Say goodbye to cheap natural gas if the U.S. acts to expand exports of this abundant resource. The decision to increase exports, over time, will cause gas prices and electricity costs to rise, according to a recent study by the Department of Energy.
Currently, U.S. nat-gas prices are about one-third the cost of those in Europe and about a quarter the cost in Asia. Exports would bring North American gas prices in line with international markets, and that could be a major negative for the U.S. economy.
Nothing highlights the axiom of exports being a cost than the current move to export natural gas. Energy is an incredibly precious resource. It is critical to the development and functioning of any nation's economy. We need energy for our very survival.
Cheap natural gas has been a boon for U.S. industry. It has sparked a manufacturing rebound, thanks to its effect of making the U.S. a low-cost producer. Exporting this resource would likely remove this advantage.
The great economist Adam Smith once said, "Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer." However, producers seem to be winning this debate. President Obama said he is in favor of expanding natural gas exports.
In a mercantile system, which is what an export-based economy is, the consumer's interest is sacrificed to that of the producer. Adam Smith was critical of mercantilism. He did not see it as a way to increase a nation's wealth, which he defined as the "abundance of its consumables."
In Smith's time, most countries operated on a gold standard or something similar. Their "wealth" came from gold, or at least their money was backed by gold, so it was necessary to export goods in order to accumulate the gold. That's why many wars were fought for gold (or silver).
Smith recognized that this was a zero-sum game. One nation's gain was another nation's loss. Only as a result of boosting domestic consumption could all nations grow, prosper and share in an ever-expanding economic "pie."
The truth is that exports are a cost in real terms. We use labor, resources and capital to produce a good and then send it away for the benefit of foreigners to consume. In exchange, we get a credit in the exporter bank's reserve account at the Fed. Or, if we receive payment in foreign currency, we get a credit in some foreign central bank's reserve account.
Yes, maybe boosting exports is a way to create domestic jobs, but it's a costly way. Wouldn't it be more advantageous to enact policies that ensure that there is sufficient income among our own residents to consume our own product? In this case, we win twice -- people have more money, and the nation's standard of living rises.
Exporting natural gas is another example of an ill-conceived policy. It's being driven by narrow interests, the major oil and gas companies, but it appears to have strong political backing. As such, it's probably a good idea to be long natural gas in some way. Check out Chesapeake Energy (CHK), Hess (HES), Exxon Mobil (XOM), Chevron (CVX) and ConocoPhillips (COP).