domestic producers and some as wages, such as to the workers who build and operate the export facilities and tankers.  But it also boosts the demand for our natural gas, creating additional jobs in gas exploration and production.[1]

The new opponents of free trade in energy — now that we are becoming exporters – are being taken seriously enough that the Department of Energy felt compelled to solicit a study of the economic costs and benefits of exporting natural gas.  Not surprisingly, the study finds that allowing natural gas exports is good for the US economy.

But the narrow economics of exporting LNG is not the strongest argument against restricting natural gas exports.  The pure hypocrisy of such restrictions — after decades of the US arguing for free trade in resources – would undermine any claim that US policy is based on economic principles rather than pure self-interest (albeit misguided).  We are, in fact, still dependent on imports for nearly half the crude oil we use.  That is why the US continues to argue that Venezuela, Saudi Arabia and other oil-rich countries should export more crude and stop using their abundant supplies to maintain artificially low domestic gasoline and diesel prices.

Exporting LNG will benefit the American economy by creating economic value and capturing much of that value in the US.  But just as important, exporting LNG will show that the US energy policies are based on sound economic principles, not the hypocritical politics of cheap energy .


[1] Not all economists think that the US will actually end up exporting much LNG, because the new shale gas technology will soon be applied in China and other locations, lowering world prices for LNG.  See the recent article by Frank Wolak.  But even if that view is right, the US has sacrificed its principles for a policy that has little practical effect.

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15 Responses to “We’re for Import free trade, just not Export free trade”

  1. Pingback: “We’re for Import free trade, just not Export free trade” | Veille énergie climat

  2. Figjam says:

    “… the US has sacrificed its principles for a policy that has little practical effect.” and isn’t this always the problem? We are “always” for something, until we are against it – because it is politically expedient…

  3. michal moore says:

    sev, excellent. good for you.
    just debated this very topic at cornell in my class. michal

  4. Soren A says:

    Hey, this is a question from the midterm I gave my energy econ class last year!
    “[A bunch of background setting up the question.] Suppose the LNG export facilities are approved. Would this be good news or bad news? Illustrate using a two-market model and answer from the perspective of four different interest groups: consumers and producers in the United States and in the rest of the world.” Answer: Domestic consumers: Bad idea! Domestic producers: Great idea! ROW producers: Grrr! ROW consumers: Yippee!

  5. Tony Bernhardt says:

    Beyond ‘narrow economics’ there are the obvious environmental virtues of natural gas as a substitute for coal for electricity generation, e.g. in China.
    Your argument also applies to the export of all the coal we will no longer need here for electricity generation, e.g. to China. Free trade in this case is environmentally harmful.
    Perhaps instead of restricting trade in natural gas and coal legislators should instead consider taxing their export, maybe according to their carbon content. And if taxing their export violates WTO rules, then they should tax them for domestic use as well, which would not violate WTO.
    Hmmm, this is sounding familiar…

  6. Alan Lamont says:

    It is also worth mentioning that by keeping our natural gas bottled up here, the price will stay low. Exploration and production will slow down. This slows down our rate of learning and innovation. We will be surpassed by other such as China and, as I understand it, the Europeans

  7. Jack Ellis, Tahoe City, CA says:

    Politics and principles mix like oil and water, which is why lawmakers have no problem talking from both sides of their mouth (sorry for being so cynical). I’m not sure it’s necessary to take the politically divisive step of taxing energy exports so long as the producers can’t escape US income taxes on the profits they earn by selling gas and coal at the much higher world prices.

  8. Dave Hackett says:

    The length in natural gas (and crude oil) is a North American issue, constrained by distance and economics. If the nat gas doesn’t flow out of the Gulf Coast of the US, it will likely leave the continent from British Columbia.

  9. Azmat M says:

    This is the universal problem of capitalism and those who ‘run the show’. We are for free trade and risk taking and …. UNTIL we (the corporations) fail. Then we want the government (ie taxpayers) to bail us out. We are true believers in free markets and private enterprise as quite succinctly captured in the comment: “Keep your stinking government hands off MY medicare.”

