Amid policy debates over and hopes placed in potential liquefied natural gas (LNG) exports from the United States, a new paper by Kenneth Medlock, James A. Baker, III, and Susan G. Baker Fellow in Energy and Resource Economics, predicts the long-term volume of U.S. exports will not likely be very large. The paper also argues that the impact on U.S. domestic natural gas prices will not be large if exports are allowed by the U.S government.
Significant changes in the global gas market in the past decade, particularly the emergence of shale in North America, have dramatically altered the global outlook for LNG markets and fueled the commercial aspirations of firms seeking to seize the apparent profit opportunity offered by exports. It has also raised the concern that allowing exports from the United States will force prices up and negatively impact industrial activity and household budgets.
"The lens that has been offered policymakers to address the question of U.S. LNG exports is inappropriate because it assumes a level of exports without accounting for the international market reaction," Medlock said. "The question before policymakers is one of licensing a capability, not licensing a fixed volume. Therefore, this issue must be viewed in the context of international trade if informed policy decisions are to be made."
Previous studies on the impact of U.S. LNG exports on domestic prices generally assume a particular volume of LNG exports from the U.S. when assessing the domestic price impact, but they do not allow for domestic and international market interactions. This is a serious flaw, argues Medlock, because market interactions will influence price movements and trade volume.
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