COLUMN-US LNG exports will be approved but with conditions: Kemp

Thu Dec 6, 2012 12:15pm EST

By John Kemp

LONDON Dec 6 (Reuters) - The more liquefied natural gas exports that the United States permits, the bigger the net benefit to its economy, according to a detailed report commissioned by the U.S. Department of Energy.

But if the report is unequivocal about the economic benefits, the politics are more complicated.

According to the study on the "Macroeconomic Impacts of LNG Exports from the United States" by NERA Economic Consulting, published on Wednesday, the benefits from higher export earnings would more than offset any adverse impact on U.S. households and businesses from the modest increase in domestic gas prices.

Volumes still would remain limited by competition from lower-cost rivals from the Middle East and Asia, and so exports would push up domestic gas prices by no more than about $1 per million British thermal units compared with a baseline assumption of no exports, under all scenarios for U.S. and international supply and demand.

The report builds on the standard case for free trade: in principle, the winners (gas-producing companies and their shareholders) could compensate the losers (households dependent on wage income and owners of energy-intensive businesses) and still come out ahead.

In practice, however, winners get to hang on to their winnings, and the losers are left to fend for themselves. Politicians must be more attentive to the concerns of losers than consultants and economists.

WINNERS AND LOSERS

If exports are permitted, "both total labour compensation and income from investment are projected to decline, and income to owners of natural gas resources will increase", the report explains, "though through retirement savings an increasingly large number of workers share in the benefits of higher income to natural resource companies whose shares they own.

"The benefits that come from export expansion more than outweigh the losses from reduced capital and wage income to U.S. consumers, hence LNG (liquefied natural gas) exports have net economic benefits in spite of higher natural gas prices. This is exactly the outcome that economic theory describes when barriers to trade are removed."

The report cannot hide, however, that some groups and industries will suffer. The big losers would be lower-income households that depend on wage income and do not own any shares in natural resource companies and energy-intensive industries for which energy is a large share of total costs.

The worst affected sectors are likely to be producers of pulp and paper, chemicals, glass, cement and primary metals such as iron, steel and aluminium, according to NERA.

Hardest-hit would be makers of alkalies, lime, aluminium, flat glass, alumina, newsprint, cement, paperboard and nitrogen fertilisers. For all these businesses, energy costs (including electricity) account for more than 10 percent of the value of the goods they sell, and they operate in internationally competitive sectors.

But iron and steel mills and ceramics and pulp makers would also suffer, since energy amounts to more than 5 percent of the value of their shipments.

The report's authors minimise the consequences. "Harm is likely to be confined to very narrow segments of industry," according to the study, and "vulnerable industries are not high value-added industries." The adverse impacts are characterised as "deep but narrow".

Even for the worst affected industries, the overall harm would be modest. "Wage income never falls short of baseline levels (without exports) by more than 1 percent in any year or any industry in any scenario," NERA explains.

The worst job losses in any industry would be around 1 percent a year, which is only about one-sixth of the normal turnover in employment due to voluntary departures and retirements, so it could be accommodated without too much hardship.

FREE TRADE TOXICITY

Forecast job losses from higher gas prices capture only part of the costs, however. Many politicians, Republicans as well as Democrats, have been counting on plentiful oil and gas and low prices as a source of future competitive advantage for the United States to enable a renaissance in American manufacturing and bring back jobs lost overseas. All that might be at risk from gas exports.

NERA makes the case for exports at a sensitive time when many U.S. politicians have started to question the benefits of free trade. Thirty years of trade liberalisation under both Republican and Democratic administrations has not raised real incomes in the lower half of income distribution, while the top percentiles have seen a sharp increase in both real income and wealth.

The industries that would be hardest hit by exports, such as steel mills and cement works, are concentrated in swing states and employ many of the blue-collar industrial voters that have become increasingly estranged from the Democratic Party.

In the 1980s and 1990s, political opposition to trade deals such as the North American Free Trade Agreement (NAFTA) and the Uruguay Round was pacified with the promise of assistance for displaced workers, including extended unemployment payments and health insurance as well as allowances for retraining and even relocation.

But the model has not worked well and may be losing its effectiveness for overcoming opposition. In 2010, proponents of a cap-and-trade programme to reduce greenhouse emissions, similar in its essentials to a free trade deal, were unable to overcome entrenched opposition from energy-consuming industries. It is precisely the same industries that would be hardest hit by allowing gas exports, a point the study's authors acknowledge.

Energy-intensive industries may not add much value compared with the rest of manufacturing, as the study dismissively points out, but that will be little comfort to workers at risk of losing their jobs. Past experience shows it is difficult to move workers from declining heavy industries into higher value-adding sectors. Former steel workers do not become brain surgeons.

EXPORTS, WITH RESTRICTIONS

Under the Natural Gas Act, the Secretary of Energy must grant permission to export gas unless he finds the proposed exports "will not be consistent with the public interest" (see Title 15 Chapter 15B Section 717b(a) of the United States Code).

NERA's unequivocal conclusion that "LNG export has net benefits to the U.S. economy" will make it hard to block exports, especially since the Energy Department granted permission for one small project before imposing a moratorium on others while it studied the impact.

If the department blocks other applications at this point it would face a legal challenge under the Administrative Procedure Act for acting in an arbitrary and capricious manner.

Nonetheless, the administration is unlikely to embrace unlimited exports. Under President Barak Obama, the White House has shown strong interest in an active industrial policy, such as using anti-dumping and countervailing duties to protect jobs in the wind and solar industries, as well as in steelmaking.

The most likely outcome is, therefore, that more gas export projects will be approved but subject to conditions. These might include a cap on the total volume, a review of their effects on the domestic market after a few years, or a requirement to identify new sources of gas that are being produced for export without reducing the volume available for domestic customers.

In the meantime, members of Congress will continue to try to amend the language of the Natural Gas Act to ban or severely restrict exports.

The North American Natural Gas Security and Consumer Protection Act, introduced in the House of Representatives earlier this year by Congressman Edward Markey, would ban new export approvals until 2025. Oregon Senator Ron Wyden, incoming chairman of the Senate Energy Committee, has also expressed scepticism about LNG exports.

Free trade has little support in Washington at the moment. And the oil and gas industry has few friends in the White House and the congressional Democratic Party after backing Republican candidates in this year's elections.

For the time being, a legislative ban on gas exports seems unlikely. But permission to ramp up exports will remain provisional and depends on gas prices remaining low. If they start to rise significantly, lawmakers will step in to curb LNG projects.