  10. Roger Bohn says:

    Severin, This is political economy, not economics. As is normal in economics discussions, you ignore the distributional effects of these alternatives. If we DO allow exports, the beneficiaries are a small number of wealthy energy companies and their shareholders. If we do NOT, the beneficiaries are everyone in the US who uses natural gas. So it’s perfectly rational for politicians (and voters) to be against exports – they just don’t accept that maximizing GDP is the only objective that matters. (Nor do most economists – we just use it as if it were.) Tony Bernhardt captured the obvious solution to this dichotomy, and the WTO difficulties with it.
    And yes, I reside in a department with a lot of political scientists.

    • Severin Borenstein says:

      Geez Roger, that’s the same argument that was made for wellhead regulation of natural gas prices in the 1950s through 1970s. That didn’t work out too well. Also the same argument made in Venezuela for keeping gasoline prices at less than 10 cents a gallon.
      More importantly, may main point was about the inconsistency of the view. I don’t see how your political science colleagues think that such hypocrisy in trade policy is ultimately good public policy….as suggested by the title of the post.

      • Roger Bohn says:

        Of course political scientists DO think hypocrisy in trade policy is normal. As a descriptive model of agricultural trade policy in most of the developed world, for example, it fits the data very well. At to whether it’s “good,” that depends on “for whom.” Farmers like it! Consumers suffer from it.
        You write: “Exporting LNG benefits the US economy by selling gas where it can be put to its highest value use and capturing some of that value.” That is correct, but “capturing some of that value” for whom? Bernhard solves the dilemma very easily when he writes: “Perhaps instead of restricting trade in natural gas and coal legislators should instead consider taxing their export. ” That converts a windfall for a small group, into a benefit for a large group.
        As for natural gas policy in the 1950s to 70s, I’ve long forgotten whatever Fred Kahn wrote on the subject! Subsidizing energy prices in Venezuela is a form of income transfer, but it’s an inefficient. In our case a tax on energy exports is quite a rational way to deal with budget balancing, because it causes relatively little distortion. Jack Ellis has a reasonable comment on that, but I given the very low effective rates of corporate taxation today, I think his premise is wrong. In fact a tax on all energy use…. back to Tony Bernhard.

        You write “The pure hypocrisy of such restrictions — after decades of the US arguing for free trade in resources – would undermine any claim that US policy is based on economic principles rather than pure self-interest (albeit misguided).” US policy SHOULD be based on self interest, surely. The economic argument is that in the long run our self interest is better served by reciprocal open trade. But in this case in the short run, export restrictions clearly help 300M consumers at the expense of windfall profits for a few large companies. (I oversimplify, of course.) Heresy to 1970s economics, but after the failures of that model in 2008 it’s time for some re-examination.

        Finally, a bill pushing an “antitrust” case against OPEC for collusion is pure grandstanding, and never went anywhere. Would anyone argue that OPEC was really acting against its members self interest? In 1980 Bob Pindyck wrote a nice model of “optimal rent extraction” for OPEC, and it was a good predictor of what they did. It said they should exploit a temporary constraint to create a windfall, then back off gradually.

  11. Jurgen Weiss says:

    The discussion between Roger and Severin is interesting. I do agree that distributional issues matter. I dug into this a bit and realized that even though taxing natural resource extraction is theoretically quite appealing, it doesn’t happen very much (or at very low levels). It turns out that good old republican Alaska has the highest extraction tax on oil in the country. So we should find a way to tax away some of the arbitrage profits from getting gas at $2/MMBtu and selling it in Japan for $15.99. By the way, I understand that the costs of getting it there are substantial. Without making excess profits, the gas could be sold in Japan for perhaps $10-12/MMBtu. The only way to make that happen is to have very long-term offtake agreements. But for some of the offtakers, various renewables will almost certainly be cheaper than $10-12/MMBtu over the time frames required. A completetly different angle, but worth thinking about. Severin also has a good point. The short-term “benefit” of low domestic natural gas prices probably has an ugly alternative face – a country locked into energy prices well below world market prices is likely to get more than the alleged comparative advantage – countries that rely on heavily subsidized domestic energy prices don’t strike me as picture children of what the US would/should want to imitate!

  12. The Constitution says:

    ARTICLE I, SECTION 9, CLAUSE 5. “No Tax or Duty shall be laid on Articles exported from any State.”

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