By John Kemp
LONDON Dec 6 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
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
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
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
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
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