U.S. energy milestone from the shale revolution

Thanks to the shale revolution, the United States is now on its way to becoming a major exporter of liquefied natural gas (LNG). In February, two LNG cargoes left Cheniere’s Sabine Pass export terminal in Louisiana for Brazil and India.

And these are just the first LNG shipments. With five U.S. LNG terminals under construction with a combined export capacity of roughly 10 billion cubic feet per day, many more LNG shipments are on the horizon. After all the export facilities become operational, the United States will become the third largest liquefaction capacity holder in the world after Australia and Qatar.

{mosads}No matter how you view a new era of LNG exports — whether looked at from its impact on the U.S. economy, our commitment to free trade, the energy security of our allies, or the potential for a significant reduction in carbon emissions as gas replaces coal in electricity production — the results will be positive and beneficial.

How times have changed. Less than a decade ago, energy analysts thought the U.S. was destined to become one of the world’s largest LNG importers. At the time, domestic gas production couldn’t keep up with demand.

The shale revolution, however, has been a game-changer. To be sure, there are those who have yet to grasp the consequences of this change. Studies from the U.S. Department of Energy as well as various think tanks show LNG exports as economically beneficial to the nation, not only providing thousands of construction jobs, but incentives for increased domestic gas production. All of this promises to be a boon to gas producers, rig hands, royalty owners and energy-rich states like Pennsylvania and Texas. Meanwhile, the notion that the price of natural gas might spiral upward as exports grow has been debunked.

Despite already growing demand for natural gas – gas now accounts for the largest fuel share of our electric power generation – the inflation-adjusted price of gas is at a 25-year low. The resources unlocked in shale are vast – 2,200 trillion cubic, roughly a 90-year supply. It’s time to put the ghosts of our energy past to bed. We should fully embrace the economic, environmental and geopolitical benefits that will come from the export of natural gas.
For one thing, any increase in global competition for LNG sales will benefit consumers worldwide. While the old dominant gas exporters — think of Qatar, Malaysia, Russia and Iran – must adjust to the new reality, gas-importing countries, many of which are our political allies, are rejoicing. Natural gas prices in much of the world have been pegged to oil prices and, consequently, have been very high.

Just two years ago, LNG prices in Asia were four or five times what they were in the U.S. The introduction of U.S. gas exports will help soften global gas prices in the long-term and likely stimulate demand. A more robust LNG market might lure some buyers away from cheaper but much dirtier coal.
China, in particular, seems to realize the danger to public health from its heavy reliance on coal for electricity generation. In December, Beijing issued its first red alert over air pollution, shutting down schools and requiring drivers to only use their cars on alternate days. Although China is building dozens of emission-free nuclear plants and investing heavily in wind and solar power, backing off of coal is a gargantuan task. China singlehandedly consumes as much coal as the rest of the world combined.

American innovation and energy technology will be critical to helping the world start to kick its coal habit but so too will be imports of cleaner fuel from the United States. China would be wise to emulate the U.S. Thanks to the shale revolution, the level of carbon emissions from electricity generation is at a 22-year low and falling. Fuel switching from coal to natural gas for electricity generation is the key driver. If U.S. LNG exports help create a more competitive marketplace for LNG, and encourage greater use of natural gas in China, India and other Asian nations, the entire world will gain from a reduction in carbon emissions.

LNG exports also have potentially far-reaching geopolitical implications, especially for the energy security of many of our allies, notably those in Europe. Growing reliance on Russian natural gas prevented many of our European allies from responding more forcefully to Vladimir Putin’s aggression in Ukraine and Syria. The opportunity to purchase U.S. LNG provides European buyers with an alternative source of natural gas. Even if they should choose not to buy U.S. gas, increased competition for gas in the world market has already reduced Russia’s bargaining power and its export revenue.

In short, US LNG exports matter. While several other LNG export facilities have gotten the go-ahead, the Obama administration, or the next administration, should move quickly to approve the remaining applications. A muscular U.S. energy policy that promotes free trade and a more competitive international marketplace for LNG is clearly in the national interest.

Perry is a professor of economics at the Flint campus of The University of Michigan and a scholar at The American Enterprise Institute.