U.S. Natural Gas Doesn't Need Protectionism

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By Evan Soltas

U.S. Senator Ron Wyden, an Oregon Democrat and the incoming chairman of the Committee on Energy and Natural Resources, is starting off his tenure with a deeply misguided opinion on energy policy: He believes the federal government should direct trade in energy according to its determination of the national interest.

More specifically, Wyden has become the public face of protectionism on exports of liquefied natural gas.

Domestic prices of natural gas have dropped over the last few years because of rising American production. The price of natural gas in international markets, however, remains high. To profit from the price difference, natural-gas producers have sought federal permits from the Energy Department to export some of their production as LNG and to construct export terminals.

President Barack Obama's administration is currently debating whether to allow these producers to export liquefied natural gas to countries with which the U.S. has no free-trade agreement. (The administration is quicker to approve exports to the 19 countries with bilateral or multilateral agreements.) After more than a year of delay, they have begun the process of issuing permits following a report for the Energy Department in December 2012 that found there would be net economic benefits.

Throughout it all, Wyden has been a consistent voice against expanding LNG exports, fearing it would boost domestic energy prices and hurt American manufacturing. He has called on the Obama administration to limit exports, sought to curtail exports even to countries with free-trade agreements, and criticized the analysis in the report for the DOE as flawed.

Wyden is not entirely wrong to fear increases in prices. In the short run, the price of natural gas is likely to rise -- with or without LNG exports -- as production comes back in line with demand. More exports will clear the glut more quickly. In the long run, however, the impact of liquefied-natural-gas exports on prices is significantly more uncertain and dependent upon the long-term capacity of suppliers to increase production in response to higher demand.

Given his considerable influence on energy issues, though, Wyden's views really matter. His interference in LNG exports reflects a broader -- and misplaced -- trust in the ability of regulators to determine the national interest.

“Natural gas is a strategic American advantage,” he said in a recent interview. “We've got it. The whole world wants it.”

Wyden also said his goal as a policy maker is to find a “sweet spot” for natural-gas prices that would keep wells in production without hurting American manufacturers. “I want to make sure we look for the opportunities," he said, "to the greatest extent possible, to export value-added products rather than the raw material.”

Natural gas is hardly a private product, in Wyden’s understanding, but rather a national resource whose price, quantity and use are best determined by the federal government. What’s so troubling about Wyden’s view, however, is the potentially enormous cost to economic efficiency from substituting market mechanisms with political decision-making.

Wyden is wrong: The federal government should not be exercising a heavy hand in this case. Liberal capitalist democracies should not allocate resources through regulatory determinations of the national interest. They should encourage free trade. If the domestic manufacturing and chemical industries require natural gas, they should place competitive bids for it. Wyden and the Obama administration have instead facilitated rent-seeking.

All of this is more disappointing given Wyden's past support for free trade. “If we put up unfair barriers, other countries will do so too,” Wyden said in 2010. Why is that not true for energy?

(Evan Soltas is a contributor to the Ticker. Follow him on Twitter.)

Read more breaking commentary from Bloomberg View at the Ticker.

-0- Dec/28/2012 19:04 GMT