The natural gas revolution has yielded many benefits to America in terms of its economy, environment, and energy security:
- Job creation
- Lower home heating bills
- Lower feedstock costs for the petrochemical and refining businesses
- Reduction in the number of active coal plants
- Increased U.S. energy security
Low domestic natural gas prices have given the U.S. a clear competitive advantage in the world economy. Consider the price differential in this chart, taken from the Wall Street Journal's recent article Should the U.S. Export Natural Gas?, which compares U.S. nat gas prices to those of Japan and Korea.
The current price of natural gas is unsustainable. Companies will either shut-in production until it becomes more profitable, or significant new demand will be created. Exxon Mobil (XOM), struggling to reap the rewards of its massive XTO takeover and the subsequent drop in nat gas prices, has recently applied for a natural gas export license. The question the U.S. Department of Energy faces (or at least should face...) becomes: is exporting natural gas smart, strategic energy policy?
Exporting natural gas would be good in a number of ways including:
- Job creation
- Increase in GDP
- Reduction in trade deficit
- Increased profits for U.S. energy companies, shareholders, and increased royalty payments to landowners
These are all very positive economic developments and at first blush, one is tempted to say, of course, let's export natural gas.
But now let's look at the flip-side. Exporting America's natural gas will, as volume picks up, quickly erode the spread between domestic and international gas prices. In the long run, the price will rise until it, plus the cost of liquefaction/de-liquefaction, transport, insurance, and profit bring the costs to equilibrium with international prices. This will take some time, but economics teaches us it will indeed happen. So, here are some of the negative effects of exporting natural gas:
- Increased domestic natural gas prices
- Higher home heating bills
- Higher feedstock costs for the petrochemical and refining industries (higher gasoline costs)
- More coal consumption
- Continued reliance on foreign oil
The biggest benefactor of exporting domestic natural gas will be Exxon Mobil, the country's largest natural gas producer. As I pointed out in my Seeking Alpha article Why Exxon Mobil Should Support Natural Gas Transportation, every $1 rise in the price of American natural gas would correspond to roughly $4 million/day to Exxon Mobil. Over the course of a quarter, this would be approximately $360,000,000. Exxon Mobil's stock is owned by many Americans, pension plans, and mutual funds. Its dividend, although small in comparison to its peers, would trickle through to many Americans.
But the question remains, is exporting natural gas a smart and strategic energy policy for the country as a whole? For this to be the case, on balance the policy must be beneficial to the majority of its citizens. In order to answer the question, we must first consider other options for the use of the country's windfall of cheap, clean, and abundant natural gas.
I have long agreed with Robert Hefner III's assertion in his excellent book, The Grand Energy Transition, that America's #1 economic advantage against all other nations on Earth is its massive natural gas reserves combined with its 2+ million miles of natural gas pipeline infrastructure which can transport and deliver natural gas from producers to every major metropolitan area in the country as well as to tens of millions of homes. China would give an eye and a tooth to have this kind of massive natural gas pipeline infrastructure. The U.S. clearly has the advantage here. How can it maximize this advantage for the benefit of the country and the majority of its citizens?
As my faithful readers are well aware, I am convinced the #1 economic, environmental, and national security threat is America's dependence on foreign oil. We see the problems every day: the price of gasoline, turmoil in the Middle East, and our men and women dying in places like Iraq, Afghanistan, and Libya. We see it every month in the foreign oil import bill - $37.8 billion flowed out of the country in August alone. This is roughly the same amount as our oil dominated trade deficit.
I have also been saying for some years now that the Federal Reserve, the U.S. Treasury, and U.S. policymakers have apparently decided to print money to "pay" for our foreign oil imports. In this article, a logical case was made that QE3 (indefinite), or "QEI" (QE infinity), is a commitment by the Federal Reserve to print $40 billion/month, which is almost exactly what our foreign oil import bill is. Coincidence? I don't think so. But you read the article and form your own opinion.
