Market Analysis

Ken Fisher on the Harder to Discern Benefits of Natural Gas Exports

The US government’s study on natural gas exports seems to have reached a sensible conclusion, though perhaps for just the obvious reasons.

Thursday, news broke that the US Department of Energy completed a study on the potential price impacts of permitting greater liquefied natural gas (LNG) exports. The study marks the completion of another round of a longstanding debate on the subject—one many analysts suppose will be a big factor in the government’s final decision—and supports increased export permit issuance. In Ken Fisher’s view, though, the big benefits of this policy aren’t the obvious GDP-related ones. They’re harder to see.

At issue in this lengthy debate is whether the US should essentially forbid or permit exporting LNG in large quantities. Those opposed to exports are largely either consumer advocates (like Congressman Ed Markey of Massachusetts) or big volume consumers of LNG like Industrials firms with factories in the US. Each group argues the low prices brought by the shale gas boom should be reserved for Americans. For example, Congressman Markey argues consumers benefit from the reduced utility costs brought by cheaper gas. Many Industrials firms note the cheap gas is a competitive advantage for American firms, which they’re reluctant to share.

Those in favor of increased LNG exports are largely producers, shippers and so forth. Some tout the benefits of reducing the trade gap (which Ken Fisher would argue isn’t much of a problem in the first place). Companies, like drillers with a direct stake in natural gas, who’ve occasionally lost money due to such cheap gas prices. A more globalized market, they argue, would benefit the US by generating increased exports. So the government’s study focused primarily on these two factors: Exports’ benefit versus competitive and consumer advantages.

But the reality is, a vote for increased LNG exports—which we’d favor as well—isn’t one with much immediate impact on gas prices. You see, the infrastructure to liquefy and ship in large quantities simply doesn’t exist in the US yet. First, you’d need to pipe gas to the coasts. Then you’d need liquefaction plants and export terminals. These pieces of the export puzzle don’t commonly exist today and likely will take some time and effort to build.

In the US, there’s currently only one operational LNG export terminal, and it’s in Alaska—obviously, far removed from the shale boom’s hotspots in North Dakota, Pennsylvania and Texas (for example). Another LNG terminal in Louisiana, originally designed as an import facility in the days when it seemed imports would be needed, has requested permission to retrofit and export—which seems a spur for the debate. Additionally, plans exist in several other locations like Oregon to construct LNG terminals. So there is no real, immediate threat of higher prices should exports be permitted because US firms likely can’t start exporting quickly enough.

But if we didn’t permit exporting, there would be real economic loss many seemingly miss. For one, construction of the facilities needed to export wouldn’t likely happen—which in and of itself is a big potential economic boon. As many discussed during the Keystone pipeline debate, this sort of infrastructure spending—entirely private-sector funded—has big positive feedback loops. But moreover, it isn’t as though firms that extract gas would simply keep on drilling, profits be damned. If we had continued abundant supplies and demand didn’t keep pace, production would likely slow. Simply, firms won’t continue allocating resources to expanding gas production if they can’t sell the product at a profit. And that effect could be seen in mid-2012, when the number of rigs fell to a 13-year low after spot prices dipped below $2/mmbtu. If gas prices are too low to be profitable, firms will curtail production until they are. Which means, all else equal, gas prices would likely have risen had exports not been permitted.

Of course, the obvious positive impact of exporting gas is true—it’s more economic activity and likely benefits both us and our trade partners Yet sometimes, the harder-to-discern impact could be of even greater value. And that seems to be at work with permits to export gas.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.