Export Natural Gas? Not a Good Idea
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There has been a heated discussion regarding whether the Federal government should allow expanded exports of natural gas (liquefied natural gas or LNG, specifically) to countries without free trade agreements with the US. The argument for allowing exports goes basically like this: the US has gobs of natural gas with no end in sight. The price of natural gas is dirt cheap. Foreigners pay up to five times as much for natural gas. Therefore, it would help the industry, the country's balance of trade and the country's unemployment to export natural gas.
True, exports would help gas producers and others, but on balance I question if it's really the best thing to do. The US Energy Information Administration estimates exporting natural gas would likely increase the price of gas 3 to 9% with a 1-3% increase in the price of electricity. This would adversely impact the US economy.
To be upfront, I own Cabot Oil and Gas (NYSE: COG) and I'm glad I do. This company claims to have 14 of the top 20 natural gas wells in Pennsylvania and enjoys a profit margin of 13.5% and cash flow increase of 23%, beating the industry average in both metrics. If exports were allowed, I'm sure COG would do well, short term. It's the longer term that I'm thinking of.
Consider the impact of low natural gas prices. Consumers and businesses using natural gas receive a financial break. In this economy, who doesn't need one? Indirectly, anyone who uses electricity generated by natural gas electric plants is seeing price relief relative to electricity generated from coal. For years, utilities have been switching away from coal to natural gas because of cost advantages. Southern Company (NYSE: SO) is a great example. In the past 12 months, they went from 28% electric generation from natural gas to 46%. It is cheaper to convert a coal plant to natural gas than to install scrubbers and other clean coal technology. The price of natural gas has fallen while the price of coal has slightly risen. Again, this helps keep energy costs down for the consumer. Low gas prices also help SO investors with better dividends.
Another argument for natural gas exports is that it would create jobs. Yes, but I believe keeping low natural gas prices would also create jobs. For example, jobs are created when a power plant converts from coal to natural gas. Someone has to lay a gas line to the power plant. With low natural gas prices, I see natural gas burning vehicles, particularly fleet vehicles, as a growth industry. Westport Innovations (NASDAQ: WPRT) develops such technology and they have been seeing steadily increasing interest in such vehicles. Cummins, Caterpillar, General Motors have all recently signed contracts to build natural gas burning vehicles. These vehicles are sold in the US, India and China. Westport has been expanding its payroll in the US and is projecting 50% growth in the upcoming year.
Honda Motors (NYSE: HMC) is making Civic CNG passenger cars in Indiana which helps keep the roughly 2000 workers employed there. Ford, GM and Chrysler will offer natural gas burning trucks in 2012. So while limiting LNG exports will reduce jobs connected to LNG exports, keeping the cost of natural gas low will stimulate growth in the natural gas vehicle manufacturing industry. Again, this growth is driven by the low cost of natural gas and the volatility of gasoline prices. Exporting natural gas and the subsequent price increase will hurt these industries.
It's no mystery that expensive energy is detrimental to the US economy. Inflation, decreased discretionary income, and other economic stresses come from high energy prices. Right now, natural gas is cheap. We have the potential to become increasingly energy independent and to improve our balance of trade by exploiting this inexpensive fuel in vehicles as well as home heating and electricity generation. Exporting natural gas will put upward pressure on prices and may erode the price advantage natural gas offers over imported oil or coal. Right now, Cheniere (NYSEMKT: LNG) is the only company permitted to build an export facility in the US. It won't be complete until 2015. We don't know what the price of natural gas will be at that time. In my opinion, we need to take a long term view and make sure we take care of ourselves before helping Europe or anyone else with their natural gas needs.
The only way I can support natural gas exports is if we begin exporting to Canada and Mexico under current free trade agreements. They buy our cheap gas and then export it at high prices to South America or Asia. Then, we might as well export the gas ourselves and get the premium price. Otherwise, I think we need this cheap energy for the general good of the American economy and shouldn't do anything to jeopardize it. Fellow Motley Fool blogger Matt DiLallo makes a good case for permitting natural gas exports. You can read his opinion here.
dylan588 has positions in COG and HMC. The Motley Fool owns shares of Westport Innovations. Motley Fool newsletter services recommend Southern Company and Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.