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Magazine / ANALYSIS: ENERGY

Manufacturers Troubled by Prospect of Exporting More Natural Gas

The administration appears poised to allow increased gas sales overseas. The move will expand America’s influence, but it carries economic risk.

Outward: Gas may add to U.S. clout.(AP Photo/Murad Sezer)

photo of Coral Davenport
December 6, 2012

The nation’s sudden glut of natural gas could profoundly change its geopolitical influence. If China, India, and other nations depend on the U.S. rather than Russia or the Middle East for energy supplies, Washington’s ability to influence policy on everything from human rights to climate change will be amplified.

But could that new clout in the world come at the expense of American manufacturers?

As recently as 2007, the supply of U.S. natural gas—which is a major source of electricity and an essential component in factory-made products such as steel, glass, plastic, chemicals, and fertilizer—appeared to be running out. Domestic natural-gas prices had shot up from $5 and $6 per thousand cubic feet to $14 per thousand cubic feet. Industrial manufacturers were leaving the U.S. and outsourcing to countries where it was cheaper to make those products. Washington was debating whether to build new East Coast terminals to import natural gas from Russia—a prospect that could have shackled the U.S. manufacturing sector to the whims of the state-run Russian company Gazprom.

 

But in the past three years, that picture changed radically. A revolution in the technology of hydraulic fracturing, aka “fracking,” affordably unlocked vast new reserves of natural gas trapped in shale around the country. Suddenly, the U.S. became the world’s top natural-gas producer—and until now, it’s been sitting on that hoard. The glut has sent prices plummeting to $3 per thousand cubic feet. That has been a boon to the ailing U.S. economy, lowering electricity costs and helping revive the nation’s manufacturing.

But prices are now so low that natural-gas drillers like Exxon Mobil are shutting down rigs while lobbying the government to let them ship liquefied natural gas to overseas markets.

The Energy Department is reviewing 20 applications from companies that want to build LNG export terminals on the Atlantic, Pacific, and Gulf coasts. The global appetite for gas is voracious: China, the world’s largest energy consumer, needs fuel for its expanding economy, but gas there costs $13 per thousand cubic feet.

The price is even higher in Japan, which desperately needs new fuel sources after shutting down its nuclear-power generators in the wake of the Fukushima disaster. Russia has approached both nations about exporting its natural gas to them; in the coming years, Iran, the world’s fifth-largest natural-gas producer, may also seek markets in Asia.

On Wednesday, the Energy Department released a long-awaited analysis of exporting natural gas. The report concluded that while exports would raise gas prices at home, overall they would benefit the U.S. economy. That verdict appears to pave the way for the department’s approval of many of those export terminals in 2013.

U.S. diplomats say that the geopolitical benefits of approving terminals are clear. Carlos Pascual, the State Department’s special envoy and coordinator for international energy affairs, sees natural gas as a way to form new strategic alliances in which the United States, as the energy supplier, at last has the advantage.

“If you’ve now got a world where [natural-gas] trade is emerging to allow competition … you start to create different commercial relationships, and you start to create different types of geopolitical relationships,” he said, “because of the dependence that the consumer has on the supplier.”

Russia and Iran—which together have the world’s largest reserves—are increasingly interested in building gas pipelines to China. But, says Pascual, “if you can mitigate the kind of impact Russia and Iran can have in geopolitical influence on their neighbors because of those pipeline relationships, it creates a different kind of global environment.”

American manufacturers fear that if the U.S. becomes a major exporter of natural gas, it will undercut their newfound competitive advantage in the global economy.

“Shale gas has given the U.S. manufacturers a massive competitive advantage,” says George Blitz, vice president of energy and climate change at Dow Chemical. “The price is so much more affordable here than natural-gas prices around the world.

“Six million manufacturing jobs left the U.S. in the 2000s because natural gas was cheaper elsewhere,” Blitz said. “Now that those prices are going down, the manufacturers of goods that use natural gas—petrochemicals, fertilizers, steel, and glass—are coming back.”

Dow and other manufacturers say they don’t oppose free trade. Rather, they prefer that affordable products made from cheap natural gas—and not the U.S. resource itself—be exported. They fear that once U.S. natural gas enters the global marketplace, prices will rise to market levels. In other countries, the price of natural gas is pegged to the global price of oil, which can often be high, volatile, and beyond the scope of governments to control.

“There’s a point at which you can go over a cliff and bring that price back into the U.S.—then you’d see a lot of this manufacturing investment just stop,” Blitz said.

Lawmakers on Capitol Hill are paying close attention. Although Republicans are generally cheering the push to export, a pair of Democrats—Sen. Ron Wyden of Oregon, who in 2013 will become chairman of the Senate Energy and Natural Resources Committee, and Rep. Edward Markey of Massachusetts, ranking member on the House Natural Resources Committee—are skeptical that the benefits of exporting are worth the costs.

“Regardless of this study’s conclusions, Senator Wyden will continue to call on the Energy Department to ensure that unfettered natural-gas exports don’t harm U.S. consumers and manufacturers,” his office said in a statement after the release of Wednesday’s analysis. “It is critical that exports do not squeeze out or price out the billions of dollars of new, natural-gas-related investments that have been proposed in the U.S. chemical, industrial, and electric generation sectors.”

It’s expected that once Wyden takes the helm of the Senate Energy panel next year, he’ll launch spirited hearings on the subject, pitting big fossil-fuel producers such as  Exxon Mobil against manufacturers of glass, steel, and plastic.

As Daniel Yergin, the Pulitzer Prize-winning energy historian and consultant, told National Journal, “This is going to be one of the biggest energy battles of 2013.”

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