America's Foolhardy Ban on Natural Gas Exports

Like other products, U.S. natural gas should be made available to those most willing to pay for it.

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In this March 29, 2013 photo, a worker helps monitor water pumping pressure and temperature, at the site of a natural gas hydraulic fracturing and extraction operation run by Encana Oil & Gas (USA) Inc., outside Rifle, in western Colorado. (Brennan Linsley/AP Photo)
A worker helps monitor water pumping pressure and temperature on March 29 at the site of a natural gas hydraulic fracturing and extraction operation in western Colorado.

Jason Rugolo is Executive Director of Zero Mass Labs at Arizona State University. Stan Veuger is an economist at the American Enterprise Institute.

One of the many blessings Mother Nature has provided us with is the banana. Bananas can be consumed as a final product – raw, fried, boiled, etc. They can also be used as intermediate inputs for banana bread, or, as in Thomas Pynchon's "Gravity's Rainbow," for Banana Breakfasts that even some who are allergic or outright hostile to bananas can appreciate.

What else? Ah yes, we can sell bananas to other people, and use the proceeds to acquire different delicious fruits or even goods and services from entirely different product categories. So many competing ends, so few bananas to allocate to them ... how do we decide what to do with them?

Now imagine a country that produces many bananas. Let's say it's on the equator, and let's call it Ecuador. Ecuadorian producers of banana bread compete with producers of banana bread all over the planet – and bananas are, for them, an important part of their cost structure. They would like to have access to cheap bananas, so what do they do? They try to keep foreigners who are willing to pay lots of money for bananas from being able to outbid them.

Ecuador is currently the world's largest exporter of bananas, but these banana bread producers will want to petition their government for a ban on banana exports. Were they to succeed, rents would accrue to them and many a gainful trade between Ecuadorian owners of bananas and banana-loving foreigners would be thwarted, making the world as a whole worse off. Should the Ecuadorian government go along with this cunning scheme? No, of course not – the goal of trade policy should not be to benefit a few insiders at the expense of everyone else.

[See a collection of political cartoons on the economy.]

Weirdly enough, the U.S. Department of Energy has implemented policies regarding the export of natural gas that have an impact that is quite similar to these detrimental consequences of a ban on banana exports. To export some of America's abundance of natural gas to countries that do not have free-trade agreements with the U.S. (that is, all but 18 countries in the world), the Department of Energy needs to give its approval. It has done so only once.

Natural gas is an extremely important world commodity for which many industries compete. It is used as a primary energy source in electricity production, for direct heating in households and industry, as a chemical feedstock in the chemical production industries and even as a major transportation fuel (among many other uses). With the recent advent of horizontal drilling techniques and hydraulic fracturing, vast new U.S. natural gas resources have resulted in a local glut, driving down prices to historic lows which U.S. corporate consumers are enjoying while the natural gas transportation industry works as fast as it can to gain access to foreign markets that haven't been so lucky.

No individual, let alone the U.S. policymaker, is able to understand the incredible complexity of such a large and multi-faceted commodity market. However, humans have luckily stumbled upon a mechanism to sort all of this complexity out – prices.  

[See a collection of political cartoons on energy policy.]

Yesterday, at a hearing in front of a subpanel of the House Energy and Commerce Committee, two former U.S. senators spoke out in support of changing the export ban, making U.S. natural gas available to those most willing to pay for it. As the banana example showed us, the vast majority benefit. Who wouldn't? Only the producers of banana bread, or, in this case, companies in natural-gas-intensive industries who want exclusive access to U.S. resources they don't own.

And indeed, it is a coalition of such firms, led by Dow Chemical, that is most forcefully opposed to allowing natural gas exports. We wonder if they'd sing the same tune were someone to propose a ban on plastic exports to keep U.S. plastic costs manageable for U.S. manufacturers.

These firms are, of course, fully justified in petitioning the government for a redress of any and all grievances they may have, but their specific demands in this case harm the common good. And not just because of the benefits that accrue to all from free trade. Natural gas is more important than bananas, and can serve broader geopolitical goals. Russia has, for example, successfully exploited its gas supplies to strongarm U.S. allies in Europe. Similarly, selling American natural gas to, for example, Japan, not only makes the U.S. better off financially, but also strengthens a crucial alliance between the U.S. and an important ally. Richer and safer. Not a bad outcome. If only all public policy changes worked that way...

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