A Modest Proposal on Exports: Give Dow Chemical a Dose of its own Medicine

by Marlo Lewis on March 15, 2013

in Blog, Features

Post image for A Modest Proposal on Exports: Give Dow Chemical a Dose of its own Medicine

Dow Chemical CEO Andrew Liveris has been making waves of late with congressional testimony and a Wall Street Journal oped advocating restrictions on U.S. exports of liquefied natural gas (LNG).

To oppose “unfettered,” ”unlimited,” or “unchecked” LNG exports — in other words, to fetter, limit, and check the freedom of gas producers to sell their own products — Dow formed a business group called America’s Energy Advantage (AEA). Other members include Alcoa, Eastman, Huntsman, and Nucor.

AEA’s rationale for restricting gas exports (to quote Liveris’s oral testimony) is that when gas is not exported but instead is used to manufacture products, it creates “eight times the value” across the entire economy. That claim derives from a Charles River Associates (CRA) study sponsored by – drum roll, please – Dow. According to CRA, using gas as a manufacturing input trounces gas exports in terms of job creation, GDP growth, and trade-deficit reduction. Therefore, AEA argues, Congress and/or the Department of Energy (DOE) should constrain LNG exports in the “public interest.” AEA also warns that higher gas prices from increased overseas demand could destroy tens of thousands of manufacturing jobs and kill the U.S. manufacturing renaissance. AEA claims it is not opposed to all LNG exports, it just wants a “balanced” approach.

Economist Craig Pirrong (a.k.a. the “Streetwise Professor“) deftly pops this rhetorical balloon:

I am adding a new entry to my list of phrases that put me on guard that someone is trying to con me: “balanced approach.”. . . . In Obamaland, “balanced approaches” mean large tax increases now, and hazy promises of spending cuts in some distant future. In Liveris’s oped, “balanced” means imposing restrictions on exports of natural gas to lower the cost of his most important input. Funny, ain’t it, that things seem to tip the way of those advocating “balanced approaches”? In other words, if it helps me, it’s fair and balanced!

The whole thing is galling. Even if Liveris were correct and gas turned into chemicals generates “eight times” the economic value of gas sold abroad, such third-party assessments should have no bearing on how companies dispose of their own property. As American Enterprise Institute scholar Mark Perry points out, AEA companies did not invest a dime to develop fracking and horizontal drilling technology, construct the wells, or hire the rig workers, yet they presume to decide what happens to the gas after it’s extracted from miles under the Earth. Not unlike the Supreme Court’s Kelo decision, AEA’s implicit premise is that central planners have the right, nay the duty, to commandeer private property whenever the resource would add more value in someone else’s hands.

But do Liveris and AEA really believe the rationale they’re pushing, or only when it cuts in their favor? Here’s an easy way to tell. Dow, Alcoa, Eastman, Huntsman, and Nucor primarily manufacture intermediate goods, not final goods. As natural gas is an input to them, so their products are inputs to still other companies. AEA-produced chemicals, plastics, electronic components, aluminum, and steel reach the consumer only after other manufacturers “add value” by turning those “feed stocks” into paints, cosmetics, fertilizers, pharmaceuticals, computers, cell phones, automobiles, and so on.

So by AEA’s logic, the government should restrict exports of chemicals, aluminum, and steel to hold down domestic prices and make U.S. manufacturers of final goods more competitive. The “public interest” demands it! I’ll bet my salary against Liveris’s that he will never, ever agree that sauce for the goose should also be sauce for the gander.

It apparently has not occurred to anyone at AEA that their agenda could backfire. AEA and CRA are preaching free-lunch economics, which never works as intended. They assume Congress or DOE can curb shale gas exports and nothing else about the natural gas industry will change. There will be no decline in investment and production. Supply will remain high and prices low. Ridiculous!

It’s bad enough groups like the Sierra Club seek to shut down fracking and, therefore, block LNG exports. But at least their agenda is internally consistent. Gas companies won’t frack what they can’t sell, so greens oppose LNG exports to restrict U.S. gas company sales and global market share. Dow, on the other hand, wants both more fracking and constrained exports. That does not compute. The AEA campaign adds to the gas industry’s already serious political risks. Actually empowering bureaucrats to make “value added” determinations of which U.S. firms get to compete in the global LNG market would likely reduce oil and gas industry investment in the production of Dow’s beloved “feed stocks.”

AEA also fails to consider the risks its agenda poses to the broader global trading system. The AEA proposal conflicts with Article XI:1 of the General Agreement on Tariffs and Trade (GATT), which prohibits adoption of quantitative restrictions on natural resource exports to promote or protect domestic processing industries.

In September 2010, the U.S. steel workers and other manufacturing unions petitioned the U.S. Trade Representative (USTR) to investigate China’s restrictions on exports of rare earth elements (among other trade-distorting policies). In June 2012, the USTR requested the World Trade Organization (WTO) to set up a dispute resolution panel to examine China’s export restraints. Earlier this week, the U.S., EU, and Japan filed a complaint with the WTO challenging China’s rare-earth export restrictions. Reuters notes that, “The EU, the United States and Mexico won a similar case against China in January concerning other raw materials.”  Chemical, steel, and aluminum workers take note: The U.S. cannot flout the same treaty obligations and trade principles we invoke without looking ridiculous and undermining the “rules-based free trade” in which Mr. Liveris professes to believe.

Ed Pirrong’s comment on this point is suitable for framing:

Here’s a balanced rule for you, Mr. Liveris: Producers can sell to whomever offers them the highest price.  Short. Simple. Easy to understand.  No bureaucrats required.  And to show what a broad minded guy I am, I propose that the rule be applied to Dow.

The CRA study commissioned by Dow is partly a critique of a NERA Economic Consulting study, prepared for DOE to help the agency review a host of LNG export license applications. NERA estimated the economic impacts of different levels of LNG exports for a range of scenarios assuming different levels of demand, supply, and price. NERA concluded:

Across all these scenarios, the U.S. was projected to gain net economic benefits from allowing LNG exports. Moreover, for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased. In particular, scenarios with unlimited exports always had higher net economic benefits than corresponding cases with limited exports.

NERA economist David Montgomery offers a concise rebuttal to the CRA study in this Q&A document. Here I’ll excerpt two paragraphs that seem to me most relevant to the issues discussed above.

Is there any possibility of a contraction of manufacturing because of higher energy costs?
No, as prior NERA studies have shown, the real threat for manufacturing is growing government regulation, of which export restrictions would be another part. The one thing about LNG exports that is certain is that they will grow slowly, and that any difference they make will be a small change in the rate at which manufacturing expands. With the possible exception of a very small slice of the chemical industry [the nitrogen fertilizer industry which employed approximately 3,920 works in 2007], there is no chance that LNG exports could turn robust growth into decline.

Don’t the data show that 1 BCF [billion cubic feet] of gas in manufacturing generates more value than 1 BCF of exports?
Absolutely not, that is an error that any first year economics student would recognize. Value added in manufacturing is created by the labor and capital at work in the industry, not by physical inputs like natural gas. The value of natural gas is fully captured by the willingness of customers to purchase the natural gas – and if overseas purchasers are willing to pay more for natural gas than domestic producers from whom some gas might be bid away, then clearly natural gas generates more value as an export than when used domestically. That is the basis for NERA’s conclusions, not some revolutionary change in the structure of industry over the past few years.

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