Low-Energy Fridays: Persistent Fallacies in Energy Trade Policy
A few weeks ago I covered why restricting liquefied natural gas (LNG) exports is a bad idea all around, but after the administration’s pause on LNG exports, a quote from the ranking member of the House Energy and Commerce Committee caught my eye: “Before we send our energy resources abroad, it is only right that we first confirm doing so will benefit Americans—not our competitors.” This seems to indicate that we lose something when we export energy and that we should view it in a zero-sum sense. But this ignores that trade is economically beneficial, and the United States has plenty of natural gas to sell. Generally, policies that restrict trade are economically harmful—and energy trade is no exception.
Consider how much natural gas the United States has to sell. Our “proved reserves” are 625.4 trillion cubic feet (for context, the United States exports 4.2 trillion cubic feet of LNG per year). One might think this volume goes down as natural gas is consumed, but proved reserves rose 32 percent from 2020 to 2021. This is because proved reserves are simply the volume of natural gas that is economical to extract with current technology at current prices.
Equally important are “unproved reserves,” which are not economically viable to extract currently; and “technically recoverable reserves,” which comprise the total volume of natural gas that could be extracted. At the beginning of 2021, the United States was estimated to have 2.5 quadrillion cubic feet of natural gas in unproved reserves and 3.0 quadrillion cubic feet of technically recoverable natural gas. As technology improves and prices rise, proved reserves increase. In a nutshell, the United States will probably never run out of natural gas.
The idea that restricting natural gas exports enriches Americans by keeping us flush with supply ignores that prices gravitate toward equilibrium. If we export natural gas and prices rise, that incentivizes additional investment in production, which in turn increases supply and lowers cost. Consider as a real-world example how high oil prices during the post-Great Recession recovery spurred directional drilling advancements that caused oil prices to fall from over $100/barrel to under $30/barrel. On the other hand, efforts to restrict price increases through price controls on oil in the 1970s reduced incentives for production and ironically led to higher uncontrolled prices and scarcity under controlled prices.
It is also important to understand that trade people engage in freely is always good because of what is called a “comparative advantage.” If I go to Starbucks one morning, even though I can produce a better and cheaper cup of coffee at home, Starbucks has a comparative advantage in that it produces that coffee quickly, and I get the benefit of less time making coffee and more time devoted to other tasks that yield more value. (This is why millennials aren’t going to get rich by cutting out Starbucks runs.)
When the United States sells natural gas to a foreign customer, they get the benefit of lower energy costs (since they would only buy it if it’s cheaper than alternatives) which increases their wealth, and we get the benefit of selling a resource that would otherwise have less value to a paying customer, which increases our wealth. The idea that Starbucks loses something by selling me a cup of coffee, or that the United States is worse off when it exports natural gas, is a zero-sum fallacy—and the reason Marxist trade theories are incorrect.
All in all, there is no benefit to the United States hoarding natural gas, either on the economic front or the climate front. Just as nobody views Saudi Arabia as losing something when it sells its oil, U.S. LNG exports provide a benefit to both buyers and sellers. Given that LNG exports are anticipated to be climate improving, and our biggest customers are Europeans trying to wean themselves off Russian gas, the administration’s moves to restrict trade are likely to do more harm than good.