With the recent development of the shale fracking process, a tremendously large amount of natural gas has suddenly become available in the US. As with any commodity, price is related to availability, and there has been and will continue to be a sharp decline in natural gas price.
There are three major uses of natural gas in the US almost equally divided; 37% heating, 31% conversion to electricity, 28% conversion to chemical products.
With the increased availability of natural gas and a significant price reduction, these three uses will increase. However, the increase will be slow because of the need to change equipment. For example, home heating involving fuel oil, will require piping for the gas and a change of burner. Public utilities now generating electricity from coal and oil will require similar changes.
The situation with respect to conversion of natural gas to chemical products is somewhat more complex. Although present use of US natural gas by chemical companies is significant, the picture is not complete.
For many years, natural gas prices have been higher in many foreign countries than in the US. For this reason, and because foreign countries impose fewer restrictions on manufacturing, many large US chemical companies have built chemical conversion plants in foreign countries. An additional advantage is that the products of such foreign manufacture are allowed entry into the US duty-free, because of the US free-trade policy.
With a significant reduction in US natural gas prices, chemical companies would have an advantage to take up manufacturing in the US, but their fixed manufacturing equipment is abroad. New plants could be built in the US, but there are still the problem of a multitude of government regulations.
With the increased availability of natural gas, presumably above current needs, many companies are interested in exporting it to those areas, where prices were traditionally cheaper, but will now be more expensive. Shipment of natural gas requires refrigeration to liquefy it, various handling equipment, and tankers to move it. All of this is significant capital investment.
We now get into the politics of the situation regarding exports.
The US Department of Energy will decide if and how much natural gas can be exported. This is a ridiculous control. Natural gas is privately owned; not owned by the public or by the US Government. However, through the years, the US public has given up its rights to private property, allowed the development of a Department of Energy and has given it control over someone's property. You may not be concerned, because it's not your property, but some day it may very well be. However, we must deal with the situation as it exists.
The US Department of Energy will make its decision on natural gas exports based on the ideology of the President of the US and various pressures from lobbyists and government members, including those from the House and Senate. In other words, another political football. The only justification for involvement of the Department of Energy would be a matter of national security, and this is not the present case.
Another agency involved is the Federal Energy Regulatory Commission, which must also approve export terminal construction. This one at least makes a little sense, because we need organized export equipment at our various ports.
An interesting aspect is the position of the chemical industry. An example is Dow Chemical, which has various natural gas conversion plants abroad and imports finished chemical products to the US. Liveris is Dow's CEO. He was initially against exporting natural gas, apparently because it might negatively affect his overseas production. He later realized that being against natural gas export, he was speaking against free-trade, which is the lifeblood of his present importation of foreign converted chemical products.
Sooner or later we will see how this plays out, even though we are on the wrong track. Persons or organizations in the US owning natural gas should be allowed to sell it wherever they wish; internally, export, or both. Free market forces will usually develop the right outcome. Government should only be involved with substantial matters, such as physical protection of its citizens from foreign invasion.
A couple of points:There are several ways to interpret Dow's position on exporting natural gas. The more common interpretation is that Dow felt that export of natural gas would tend to increase the domestic price. On the other hand, they realized that export would bring about a corresponding increase in domestic production and the effect would be minor. Also, Dow is probably more interested in the ethane and propane as feed stocks for steam crackers to produce ethylene and propylene; the building blocks of their petrochemical plants. Finally, local manufacture of petrochemicals is preferred over importation because of logistics.
ReplyDelete