Tuesday, July 17, 2012

On The Subject of Exports...

Yesterday I referenced the growing debate in Washington about allowing more export of LNG from the U.S.  Here is an article that goes into more depth from both sides of the debate.  Since the dawn of shale gas coincided with the steep economic downturn in the U.S., the natural gas industry has been vigorous in pushing the concept of "cheap gas" to drive demand.  But now this message has gotten the industry into trouble as the perceived price of "cheap gas" has been set too low.  Now the manufacturing sector has begun to develop projects that are based on "cheap gas" and is eager to protect this new competitive advantage.

Since manufacturing is a lot more popular than the energy industry, the argument to prevent exports to keep the price of gas suppressed seems to be gaining some traction.  The debate is actually quite interesting, although gut-wrenching for gas fans, because it's not strictly partisan or regional.  There are a few of the usual suspects, like Massachusetts Rep. Ed Markey, who has proposed a moratorium on LNG export until 2025 because “low-priced natural gas is driving an American manufacturing renaissance,” but the big battle is between manufacturers and chemical plants and gas producers.  It is not being fought in the open, however, because nobody wants to look too greedy.

But the plain fact is that exports help balance the supply/demand equation to keep prices at a level where it is sustainable to drill profitably.  Yes, the gas industry seeks exports to be able to achieve higher commodity prices in the U.S. to make more money.  There, I said it.  This is a market economy.  It's ugly, but that's how it works. Shale gas has created an economic revolution of sorts and gives many businesses an opportunity to prosper.  The export potential has to be balanced against the manufacturing opportunity.  Both provide major economic potential for the U.S. and should be able to coexist.

I always hated studying economics because you always strive for equilibrium but you never actually get to stay there for any length of tiime.  You may drive by it quickly, but economic equilibrium is by nature unsustainable.  The more tools you have to moderate the supply/demand relationship, however, the more often you get to visit equilibrium.  And let me tell you, $2.75/MMBtu is nowhere near equilibrium.

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