On June 7th, NERA Economic Consulting published a study that outlines the effects of U.S. liquified natural gas (LNG) exports on the U.S. economy and energy markets. This 2018 study is the fifth one commissioned by the Department of Energy’s Office of Fossil Energy (DOE/FE) since 2012. It examines and develops a wide range of scenarios for future U.S. LNG exports, assesses the likelihood of different levels of unconstrained LNG exports, and analyzes the outcomes of different LNG export levels on the U.S. gas markets and the U.S. economy over the 2020 to 2040 time period. By developing 54 scenarios that assume several conditions for domestic and international natural gas supply and demand, this 2018 study projects the impact on GDP, aggregate household income, and consumer welfare.
Across all scenarios, the authors of the study found that the overall U.S. economic output is higher whenever global markets demand higher levels of LNG exports, assuming there is no limitation on LNG exports. The more likely range of LNG exports in 2040 is projected to be from 3.2 to 11.2 trillion cubic feet per year. In low supply scenarios, the combined probability of prices in the range of $10 to $13 per MMBtu in 2040 is only 3 %. In the average supply cases, the combined probability of prices in the range of $5 to $6.50 per MMBtu in 2040 is 47%. The very low prices are achieved when U.S. supply is high, and these cases have a combined probability of 22% with prices ranging from $3 to $4 per MMBtu in 2040.
For each of the supply scenarios, higher levels of LNG exports in response to international demand consistently lead to higher levels of GDP, household income and consumer welfare. Levels of LNG exports, GDP, and consumer welfare (present value measure of the standard of living of all households from 2020 to 2040) are strongly affected by U.S. natural gas supply conditions. As expected, economic growth is greater with high U.S. oil and natural gas supply than with low U.S. oil and natural gas supply. For example, in 2040, when U.S. LNG exports are expected to be around 8.6 Tcf, the U.S. GDP levels could be range from $31.6 trillion in a low U.S. supply level to $33.1 trillion in a high U.S. supply level. Likewise, consumer welfare could range from $30.1 trillion in a low U.S. supply level to $31.3 trillion in a high U.S. supply level.
The study concludes with several reasons for the positive relationship between LNG exports and measures of economic performance. The most significant factors are that (1) about 80% of the increase in LNG exports is due to increased U.S. production of natural gas, with positive effects on labor income, output, and profits in the natural gas production sector. And (2) the higher the world prices, the U.S. terms of trade improve, so there is a wealth transfer to the U.S. from the rest of the world equal to the increase in prices received for LNG exports times the quantity exported. The transfers from natural gas related activity to the U.S. economy improve the average consumer’s ability to demand more goods and services leading to higher economic activity.
In summary, the study indicates that unless constraints are imposed, LNG exports should reach 7-11 Tcf per year by 2040, with minimal impact expected on domestic natural gas prices. This level of exports would represent substantial growth from current export levels. Any constraints on imports that might be imposed in the future would also be expected to create an overall negative effect on U.S. economic activity.