Guest Contributor William Krist with Dani Litovsky: LNG – to export or not to export, that is the question

oil drilling at sunset
The United States is rapidly moving from being dependent on imported fossil fuels to becoming a major world producer.  We’re sitting on vast supplies of natural gas, and recent technological innovations have made it possible to tap previously unattainable resources.  So what should we do with these new-found riches?  Producers of natural gas, by and large, want to be able to sell where they can get the best price, and often that will mean selling overseas.  But consumers oppose exporting our natural gas, arguing that keeping these supplies to ourselves will keep the price here in the U.S. lower than the world price, and that this will give them a competitive advantage.  They believe this will add more value to the economy and trade account than exporting LNG.  And some environmentalists oppose exports because they believe this would raise the price of natural gas and thereby encourage more production.

From an economic perspective, allowing exports would lead to some increase in domestic prices, but the price of natural gas in the U.S. is far lower than in many other markets, for example, $2.66 per thousand cubic feet on average in the U.S. in 2012 compared to some $10 in the U.K. Somewhat higher prices in the U.S. because of exports would encourage greater U.S. production, but prices in the U.S. would still be lower than in most markets because of transportation costs, and this would continue to give manufacturers that use natural gas a cost advantage.  From an environmental perspective, natural gas is less polluting than other fossil fuels.  Until renewable energy such as wind and solar can meet the world’s energy needs – a prospect that is likely to be at least a decade away – encouraging the use of natural gas probably has a positive environmental impact.

From a trade policy perspective, restricting exports would likely run afoul of World Trade Organization (WTO) rules, and it would weaken our complaints about other countries’ export of vital minerals, which many believe is an attempt by China to gain a competitive advantage at its trade partners’ expense.

The economic impact of allowing natural gas exports is likely to be small, as is the environmental impact.  So perhaps this debate is more like “much ado about nothing.”

(Click here for a paper that sets out these issues in more detail.)

William K. Krist is a Senior Policy Scholar at the Woodrow Wilson Center.  He is a former Senior Vice President of the American Electronics Association.  He has written extensively on trade, development, and the environment.

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Global Trade and the State of the Union

SOTUUnsurprisingly, the State of the Union address focused primarily on the domestic economy. President Obama emphasized issues such as the looming sequester and the need for immigration, entitlement, and tax reform. In terms of major announcements on the international trade front, the President revealed that the US aims to start talks with the EU towards creating a “comprehensive transatlantic trade and investment partnership.” This is a significant development for a multitude of reasons. A free trade partnership between the US and the EU would streamline trade by reducing regulatory barriers and tariffs, thereby expanding the already huge amounts of exchange. Not only would a transatlantic free trade agreement heighten the interconnectedness of these two massive markets, it would drive growth, deflect increasing competition from China, and would help reestablish the authority of the United States and Europe as leaders of the global economy.

The President also announced that the US is on course to finish negotiations over the Trans-Pacific Partnership, an agreement that will substantially increase US trade presence in the Pacific. There was no date given about when the talks would be complete, but it appears that things are falling into place. In addition, the President outlined some domestic economic policies that were relevant to global trade issues. For instance, President Obama’s unveiling of the “Fix-It-First” program, which intends to put people to work on urgent infrastructure repairs, could improve US trade performance through more efficient and faster travel times. Smart Grid enhancement would make the US a more appealing place to do business and it would protect vital information trade-lanes from cyber disruptions. The energy boom, both through enhanced fossil fuel production and clean energy development, will allow the US to dramatically increase its energy exports and could fundamentally transform the global energy trade. Through the creation of innovation centers, President Obama wants to accelerate the continuing trend of re-shoring in order to increase US export trade.

While domestic issues were clearly the main theme of the address, it is vital that President Obama address the larger context issues of global trade to enact policy that will take advantage of new economic opportunities. It would also be a mistake to underestimate the potential of trade as a key engine of economic growth for the US and the global community. A secure and healthy global economic structure is important in order to maintain further international stability.

Posted by: Matthew Goldberg

Sources: Wilson Center, United States Trade Representative, ABC News, Department of Energy

Photo Credit: Presidential Seal courtesy of flickr user Dave Newman

What Went Wrong with A123?

China’s largest producer of automotive parts is poised to purchase a controlling share of a US company, A123 Systems, which develops and manufactures advanced lithium-ion batteries and battery systems.  China’s Wanxiang Group Corp said on Wednesday they intend to invest up to $450 million in A123 Systems, taking an 80 percent stake in the company.

