Parsing A New Study On Natural Gas Exports

The EIA released a new study last week that attempts to quantify the market impacts of increased natural gas exports from the United States. It’s a useful and informative piece of work, but it also has some important limitations. I want to sort through a couple of those here.

The headline from the report is straightforward and in some ways troubling: exports could raise U.S. natural gas prices by as much as 36% over what they would otherwise be. This figure, which has naturally grabbed attention, is for a scenario where exports are ramped up quickly, starting in 2014, to high levels.

There are at least two problems, though, with this estimate. The first is practical: this scenario is unlikely to materialize. This is not a flaw in the analysis, since the EIA was studying different scenarios, but it is a problem when it comes to how the report has been received. The second problem, though, is deeper. If you look at the estimated price response that the EIA reports, you’ll notice that prices stay low until the day that exports begin, at which point they jump. This is a sign that the model is not allowing market players to anticipate the increase in exports. If they were able to do that, prices would start to rise before the exports began, as people put gas into storage in anticipation of future opportunities to make money selling it later. That same foresight would also deter early overinvestment in natural gas dependent infrastructure. Both of these dynamics would lessen the ultimate price impact of exports. How much is unclear, but the answer isn’t zero, contrary to the impression left by the study.

The other striking finding is that most exports will be balanced primarily by increased production rather than decreased domestic consumption, and that whatever decline in domestic gas consumption happens will come primarily at the expense of gas use in the power sector. This is, in one way, quite worrying, since coal will likely fill most of the gap; on the other hand, if the exported gas displaces coal use overseas, the net climate impact could be a wash. There’s also another dimension, which the report flags as a weakness, that’s understudied: we still don’t know the real impact of exports on availability of feedstock for the chemicals industry. It is actually plausible that ethane availability to domestic petrochemicals firms (ethane is a critical feedstock) could rise, as exports incentivized greater gas production, but some of the ethane was stripped out before the gas was exported. On the other hand, if enough of the ethane is left in the gas at the time of export, domestic manufacturers could suffer. I suspect the net effect either way is small, but it any case, it’s something we should be able to get better purchase on through further study.