The Washington Post reports:
The Energy Department gave a terminal near Freeport, Tex., permission Friday to ship liquefied natural gas to Japan, providing a new outlet for rising U.S. production of shale gas despite qualms of environmentalists and many domestic manufacturers.
The permit marks another step in the sudden reversal of fortune in the natural gas business. Less than five years ago, anticipating a worsening shortfall in domestic supplies of natural gas, the Freeport terminal on Quintana Island began operations as an import facility.
But advances in hydraulic fracturing techniques have unlocked new supplies of natural gas from shale rock. Freeport, like other import terminals, now wants to spend $10 billion to retool the terminal so it can send gas abroad in liquefied form.
Japan, with virtually all of its nuclear power plants shut down, is paying extremely high prices for energy imports and is looking for new supplies. Osaka Gas and Chubu Electric agreed to buy all of the liquefied natural gas, or LNG, from the first of three phases of the Freeport export project for 20 years. The facility was conditionally authorized to export at a rate of up to 1.4 billion cubic feet of natural gas a day.
It was the second permit given by the Energy Department for LNG exports to a country that does not have a free trade agreement with the United States. The department said it weighed economic, energy security and environmental considerations as well as nearly 200,000 public comments.
This wasn’t a surprise — the Financial Times reported earlier this month that the Obama administration was leaning toward loosening the rules for natural-gas exports, specifically mentioning this Texas depot, but it’s nonetheless a heartening victory for free trade.
Because nautral gas is an exhaustible natural resource, WTO’s general trade rules allow the U.S. to restrict its export without causing any particular problems, and that’s in effect what we’ve been doing the shale/fracking boom began booming several years ago. In part this is because natural gas is pretty complicated to export — it can be transported via pipelines, but for countries that are more efficiently reached by ship, the gas has to be liquefied, a relatively expensive and complicated process that produces a highly volatile product (in fact, LNG terminals and ships are considered a serious security risk in U.S. ports). The federal government has to approve the construction and operation of those ports, and as WaPo explains, this is just the second time it’s done so for an operation that will ship LNG to a country with which we don’t have a free-trade agreement.
Since the beginning of the U.S.’s natural-gas boom, the Obama administration probably could have done more to allow and encourage the free export of natural gas, but their sins against the gospel of free trade have been more of omission than commission. But the de facto restrictions have mattered a lot nonetheless: High levels of natural-gas production and constrined exports have pushed U.S. prices lower and raised prices in Europe and Asia higher than they would be otherwise. In fact, while commodities prices tend to vary somewhat across the world, the differences are really stark in natural gas. Asia pays dramatically more for it than the U.S. does, and Europe pays somewhat more:
That’s had a few interesting effects: While some U.S. electricity production is rapidly shifting from coal to natural gas, Europe has been slower to do so, keeping their electricity production dirtier than it might be (although the process needed to liquefy natural gas for export is carbon-intensive, so some environmental groups see little to gain here — in terms of actual air pollution, though, coal is clearly much worse). Further, it’s been a subsidy to natural-gas consumers in the U.S. – mostly people who heat their homes with it and industrial firms that use it for manufacturing. With substantially higher levels of exports, these people will definitely see their prices go up, but only from an artificially realistic low. There’s been a lot of hope that the shale boom’s lower U.S. energy prices could fuel a recovery in U.S. manufacturing, and higher LNG exports will blunt that advantage somewhat, but not entirely, because transporting gas to Europe is still expensive and the two continents’ prices aren’t going to converge completely.
But while such restrictions have obvious benefits for the U.S., a huge trade distortion such as strictly limiting exports of a commodity carries tremendous economic costs to Americans, too, even, as often is the case, the costs aren’t as obvious as the benefits. For one, higher natural-gas prices at home and more export opportunities will encourage more natural-gas-extraction development here and the jobs that creats, because supply is piling up and current prices can’t support more-costly drilling in the U.S. For that reason, many of the president’s environmentalist supporters, who oppose fracking like Brigadier General Ripper did fluoridation, don’t want the president to approve higher LNG-exports levels, even though it would mean less coal is burned elsewhere (in addition, they object that more permits for liquefication will increase the U.S.’s national carbon emissions, regardless of the fact that this will be cancelled out globally by reductions elsewhere). On LNG, then, as with free-trade issues generally, the president has slowly and less than eagerly made the right, liberalizing decision. And one that should have positive ripples, too: U.S. moves toward a freer market in one commodity only strengthens our case for free trade generally.