The purchase is an almost textbook example of the kind of issues America currently faces in an ever more competitive and global economy.  A123 is a startup company that was founded in 2001 based on the research of a duo of scientists at MIT.  The company’s unique nanophosphate technology is built on novel nanoscale materials initially developed at MIT and, according to the company, “enables customers to commercialize innovative products for the transportation, electric grid, commercial and government markets”.  The company has received tens of millions of dollars in grants from Chrysler, General Motors, Ford, GE, and defense contractors to develop lithium-ion batteries using their technology for hybrid cars, commercial trucks and buses, and components to electric grids.  A123 received more than $200 million from venture investors before raising $378 million in a 2009 initial public offering.  The company had also received frequent grants and investments from the Department of Energy and in 2009 was awarded over $200 million as part of the Stimulus Act, specifically under the Electric Drive Battery and Component Manufacturing Initiative.

Apparently all this was not enough to keep the company afloat.  It reported a second-quarter loss this year of $82.9 million, or 56 cents per share, and a 53 percent drop in revenue to $17 million.  Its cash pile was more than halved to $47.7 million at the end of the quarter, down from $113.1 million at the end of the first quarter.  The battery industry as a whole has suffered in the US, with some pointing to too much capacity and not enough demand for hybrid vehicles.  Essentially, A123 and companies like it invested heavily in the ability to churn out their batteries on a large scale, and then found a painful lack of consumers.

A123 Systems is exactly the kind of company Americans hear so much about as the way forward in this global economy.  Researchers at one of the country’s top universities developed cutting edge technology, were able to successfully commercialize it, created manufacturing capacity here in the US, and received both private and government support that is so often considered a necessity for innovative startups.  Energy Secretary Steven Chu said of A123, “It’s a perfect example of what’s possible when the private sector, government, and academia work together”.  And yet, that company is now owned by a private Chinese company.  It remains to be seen what kind of tangible effects this will actually have.  The company will most likely still allow for manufacturing jobs in the US and will still have domestic factories; in fact the bailout from Wanxiang might actually save some American jobs.  Of course, it is unlikely that any future expansion will occur in the US.  More generally speaking, the case of A123 Systems shows that there is no easy fix when it comes to creating high-tech manufacturing in the United States and that further discussion, research, and methods need to be explored if the US hopes to be the home of companies like A123 Systems in the future.

Posted by: Sean Norris

Sources: CNNMoney, Reuters, The New York Times, BusinessWeek, Fortune

Photo Credit: Energy Secretary Steven Chu and Michigan Governor Jennifer Granholm at the grand opening of an A123 Systems plant in Michigan entitled A123 Systems Grand Opening in Livonia courtesy of flickr user graham.davis

Live Webcast Tomorrow: In Search of Arctic Energy

The Wilson Center’s Canada Institute, Environmental Change and Security Program, European Studies, Kennan Institute, and Program on America and the Global Economy

 present

In Search of Arctic Energy

 

 with

 Charles Emmerson, senior research fellow, Energy, Environment and Development Programme, Chatham House

Zachary Hamilla, principal Arctic analyst, Office of Naval Intelligence

Jed Hamilton, senior Arctic consultant, ExxonMobil Upstream Research Company

Robert Johnston, director, Eurasia Group

Julia Nanay, senior director, PFC Energy

 and moderator

 Jim Slutz, president and managing director, Global Energy Strategies LLC

            As ice continues to melt in the Arctic, previously inaccessible and undiscovered resources are becoming available to the world. Driven by ever increasing energy demands, exploration of the Arctic has exploded in recent years. As the competition for these resources has increased, new partnerships and rivalries have begun to emerge at the Northern Pole. To discuss the expansion of Arctic activity, the Wilson Center will host an event focused on understanding the forces driving the increase in exploration. Our panel of Arctic oil and gas industry professionals will reveal what new techniques and technologies are allowing this unprecedented activity. In addition, Arctic experts will examine what nations can do to protect the environment, increase production, and ensure international cooperation.

Thursday, July 12, 2012

9:00 a.m. – 12:00 p.m.

Woodrow Wilson International Center for Scholars

6th Floor Flom Auditorium

 Please allow extra time to enter the building. A photo ID is required for entry.

Directions at www.WilsonCenter.org/directions

 RSVP to Canada@wilsoncenter.org or here

Limited Seating Available

 

 

Promoting “Green Growth” in the Development Conversation

Last week, an audience at the Wilson Center heard new recommendations from the World Bank on how to get countries to grow green. Their report, titled Inclusive Green Growth: The Pathway to Sustainable Development, calls on governments to “think green when pursing growth policies which can be inclusive, efficient, affordable, and necessary to sustain economic expansion in the years ahead.” It makes the point that sustainable growth is critical to meeting the needs of developing nations, and that unsustainable growth will lead to greater socio-economic problems if environmental and social considerations are not accounted for.

The World Bank’s “Inclusive Green Growth” model recommends using more than just a nation’s Gross Domestic Product (GDP) to evaluate its economic growth. It requires using “case-by-case analysis” to minimize short-term costs and promotes enacting “well-designed” regulations to encourage private-sector development that still protects the environment. The World Bank explicitly states that “green growth is not anti-growth,” and presents a plan that implements policies which will allow for greater development that is also “greener” development.

