One of the stated purposes of the Federal Government enumerated in the US Constitution is the power of Congress to regulate commerce with foreign nations, and among the several states, and with the Indian tribes. The Commerce Clause of the Constitution has been used to great effect by the Federal Government to usurp the powers that were once held by the states themselves. While there is a great deal of debate over the Congress’s power to regulate interstate commerce, courts have been less restrictive when examining the Federal Government’s power over foreign commerce. In fact, one reason that the Federal Government was given unlimited power over foreign relations was to protect the freedom of commerce from state interference.
That said, there are many cases where Washington has restricted international commerce, mainly for national security reasons. Exports of certain products, like missile technology or computer software have been restricted because they could be used as weapons against the United States or its allies. Other restrictions have been placed on trade with specific countries either for foreign policy purposes (Cuba) or due to treaty obligations or United Nations rulings (Iran). For the most part, the export of goods and services from the United States to foreign buyers is unfettered. That, however, is not the case with petroleum – particularly crude oil and natural gas. As the United States has become the world’s largest petroleum producer, there is a rising tide of voices to reexamine these 40 year old restrictions.
Government Restrictions on Natural Gas Exports Cost Our Allies Today and Our Citizens Tomorrow
In the mid 1970s it seemed as if America was falling apart. Inflation was running at about 9 percent, unemployment though falling, was around 8.5 percent, and consumers were waiting in long lines at gas stations because of an oil embargo imposed by the Arab petroleum producers. No wonder that Congress enacted a range of laws designed to enhance energy conservation and to try to drive down prices for oil and natural gas.
In December 1975, President Ford signed the Energy Policy and Conservation Act, which among other things, established the Strategic Petroleum Reserve, fuel economy standards for automobiles, and conservation standards for appliances. In addition, the Act granted the President the authority to ban all exports of raw petroleum products and coal. The law (42 U.S. Code § 6212) reads, The President may, by rule, under such terms and conditions as he determines to be appropriate and necessary to carry out the purposes of this chapter, restrict exports of … coal, petroleum products, natural gas, or petrochemical feedstocks. An exemption is granted if the President declares them to be in the national interest.
As we found out from the Buffalo spittoon act, laws have a tendency to linger long after they have served any purpose, and the export provisions of the Energy Policy and Conservation Act are that type of law.
The unexpected consequences of the export ban can easily be seen in the market for natural gas. Recent events in Ukraine, where consumers are dependent on a belligerent Russia for all of their natural gas resources, show how dependent Europe now is on unsteady supplies. In fact, prices for imported Liquefied Natural Gas (LNG) range from about $9 to $12 per million cubic feet at receiving terminals across the continent. At the same time, over production in the United States has caused prices to collapse to well under $4.00 per million cubic feet, a price that makes most new exploration and production uneconomical. American exporters can make a substantial return by simply liquefying and exporting excess production to Europe, but more importantly, if new markets for natural gas cannot be found, the low prices will undermine production in the long term.
Examining each of these benefits from allowing LNG exports separately, shows just how much the ban costs American companies and could eventually cost consumers. Currently the US produces about 26.4 trillion cubic feet of gas, and consumes about 26.0 trillion cubic feet. Assuming no trade in gas (and there is some), that would leave 380.1 billion cubic feet available for export. This is not a huge amount; however, production is currently growing at a higher rate than demand so over time, the ability to export will grow.
More importantly, production of natural gas depends on prices that are high enough to sustain the investment in new exploration, drilling, remediation and processing. Looking at the long-term relationship between price and production suggests that in order to continue to produce at current demand levels, the price of natural gas in America would have to rise to about $9.25 per million cubic feet – about the world market price.
Therefore, if US producers are not able to at least export surplus, production prices in America will begin to slowly rise as marginal wells are taken out of production or not drilled. Even if prices were to rise to just one half of the European market price, this would cost American consumers (including both homeowners, and industrial users of natural gas) as much as $21 billion annually.
The fact is that restricting trade will not decrease prices in the long-term, rather it will lead to reduced production. Processing and transporting LNG is expensive so the domestic price will continue to be well below world prices just as bananas are cheaper in Honduras and sugar is cheaper in Brazil.
What the unnecessary restrictions on the export of LNG show is that policies made during a crisis may seem sensible at the time, but may lead to unintended consequences in the future. Economic policies should never be set in stone, as that setting may cost a heck of a lot!
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