Wall Street Journal: Robert Johnston and Leslie Palti-Guzman: The Foreign Policy Uses of an Energy Bounty

January 10, 2013

In today’s Wall Street Journal, global energy analysts Robert Johnston and Leslie Palti-Guzman present a case for the White House to approve additional exports of U.S. natural gas. Johnston and Palti-Guzman argue that allowing increased LNG exports is good for the U.S. economy and our foreign policy. Introducing more U.S. gas into the world market could help restore America’s trade balance, improve our relationships with foreign allies, increase global competition, and ultimately help lower energy prices. The piece comes on the heels of a December 2012 Department of Energy analysis that the U.S. economy will experience "net economic benefits" from allowing increased LNG exports.

The Wall Street Journal
The Foreign Policy Uses of an Energy Bounty

The White House will effectively decide whether the U.S. becomes a global gas superpower.

The United States is poised to become a global gas superpower. Thanks to innovation and investment in shale-gas technology, the production of natural gas in America has surged by 20% since 2006. But this story is about to enter a new phase—one in which success will depend on whether and how well the White House prepares the way for exports of America's energy bounty.

American gas production has grown so much that the global market is now intently focused on the "U.S. LNG export play," or shipments of liquefied natural gas overseas. The export demand is a win for U.S. gas producers, who are struggling with weak prices at home due to a domestic glut. Yet the surge of U.S. natural gas into global gas markets will have major implications for U.S. policy abroad, too. As the Obama administration considers energy-policy priorities for its second term, LNG exports could also be an attractive new tool in the State Department foreign-policy box.

A boom in U.S. gas exports would help rebalance relationships between producers and consumers, largely to the advantage of America's allies. The current market consensus is that the U.S. will export about six billion cubic feet per day of natural gas (also measurable as 45 million tons of LNG) by 2020. That's the equivalent of about 8% of current U.S. gas production or 16% of global LNG production. Globally, that would place America just behind the world's largest current LNG exporters, Australia and Qatar. …

Furthermore, the rise of American LNG exports makes it easier for Washington to convince allies not to do business with rogue states, particularly Iran. With the prospect of American LNG imports, India, for example, now has more attractive alternatives to the Iran-Pakistan-India pipeline. Pipelines are like a marriage, where the partners may be locked into supply and pricing arrangements that can last decades. A reliable and stable supplier of LNG such as the U.S. eliminates the need for risky long-term infrastructure projects and contracts. …

In Asia, Japan and India are enthusiastic about the potential of U.S. LNG. News reports that say diplomats of both countries have urged the Department of Energy and the State Department to authorize enough production and export projects to satisfy their goals of importing cheaper gas from the U.S. In post-Fukushima Japan, American LNG is part of a new acquisition strategy designed to yield a more diversified supply portfolio, both in terms of sources and pricing.

Another appeal of new U.S. LNG supply is that American gas prices are linked to Henry Hub futures, a benchmark system (named after a major distribution hub in Louisiana) where prices reflect supply and demand. In the rest of the world, however, most gas sales until now have been contracted at a price calculated as a certain percentage of the oil price. As a result, buyers are currently paying a premium for oil-market risks that have little to do with global gas supply and demand. Exports of LNG from the U.S. could further encourage the decoupling of international gas prices from oil prices, and push down gas-market prices. …

Unlike in many other major gas-producing nations, the U.S. government does not dictate investment decisions or contractual arrangements by American oil and gas companies. Yet through its power to permit exports of U.S. gas and set the regulatory and environmental framework for domestic production, the White House will effectively say yea or nay to the emergence of the U.S. as a global gas superpower. The world is waiting for its answer.

Read the full article online HERE.