No Wonder We Have a Trade Deficit: Did You Know You Need Permission to Export Natural Gas?

As the U.S. Balance of Payments Drives Us Deeper Into the Hole

The U.S. is running a current account deficit of almost a half trillion dollars (c. $450 billion.)  China has accumulated some $2 trillion of dollar denominated foreign exchange reserves in its $3+ trillion hoard.  The U.S. Treasury is in hock to China for over $1.1 trillion.  Our energy trade deficit was approximately $850 billion in 2010.  That means that other than energy, our current account had a surplus of some $400 billion.

Getting our international accounts into surplus and preserving the reserve currency status of the dollar should be a priority.  The President has called for doubling our exports in five years.  It is not clear what might make that happen, but exporting something the U.S. has in surplus should be good news.  Or so you would think.

Cutting Into Our Energy Deficit Should Be a Good Place to Start

Gregory Meyer writes in the Financial Times, "The US approved the first exports of large quantities of natural gas through the Gulf of Mexico," specifically, the Department of Energy granted a license for Houston's Cheniere  Energy to "refit a gas import terminal to condense and ship up to 2.2bn cubic feet a day" of liquified natural gas (LNG.)  According to the DOE, "In August 2010, [Cheniere's] Sabine Pass Liquefaction, LLC filed a two-part application requesting authority to export up to 803 billion cubic feet per year of domestically produced natural gas as LNG for a period of 20 years. On September 10, 2010, the Department approved these exports to 15 countries with which the U.S. already has a Free Trade Agreement covering natural gas. Today the Department is extending this authorization to include all other countries except those that lack the ability to receive imports or those with which trade is prohibited by U.S. law or policy."

Please note: Cheniere had to ask permission to help right our balance of payments! 

Apparently we have rules that prohibit exporting natural gas.  Getting a "Get Out of Jail Free" card also allows others to lobby against the license.  In this case a group called the Industrial Energy Consumers of America lobbied against Cheniere.  No wonder the dollar is on the ropes!

Are these rules some fossilized leftovers from the 1970s?  ("A sober economic historian would judge the years 1973 to 1982 as the worst decade in the last sixty years." See also "When Will They Ever Learn?") In that horrible decade, we had widespread natural gas shortages caused by government price controls.  A tangled web of administrative rules, laws, and policies tried to contain the damage done by price controls.

Some background:

Pioneers like Michell Energy developed some tricky technology that has allowed Americans to tap huge new reserves of natural gas.  These reserves are trapped in deep shale formations that require very unconventional drilling techniques to capture the gas.  These reserves ("shale gas" for short) have been the focus of a drilling boom in the U.S. and have created an enormous glut of natural gas.

This is the one great "good news" news story in recent years for the U.S. economy. Natural gas prices are fluctuating near $4 per mmBtu. Henry Hub Natural Gas settled at $4.32 today.  This is close to a third of its 2008 peak.  By way of comparison, the energy equivalent price of oil would be about $16 per mmBtu.  This means Americans are getting a great bargain.

Internationally, prices are much higher.  Britons pay over twice our price for natural gas and in Asia the price is more like four times as much.  In much of the world, natural gas contracts are tied to the price of oil.  Why are these price differences not arbitraged away?  It is not easy to get natural gas from one place to another.  The U.S. has facilities for re-gasifying imported liquified natural gas (LNG).  These facilities were built in the 1970s: remember those artificial shortages?  Our facilities are limited for liquifying natural gas for export.  Hence this project and similar ones.  How many are going to rush to invest in such facilities if they will wait for eight months may to be told, "No you can't!"

The Future of Natural Gas

Oil prices make headlines; Solar and wind power are sexy, yet natural gas is the real news.

While U.S. oil production has been declining since the 1970s and the peak of world oil production is continually predicted, natural gas looks like the rabbit we are pulling out of the hat.  And the future is paved with shale.

It took companies like Mitchell Energy twenty years to figure out how to extract natural gas from the Barnett shale formation in Texas.  The technology having been mastered, we now realize that there is an abundance of gas in shale formations around the country and the globe.

Interestingly enough the home of the Whiskey Rebellion and the first U.S. oil rig, Pennsylvania, is home to one of the biggest.  The Marcellus shale formation in western Pennsylvania, west Virginia and western New York has been estimated as having natural gas equivalent to the nation's energy needs for twenty years.

Chevron's 4.3 billion Shale Bet

As iStockAnalyst put it, [C]onsider this number: 4.3 billion.That is what Chevron offered to pay for Atlas Energy.  As Bill Wince of Chesapeake Energy points out the big integrated oil companies are used to dealing with huge fields and negotiating with governments. Unlike America, in many countries the state not the landowner owns the mineral rights.   The independents can field an army of land men who track down tittles and negotiate drilling rights.  The Chevrons of the world have decided if they do not have a distinctive competence, they can always buy it. 


Platts tells us, "Chevron's first deal in a US gas shale play dovetails nicely with the
company's plans to increase its proportion of gas production from 31% of total
output currently to 41% in the next seven years," according to Atlas' Indian joint venture partner, Reliance Industries, CEO John Watson who spoke at a Bank of America
Merrill Lynch's Global Energy Conference.

This is Not the Last Big Buy

Platts further reported, "Watson said he expects Chevron's Marcellus Shale production to grow from Atlas' 63,300 Mcf/d to more than 500,000 Mcf/d in the next decade and that, combined with the play's proximity to premium markets in the northeastern US made it fit into Chevron's plans.


"The cost per well in the Marcellus Shale are about half that in other
major shale plays such as the Louisiana's Haynesville and Texas' Eagle Ford
because vertical drilling distances in Appalachia are about half those in
rival plays.


"Atlas wasn't the first shale producer Chevron looked at and it probably
won't be the last, Watson said."

Heard on the Street: IEA's Energy Outlook Forecast 11/9/2010 5:42:06 PM
Forecasting the next quarter is perilous.  Forecasting the next 26 years is both easier and riskier.  Few will remember your forecast after the twenty six years pass and the fundamentals assert themselves over the long run.  Still, you have no idea where in the crazy commodity cycle you will be nor what the value of a dollar will be.

The International Energy Agency's 26-year forecast for the energy industry

The Wall Street Journal's Heard on the Street columnist, Liam Denning, talks to the Journal's Lee Hawkins:




Lee Hawkins and Liam Denning also discuss Chevron's "We Agree" Campaign.