The debate that's raging in Washington over the export of liquefied natural gas, or LNG, has two very distinct sides, and it appears that President Obama is coming down clearly on one of them. On one side is a lobby of American corporations, called America's Energy Advantage, that supports the restriction of LNG export as a way of protecting American business. On the other side of the argument is the belief that restricting free trade is not only negative for the geopolitical landscape, but it also limits the ability of the United States to bring good-faith complaints against other nations that restrict the export of natural resources.
Statements from the White House suggest that Obama is in the later camp, with U.S. officials believing "that being seen to restrict exports for the benefit of domestic industry would send a terrible signal about the country's support for free trade," according to The Washington Post. The push to limit exports -- championed by Dow Chemical (NYSE:DOW) and Alcoa (NYSE:AA) -- faces certain legal hurdles as well, although exceptions to free trade in the case of natural resources do exist. Ultimately, the net global good may win out over the push to keep American free from dependence of foreign sources of energy.
America's Energy Advantage
The position of the lobby that wants to limit exports seems fairly straightforward on its face. The shale boom in oil and natural gas has given the U.S. a rare leg up on the global energy resource stage. Natural gas prices in the U.S. are as much as five times lower than they are in Asia. The supply glut has allowed business to upgrade to gas-burning operations -- largely a move away from the dirtier energy available from coal -- and save billions in production costs.
One of the problems with this position, however, is that natural gas is a major input for several of the productions that Dow and others manufacture. This changes the feel of the argument, because keeping input costs low is not as broadly advantageous as keeping energy costs low in general. None of this, of course, considers how natural gas companies such as Chesapeake Energy will be affected. As with most such stories, there are several layers to be considered.
Of the two arguments in favor of free trade are a legal one, and one of global public opinion. Beginning with the legal side, Article XI of the General Agreement on Tariffs and Trade disallows placing restrictions on export through either licensing or by quotas. While clear exceptions exist, some have argued that to lean on those exceptions, the U.S. would have to limit its own production of natural gas. The general view of the administration has been that allowing free trade to apportion resources is preferable to taking a protectionist attitude.
The public-opinion argument looks to several cases the U.S. had brought against China for its restriction of the export of rare-earth materials. Molycorp (NASDAQOTH:MCPIQ), one of the largest rare-earth companies outside China, is just getting its California-based mine online, so reliance on China has been steep. Proponents of free trade -- including Obama, apparently -- see it as disingenuous to hit China with these types of complaints while making the same types of transgressions.
A look behind the politics
While the administration's arguments are founded on solid logic, they're not necessarily in the United States' best interest. The availability of rare-earth materials is very different from the availability of natural gas at cheap prices. Equating them is an oversimplification that does not bespeak the true complexities of both issues. You must hope that the message the president is sending is but the public face and not the final word on what will happen.
In the alternative, Obama could publicly support free trade while simply allowing the ramp-up of exports to drag out over a course of years. There are limited means by which LNG can currently be exported, and approval will be required for the situation to change. The administration could choose to trumpet free trade while conducting a multi-year study to address safety concerns -- the practical version of a pocket veto.
Ultimately, this issue is critical to the future of American business and the global economy. Monitoring how things play out can give you a good look at where energy prices may head in the future. There is more to American energy independence than LNG, but it shouldn't be overlooked.