Is This the Time for Government Intervention in Free Markets?

Last week the U.S. Senate Committee on Energy & Natural Resources held a hearing on natural gas and Liquid Natural Gas (LNG) exports.  On the whole, the discussion was a good one, covering issues of natural gas availability, safety of fracking fluids, domestic uses of natural gas, and jobs created in the natural gas industry and related chemical manufacturing industry.  But there were some elements of the discussion that should leave Senators and the public somewhat puzzled.

Perhaps most puzzling were statements associated with the desirability and viability of potential government control of natural gas prices and markets.  The idea is seemingly simple; keep domestic natural gas prices low.  Doing so will, of course, benefit domestic consumers of natural gas.  Those consumers include the public and large manufacturers like Dow Chemical, which is a heavy user of natural gas and whose CEO, Andrew N. Liveris, testified at the Senate hearing.

This blog has already pointed to the conundrum that the US faces with oil and gas prices.  We are not an island that is insulated from global energy prices.  Yet, a puzzling premise of the hearing appears to be that our domestic abundance of natural gas allows us to behave as if we were an island.  And that is the second puzzling aspect of the Senate Committee’s hearing.

Since the US has the potential to become a net exporter of natural gas because of its domestic abundance, the government can stand in the way of exports by limiting permits for exports of LNG.  Of course, damping the supply of domestic natural gas has several unintended, potential consequences.  Those include stifling job growth in the energy industry, stifling domestic production of natural gas, causing prices to rise for domestic consumers and increasing the balance of payments by restricting exports.

The third and final puzzling aspect of the Senate hearing is why the Senate or the federal government should try to pick winners and losers among potential job creators.  Keeping the domestic natural gas price low perhaps will positively impact the US chemical industry and the number of jobs it creates with increased production.  At the same time, keeping natural gas prices low and restricting exports of natural gas have the potential to stifle job growth in the domestic energy industry.  It will do so by restricting supply for US natural gas with prices held artificially below global levels.

More hearings from the Senate Committee on Energy & Natural Resources are likely.  We should watch closely for testimony and Senate recommendations that may tend to distort US markets and negatively impact economic growth with restrictions on job growth in any industry, including the natural gas industry.

Liquid Natural Gas and US Energy Exports

The potential for growth in US energy exports was evident in two recent but unrelated reports – one from Honeywell UOP and the other from the US Energy Administration.  Together the two link growing global demand for natural gas to technological advances that will increase US energy exports.

Honeywell UOP just announced a deal with Malaysia’s Petronas to collaborate on natural gas processing.  Natural gas is the fastest growing source of energy, and the US has abundant resources.  This blog has previously pointed out how natural gas resources in the US have the potential to make the US energy independent.  The partnership between Honeywell UOP and Petronas is focused on new technology that will make natural gas more easily shipped in its liquid form, commonly referred to as LNG – liquid natural gas.

The technology that Honeywell UOP and Petronas are working on will remove contaminants such as CO2 and mercury prior to the liquefaction of the natural gas.  The resulting product can be even more compressed in its liquid form, thereby increasing the capacity of a ship to move it to areas of global demand.  And that is where another recent report – this one from the US Energy Administration – makes clear why the Honeywell UOP-Petronas partnership really matters.

Earlier in the month, the US Energy Administration published its current analysis of Chinese energy demand.  China has sought to raise its imports of natural gas via pipeline and LNG.  Although natural gas still accounts for only 4% of China’s energy consumption, the China Offshore Oil Company has substantially increased its investment in natural gas.  The China Report states that the China Offshore Oil Company invested $12 billion of its total 2011 $18 billion investment in natural gas.

While natural gas imports in China represented 12% of the total in 2010, they rose to 22% in 2011.  The Chinese government has established a 2020 goal for natural gas consumption to rise from 4% to 10% of total energy use.  The potential for the US with its huge supplies of natural gas is evident.  And that is the reason the technological advances intended from the Honeywell UOP and Petronas collaboration really matter.  Lowering costs of transport will further the capacity of the US to meet global energy demands such as those in China, thereby increasing US GDP and helping to reverse the long trend of US imports exceeding our exports.