America / Energy / Environment / National Security

Oh! The Places LNG Will Go!

News that Sempra Energy became the second company to secure all the permits necessary for building the facilities to export natural gas has pushed the debate over energy exports into the fore once again. Geopolitical risk in Europe and Asia, growing economies in the developing world, and worries about climate change ensure that the energy trade will remain robust in the future.

Although the locations of most deliveries are yet unknown, allowing the export of American energy offers strategic benefits to partners in East Asia. The US could improve the position of its Asian allies by adding supply and by using it to demonstrate its commitment to the security of the region.

America’s export markets are generally seen as being Asia or Europe, and regardless of the specific market, American LNG offers economic benefits for Asian customers. Projections for East Asian and Southeast Asian countries foresee a rising need for imports. At a basic level, the addition of 4-6 bcf/day of LNG on the world market would help drive supplies upward. Oil exports would probably be even more marginal relative to world demand, but the political stability of that supply would be welcome.

A consequence of increased supplies is lower prices. Already, as natural gas has displaced coal domestically, much of that supply has been directed at Europe, where it is competing with Russian gas. In addition, exports provide the opportunity to give importers additional options for how gas is priced. The US’ hub pricing system offers flexibility for importers that usually enter into long term contracts that tie the price of natural gas to that of oil. Natural gas prices based on supply and demand for that commodity alone, along with the possibility of more flexible delivery options could make the market more competitive.

Yet even if only a fraction of America’s LNG is exported to Asia, there are still opportunities for the US demonstrate that its strengthened commitment to the region extends beyond military matters. One way of demonstrating leadership is to use the lure of US exports to complete negotiations of the Trans-Pacific Partnership (TPP), a regional free trade agreement with Asian, Oceanic, and South American countries. In particular, Japan, Malaysia, and Vietnam might be incentivized to accept some compromises in exchange for the offer of an open American energy market. The latter two countries, although having extensive energy supplies, have rapidly growing demand and a resource hungry China nearby. In addition, opening the energy sector to international trade would be a powerful counterexample to China’s controls over commodities exports.

America’s resource boom provides the opportunity to offer its Asian allies reassurances about its commitment to the region—if it allows energy exports. Although the amount of trade that could be expected under liberalized trading rules is expected to be modest, it could allow the US to expand its linkages in the east. The high dollar stakes will still be significant in dollar terms and allies might also take comfort that the US Navy would probably work to avoid security problems that would compromise some very expensive trade. It might even work to strengthen relations with exporters such as Australia.

So long as our allies do not use the opportunity to antagonize China, it could improve security in the region.