Should We Export Natural Gas?

A blog about business and economics.
Dec. 10 2012 10:59 AM

Should We Export Natural Gas?

The development of hydraulic fracturing techniques for natural-gas mining has been a huge transformation of the American resource-extraction sector. And natural gas turns out to be a somewhat difficult commodity to export globally, so right now gas prices are much lower in the United States than in foreign countries. So should we build the liquefied natural gas terminals that would be needed to turn America into a gas-exporting powerhouse?

The Washington Post says it's a no-brainer:

Usually, opponents of freer trade argue that Americans shouldn’t be buying so many cheap products from abroad, sending their cash overseas. But when it comes to exporting some of this nation’s abundant supplies of natural gas, those who oppose opening up to the world turn that logic on its head — arguing, strangely, that Americans shouldn’t be trying to sell this particular product to other nations, bringing money into the country in the process. Both arguments are unconvincing, and for the same reason: When countries can buy and sell to each other, their economies do what they are best at, producing more with less and driving economic growth.

I think this is much more complicated than the Washington Post is making it out to be. The first sentence, noting that import-restriction policies are generally advanced via poor arguments, is quite true. But leading with it suggests a failure to engage with the substance of the issue here, which is about restricting exports of natural resources.

Blocking gas exports would be, in effect, a tax on natural-gas production in order to subsidize users of natural gas, including both households and energy-intensive firms. On the household level, we know that utility consumption has a strongly regressive bias. The bottom quintile of American households by income spends about $22,000 a year, of which almost 10 percent goes to utilities. The top quintiles earns $161,292 on average, of which about $94,551 is spent, and of that only about 5.6 percent is spent on utilities. So a tax on natural-gas production to subsidize consumption of natural gas and gas-fired electricity plans is a distributively progressive program.

Then on the industrial side, you're essentially taxing gas mining in order to subsidize factories. As longtime readers know, I'm not a huge proponent of manufacturing subsidies, but this is a much more sensible version of the scheme than what's normally floated in that regard and certainly worth considering.

I think the Post's error is overinvesting in thinking about this as a trade policy question. If you think about the standard advice that would be given to a low-income country that stumbled upon vast oil reserves, what we'd say is that it's important for this oil wealth to be deployed in a way that advanced long-term prosperity. You don't just want to feed luxury goods consumption by a narrow elite and a few white elephant public works. The smart countries take their money and invest in the kind of infrastructure and education services that promote a robust and diverse economy, while doing so with tax levels that remain friendly to business and entrepreneurship. Restricting natural-gas exports is a bit kludgy compared to a totally optimal policy framework, but it's a reasonable approximation of one. We'd be bolstering the incomes of the poor and the middle class while promoting a more diverse economy via a de facto tax whose incidence would fall largely on land and thus have little incentive-side impact.

Now that's all pretty hasty on my part, and it's possible someone could run the numbers and show a huge negative impact on gas production that far outweighs any of these other benefits. I'm open to the idea. But the Post and others should be open to the idea that the numbers run the other way.



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