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Analysis of the Macroeconomic Outcomes of Market-Determined Levels of US LNG Exports
The Situation
The Natural Gas Act (NGA), 15 USC § 717b, requires the Department of Energy (DOE) to conduct a public interest review of applications to export liquefied natural gas (LNG) and to grant the applications unless it finds that the proposed exports will not be consistent with the public interest. To inform this public interest review, the DOE has commissioned several natural gas export studies in the past, which have evaluated the effects of increasing volumes of LNG exports from the Lower 48 states in the US on natural gas prices and on the US economy as a whole. An understanding of these impacts are critical since the results from such market studies are relied upon by the DOE when granting authorizations to proposed LNG export facilities in the US and in guiding policy decisions relating to LNG exports.
NERA's Role
NERA was retained by the US Department of Energy’s Office of Fossil Energy to analyze the macroeconomic outcomes of different export levels on natural gas markets and the US economy. As part of this study, NERA developed and examined a total of 54 scenarios for future US LNG exports, assessed the likelihood of these different levels of LNG exports, and analyzed their outcomes on the US natural gas markets using its Global Natural Gas Model (GNGM) and its NewERA macroeconomic model of the US economy to project the impacts of the different scenarios on key metrics such as gross domestic product (GDP), consumer welfare, change in sectoral outputs, and aggregate consumption and investment, over the 2020 to 2040 time period.
These scenarios differed with respect to their assumptions relating to four major sources of uncertainty that affect LNG exports from the United States: 1) natural gas supply conditions in the US, 2) natural gas demand in the US, 3) natural gas supply availability in the rest of the world (ROW), and 4) ROW natural gas demand. In total, NERA developed eleven cases to evaluate the uncertainty from these scenarios. Uncertainty from natural gas supply, demand in the US, and ROW demand was captured by three cases each; while two cases were developed to capture ROW supply uncertainty. Each path through the four sources of uncertainty—which combines a US supply case, a US demand case, a ROW supply case, and a ROW demand case—represented a scenario that, when combined, yielded the 54 scenarios that were analyzed. The likelihood of the LNG export levels associated with each of the scenarios was calculated by assigning probabilities to them, which were developed by the study authors in consultation with external peer reviewers. A cumulative probability distribution over the export levels across the 54 scenarios was constructed, and the analysis concentrated on scenarios that lay within a one-standard-deviation interval around the mean export level in 2040.
The Result
Throughout the entire range of scenarios analyzed, the study determined that the overall US economic output is higher whenever global markets call for higher levels of LNG exports, assuming that exports are allowed to be determined by market conditions. The consistently positive relationships between LNG exports and measures of economic performance (such as consumer welfare, aggregate consumption, and investment) were determined to be primarily a function of the following:
- The increased US production of natural gas, which has positive effects on labor income, output, and profits in the natural gas production sector.
- Higher ROW natural gas prices that result in greater natural gas supply in the US, improving US terms of trade. The transfers from natural-gas-related activity to the US economy improves the average consumer’s ability to demand more goods and services leading to higher economic activity.
These two factors more than make up for the dampening economic effects observed in these scenarios, which include a modest increase in natural gas prices, a slightly slower growth in output of certain natural-gas-intensive industries, costs of substituting other fuels for a small fraction of natural gas use in power generation, and small reductions in natural gas use by households and other industries.