Free Lunch?


In “Better Out Than In”, the author asks a poignant question, “why are we not exporting natural gas now that fracking has made the U.S. the Saudi Arabia of natural gas?” Due to natural gas’s clean burning nature, the author argues that it would be in society’s interest to export America’s cheap natural gas abroad because it would decrease worldwide pollution while also allowing American energy firms to make a fortune in the world market.

It would seem that the government is responsible for preventing a major potential positive externality by withholding export permits to gas exporters because of domestic lobbying. As the author points out, natural gas prices in the U.S. are far below the world average, at a rate of about 3.40 per million British Thermal Units. The cost in Asia and Europe for the same amount of natural gas sometimes rises to 20 dollars per mBTU. Because of the administration’s stalling, some natural gas producers may choose to leave their natural gas in the ground, creating a heavy deadweight loss in the world economy. The irony here is that despite the U.S.’s concern for its domestic markets, the author contends that the cost to American society for not allowing the export of natural gas is higher than the benefit of retaining our gas! Because of pollution released in other countries through more dirty forms of energy, American society will pay a high price for its cheap natural gas, along with the rest of the world that did not benefit from American natural gas. America seems to be missing an incredible free lunch opportunity here; domestic natural gas producers could benefit from massive profit, while the world would enjoy a cleaner environment.

So who benefits economically from keeping domestic prices below the world market by not allowing trade? First and foremost; energy-hungry companies seeking economic rents. In an increasingly competitive world market, low-energy prices can give American firms an edge in producing energy intensive products such as smelted aluminum or natural gas fueled power plants. Second, many environmentalists see fracking as a danger to public health, and thus lobby against the expansion of fracking. In addition, domestic consumers of energy (such as myself), also benefit from the artificially low cost of natural gas.

However, because the government has yet to decide what the optimal quantity of gas exports is, they have yet to sell the permits required to export the natural gas that has been produced. The price of natural gas will eventually increase domestically regardless of the world price as natural gas becomes harder to obtain; are we willing to sacrifice a few years of unnaturally low energy price to improve pollution and economic growth worldwide? The decision is in the Department of Energy’s hands.

Via Better out than in; american energy and economics. (2013, Mar 02). The Economist


4 thoughts on “Free Lunch?”

  1. In response to question you posed at the end of your article– I think it is safe to say no. There are very few in the world who are willing to sacrifice a few years of unnaturally low energy price to improve the enviroment and growth of the world economy. It is disheartening to know that the major players for this product are in it for the profit and not the good of the enviroment or those they are serving to. This idea of the United States having access to thier own natural gas is a new phenomena to me proving that the major actors do not have this as a solution when the effects could be for the benefit of the American people.

  2. There are some really good points here. But this doesn’t really take into account the effects of fracking on the environment or on the local population. There may be some financial deadweight loss due to temporarily leaving this gas in the ground, but I would rather have that loss then to bathe in / wash with / drink water that I can light on fire.

  3. I read this article in the Economist as well and really enjoyed it. Its funny how we’re so dependent on foreign oil, but we have this excess of natural energy. I’m confused as to how this would benefit the environment, but the environmentalists are against its use? Interesting stuff though!!

  4. The environmental effects of fracking may be quite controversial, but at the end of the day we’re not choosing between exporting or being environmentally friendly, we’re choosing whether we’d rather pollute our water supply or our air. Because as long as coal is the hydrocarbon fuel of choice for Asia, (and statistics shown in today’s Kennedy Center Lecture show that in the next 8 years China will build enough power plants to power the entire U.S. electrical grid), then we are going to be inhaling a lot more sulfer on this side of the Ocean. There’s not an easy answer here, but if the choice is either this:
    or this:

    Then it would seem to me that we put more pressure on domestic firms to keep our water pollution under control to provide developing nations an economical way to clean up their act. The EPA has so far failed to regulate fracking pollution in any effective way because interest groups have captured regulation before it could be put into place. Perhaps fracking could be more environmentally friendly if companies were given greater incentive to do so.

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