70% of total U.S. oil usage is consumed by the transportation sector. Although increased oil production from the Bakken and Eagle Ford shales, as well as the Permian Basin and a few other plays is helping, the size of the problem is enormous. If the $37.8 billion import bill for August isn't proof enough, consider U.S. oil demand is running around 18 million barrels/day and U.S. oil production is only 6-7 million barrels/day. Big problem.
With these facts as background, it is obvious exporting natural gas will not solve the oil crisis that goes under reported and which continues to evade a rational, logical, and transparent debate. On the other hand, if we could figure out a way to use natural gas to significantly reduce foreign oil imports, it would be a win-win for everyone: natural gas and energy producers, middle class Americans, farmers and landowners who would reap higher royalty rates, and the broader economy as oil dollars now flowing out of the country would stay inside the country. The multiplier effect of $37.8 billion/month staying inside of the country would be phenomenal.
The good news is we have a solution: natural gas transportation. We know it works. Clean Energy Fuels (CLNE) is proving this in the long-haul trucking industry and fleets with the spread between diesel and natural gas close to $2 GGE. Many of these NGVs are powered by Westport Innovations' (WPRT) truck engines. Citizens lucky enough to live near natural gas refueling stations are buying the Honda (HMC) Civic GX, the only natural gas vehicle (NGV) available to the American middle class. They are enjoying refueling with domestic gas at over half the price of gasoline refined from foreign oil. States such as Utah and Oklahoma have dug out from under EPA restrictions and have a thriving NGV conversion market and are building nat gas refueling stations.
NGVs have been used for almost 100 years and are being deployed successfully in many countries around the world - Italy, Pakistan, Iran, Singapore and Brazil just to name a few. All that is needed is intelligent policies by our country's leaders and we too can join the party and reap the benefits. On the other hand, Electric cars have been a huge distraction and are about as much of a myth as "clean coal." Despite hundreds of millions (billions?) in battery research, there are still no affordable electric cars for middle class Americans. Electric vehicles are being pushed by lobbyists and Congress because they know this distraction will keep Americans addicted to gasoline, which for some strange reason they want to do.
But for one moment, just imagine if the millions spent on battery research and all the QE's had instead been used to build out a natural gas refueling infrastructure on the interstate highway system and for tax credits for NGV conversions. Would the country be better off today? Obviously the answer is yes. We'd be reducing foreign oil imports, keeping the money inside our borders, while NGV drivers would be saving energy dollars and would have more disposable income to power the economy. Meantime, the benefits to our environment (nat gas emits 30% less CO2 than gasoline and 100% less of toxic particulates) and national security are obvious.
Like the ethanol mandates, exporting American natural gas is not just bad energy policy, it is terrible energy policy. Such a policy simply fritters away our biggest economic advantage while at the same time keeping Americans addicted to our biggest economic problem - gasoline refined from foreign oil. Exporting natural gas is simply not in the strategic interest of our country. However, if history is any indication, Energy Secretary Chu (Mr. "I am agnostic about natural gas transportation"), will probably OK the export license for Exxon Mobil. This would be hugely bullish for XOM. Meantime, the most superior car architecture on the planet, the Toyota (TM) natural gas/electric hybrid, remains on mothballs. Fuel Systems Solutions' (FSYS) home garage natural gas refueling appliance is being made in Italy. What a sad commentary on the state of U.S. energy policy.
What the United States needs is a strategic, long-term, comprehensive energy policy like this one (feedback welcome). As long as the powerful big oil, refining, coal, utility, and railroad special interests keep such an obviously beneficial energy policy from being adopted, oil prices will continue to rise. This means more U.S. dollar printing, and more pain for the American middle class as food and energy inflation continue to hammer them. Long-term, I cannot see how this is sustainable so one has to wonder about the long-term health of the S&P 500 and the U.S. financial system as a whole. Oil stocks and gold should do well. If the nat gas export license is approved, XOM will print money and the stock should take off, moving from lower left to upper right.
Disclosure: I am long XOM.