The model that the World Bank has developed focuses on three main pillars to achieving sustainable development: economic, social and environmental sustainability. Economic sustainability requires tailoring a country’s sustainable development strategies to specific circumstances. Meanwhile, social and environmental sustainability encourages sound decision-making by stakeholders in the hopes of building better partnerships between the public and private sectors to meet “up-front capital needs with innovative financing tools.” This recent report by the World Bank highlights how environmental and sustainable growth will be the key to generating a more prosperous and sound world economy. The Inclusive Green Growth project is so important because it points out the need to change our attitude and approach international development efforts moving forward.

Click here to view the video from the event.

Posted By: Jonathan Sherman

Sources: The World Bank

Photo Credit: 24 Solar Panels courtesy of Flickr user Michael Coghlan

America’s Energy Boom: Is Independence Closer Than We Think?

Economist and oil expert Philip Verleger recently discussed America’s current energy boom and its implications at the Peterson Institute for International Economics.  He is currently a private consultant on energy issues and a former senior economist with the Council of Economic Advisers and the Treasury Department during the Carter Administration.  As an oil and energy analyst for almost 40 years, he says he has never seen anything like the current energy boom that the United States is currently enjoying, emphasizing that the U.S. could soon be a net oil and energy exporterVerleger is not the only one catching on to this development.  In late March, a major article was published in The New York Times highlighting these changing circumstances.

Verleger now recognizes that the U.S. will be a low-cost producer of energy well into the future, projecting that domestic production will have a “50, 70, maybe 80% cost advantage,” subsequently enticing companies to return production back to the United States.  In this new environment, every increase in global prices will now be a competitive advantage for U.S. and its exports moving forward, providing a base for stronger economic growth than many of the other industrialized countries.

For years, many administrations had sought the “high-cost solutions” to energy independence driven by major investments in alternatives, but now we finally have the “low-cost solutions.” In looking at the causes behind this change, he states that major oil companies left the United States and abandoned production, but reduced costs and size of computers allowed smaller companies to compete technologically and develop smaller fields untouched by large companies.  Another contributor was the development of the energy futures markets that stabilized prices and built inventories, enabling investment growth.  Verleger noted the key role of regulators that have mandated fuel economy improvements, the use of ethanol in gasoline, and other environmental regulations.  The auto industry itself has also been a factor, changing business models in the wake of its 2009 “near death experience.” Further contributing to price declines, domestic gasoline demand has been falling between “5 and 6% year over year” as well.

Looking to the future, Verleger is quite optimistic.  He believes these circumstances lay the foundation for a U.S. competitive advantage that will last for at least 10 to 15 years, maybe even 30 years.  He predicts that this phenomenon will add one-half to a full percentage point to the U.S. GDP growth rate through both consumption and investment.  However, he is still cautious on a few fronts.  First, he worries that major oil companies will be unable to compete in this low-cost, low-price environment.  Second, we must significantly improve our infrastructure. Finally, he doesn’t think the U.S. will become protectionist of this advantage through export quotas, but he says that the temptation will be there and will be difficult to fight.  Nevertheless, these changes are likely to strengthen the dollar and trade balances, help to control debt and deficits, and enhance overall economic competitiveness.

 

Posted by: Brian Gowen

Photo Credit: Oil well pump jacks courtesy of flickr user Richard Masoner / Cyclelicious

U.S. Announces Tariffs on Chinese Solar Panels

A New York Times article reported that the U.S. Commerce Department announced on March 20 a decision to impose tariffs on solar panels from China, having concluded that the Chinese government provided export subsidies to manufacturers. U.S. firms that depend on the imports of inexpensive Chinese solar panels were relieved that the tariff rates of 2.9 to 4.73 percent were lower than expected, while American competitors to the Chinese firms were not satisfied. However, the Commerce Department is due to decide in May whether these subsidized Chinese imports can be considered dumping. Should the act of dumping be confirmed, tariff rates will be further increased.

China’s rapidly growing green energy industry is clearly demonstrated by the enormous increase in U.S. imports of Chinese solar panels: from $21.3 million in 2005 to $2.65 billion in 2011. Such a fast rate of growth was made possible in part by government subsidies, which stem from the Chinese government’s concern for greater energy and economic security

The authors noted that some experts have suggested looking at the “trade strategies worked out between the United States and Japan in the 1980s to manage Japan’s rapid rise as an exporter.” However, the plan’s feasibility is unclear because U.S. leverage over Japan at the time was probably greater than U.S. leverage over China today. A trade official offered a different viewpoint – Beijing and Washington need to resolve the situation in a “mutually and globally beneficial way,” instead of taking unilateral action.

Posted By: Pokyee Yu

Sources: The New York Times

Photo Credit: solar panels courtesy of flickr user spanginator