Global Energy Grab Bag

Freeing natural gas trade

Late Monday, the Federal Energy Regulatory Commission (FERC) approved retrofitting a large liquefied natural gas (LNG) import terminal in Louisiana to export natural gas. When complete, it will be the first major natural gas export facility in the contiguous US—moving the country one step closer to being a net energy exporter and freeing trade of this globally sought commodity.

The US-led shale gas revolution has made LNG import terminals less desirable or needed at this point. Currently, the US has near-record inventories and prices below $2 per million btu. Compare that to other natural gas-hungry countries (like Japan) paying close to 10 times as much. New US export facilities would allow US natural gas companies to export excess supply to countries with much higher prices—and reap the profit.

Opponents of these export facilities claim, among other things, opening natural gas exports would push US prices higher. Perhaps. But political rhetoric aside (in an election year where gasoline prices are at record highs), it might actually behoove the US to open more export terminals. Depressed prices mean lower margins for US producers, potentially even unprofitable wells. And should producers earn less—or even lose money—on drilling, they might decide to cut back on production to reduce the supply glut. That could mean higher prices for US consumers in the long run—exactly the issue opponents of natural gas export facilities sought to prevent. In a system as complex and dynamic as the global economy, it’s tough to say action X will have impact Y. And in our view, selling something other people want is generally a net benefit for all involved.

Fracking’s fault?

Does hydraulic fracturing cause earthquakes? The UK’s Department of Energy and Climate Change (DECC) seemingly thinks so—yet is now permitting the use of hydraulic fracturing nationwide.

But lest you think the UK’s government is now intentionally attempting to cleave part of Scotland into the sea, consider the details. Last year, the DECC blocked new shale gas wells and launched a study of fracking and earthquakes after two tremors measuring 2.3 and 1.5 on the Richter scale were reported near a well. And both the company and organization found evidence the well may have caused them, as fluids were unintentionally injected near a fault.

At this point, whether fracking causes earthquakes is still an open question. But tremors of these tiny magnitudes are unlikely to even be felt, much less carry significant risk of damage or injury. Ultimately, it seems DECC made a risk versus return call—and, seeing the huge return associated with the US shale gas revolution, it determined the risk of such minor shaking isn’t sufficient to stop fracking.

In business, the existence of a risk isn’t necessarily a reason not to move forward. It is something to be managed because virtually any action—or even inaction—can carry a risk.

When government oars rock the boat...

State-owned Taiwanese power company, fittingly named Taipower, plans to increase electricity rates in May—prompting concerns among many Taiwanese producers their competitiveness with South Korea and possibly Japan may be harmed. But interestingly, Japanese and South Korean companies have been known to receive government subsidies to help ease their own business costs, making the playing field a complex and decidedly uneven one.

Yet, there seems to be a common thread: government involvement. In one form or another, governments in all the involved countries are propping up some at the expense of others—South Korea and Japan are apparently giving shipbuilders, semiconductor firms and steel producers (among others) subsidies. While Taiwan is seemingly favoring its electricity generation business—though potentially at the expense of producers who could otherwise more easily compete with local alternatives.

The story isn’t over yet—and whether it helps or hurts the intended or unintended parties all remains to be seen. But one thing’s certain: It’s an illuminating example of the complications commonly caused when government too readily puts its oar in.

Argentina’s misguided Chavismo

In a move only Hugo Chavez could love, Argentine President Cristina Fernández announced plans to nationalize Argentina’s largest oil company. Details, like how Argentina will compensate the Spanish owner (and its shareholders), aren’t clear. Nor are the diplomatic consequences, judging from Spain’s strongly worded response.

Economically, the move’s a head-scratcher. Spain is Argentina’s largest source of foreign direct investment, and investors could keep their distance should moves like this stand. Private property rights are essential to a well-functioning economy (and investor confidence). And resource nationalism, resurgent in South America over the past decade, is fraught with peril. History has overwhelmingly shown the private sector is a more efficient administrator than the state, bringing greater socio-economic benefit. Were it otherwise, distressed peripheral European nations would be scrambling to nationalize, not privatize, resources.

One big example comes from Argentina itself. In 1989, then-President Carlos Memem inherited an economy ravaged by the Peronist dictatorship, with annual real GDP near 1973 levels and a bloated public sector. He privatized utilities (including the firm in question today) and pensions, and during his tenure, foreign investment poured in, productivity jumped and real GDP grew roughly 50% (through 1999).ⁱ Though Argentina would soon enter a financial crisis tied partly to defending, then discarding a peso-dollar peg, privatization’s benefits were obvious across the country throughout the 1990s—just as obvious as the economic fallout from the socialist policies of Fernández and her predecessor/late husband, Nestor Kirchner.