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Abstract
A decade ago, market players were making large capital investments to facilitate the import to the United States of liquefied natural gas (LNG) from distant locations, such as the Middle East, Africa, and Russia. This was predicated on the consensus at the time that U.S. domestic supply was becoming increasingly scarce. However, innovations involving hydraulic fracturing and horizontal drilling subsequently led to the dramatic growth of domestic production from shale gas. In fact, domestic production growth has been so strong that the U.S. is considered a possible exporter of LNG—an unthinkable notion just a few years ago. This new consensus is fueled by the current reality—one that features abundant supplies and low prices in North America relative to the rest of the world. Importantly, the commercial aspirations of firms that seek to seize the apparent profit opportunity offered by exports run headlong into concerns that allowing exports from the U.S. will force prices up, thereby negatively impacting industrial activity and household budgets. Hence, the issue of allowing LNG exports from the U.S. has entered the political realm.
Several groups—such as the U.S. Energy Information Administration, the Deloitte Center for Energy Solutions, and RBAC—have studied the impact of U.S. exports on domestic prices. These studies generally assume a particular volume of LNG exports from the U.S. when assessing the domestic price impact, but they do not allow interaction between domestic and international markets to influence the volume of trade. U.S. LNG exports will occur in a global setting, so it is an international trade issue. Thus, to separate truth from fiction one must apply the appropriate analytical framework grounded in international trade. Specifically, domestic market interactions with the market abroad will determine export volumes and therefore U.S. domestic price impacts.
After introducing a basic international trade framework, the consequences of U.S. LNG exports are discussed. This paper argues that (a) the impact on U.S. domestic prices will not be large if exports are allowed, and (b) the long-term volume of exports from the U.S. will not likely be very large given expected market developments abroad. The bottom line is that certification of LNG exports will not likely produce a large domestic price impact, although the entities involved may be exposed to significant commercial risk.
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