Once an entity with powers limited to those enumerated in the Constitution, the federal government has become a Leviathan, a central practice of which is the legalized theft of private property to be redistributed to favored constituencies. If additional evidence of this truth were needed, look no further than a recent letter from ten U.S. senators to Energy Secretary Jennifer Granholm, complaining about high natural gas prices in the northeast in particular and about the effect of substantial U.S. natural gas exports on domestic natural gas prices, and urging Granholm to “consider halting approvals of U.S. LNG export facilities.”
The ten senators almost certainly do not understand how counterproductive any such policy would prove almost immediately even in the narrow context of domestic natural gas prices. Their lazy assumption is that the effect would be an increase in domestic supplies and a resulting downward pressure on prices.
Not so fast. There would be a simultaneous decline in investment, a decline over time in production, and therefore a countervailing upward pressure on prices even in the near term. The production of natural gas is “substitutable” over time: unlike perishables that must be sold and consumed immediately, fossil fuels can be produced either during the current time period or stored (in the ground) for the future. This means that the adverse price effect from an expected decline in future investment would be reflected in prices almost immediately because an expectation that future prices will be higher – that there is a profit opportunity created by a current delay in some output – will engender reduced production during the current time period. The upshot is Natural Resources 101: the future price path expected by the market at any given moment rises at the market rate of interest.
After all, even these ten senators cannot believe that the private sector’s investments in the technological revolution in horizontal drilling and hydraulic fracturing, and in the development of gas resources, were accidental. And the industry and the capital market would understand immediately that political efforts to confiscate the economic value of investments in fossil fuel resources might not be limited to export constraints.
But put that aside. What has not been noticed is of greater interest: an effort to limit gas exports or approvals of U.S. LNG export facilities would create an administrative nightmare. A limitation on gas exports means that someone must receive the right to export gas while others are denied, and/or that quantitative limits are placed on each exporter, whether equal or unequal. The senators’ letter calls for a halt in approvals for LNG export facilities, but it is difficult to see how that could be implemented without destroying the industry that builds them; instead, there would be a reduction in the number and/or the capacity of such new facilities, again yielding a requirement that such rights be allocated politically.
There is no need to speculate about how such a system would evolve, as we can review the history of the U.S. oil import-quota program, the mirror image of the proposed export constraints on natural gas and/or the permitting of LNG export facilities. From 1959 through 1973, an import-quota program limited the amount of crude oil and refined products that could be imported into the U.S. (This was justified on dubious national security grounds.)
The import quotas had the effect of raising domestic prices for crude oil and refined products above international prices by roughly $7.50 per barrel (in 2021 dollars). Accordingly, the right to import a barrel was worth about $7.50, and the allowed volume of imports was approximately 400–800 million barrels per year over that period. If we assume 600 million imported barrels annually, that was about $4.5 billion per year that the bureaucrats and politicians were able to bestow upon those offering something of political value in return.
So: How did the federal government allocate the import rights? That was the subject of a classic 1971 paper by Professor Kenneth W. Dam, the upshot of which is that the rights were allocated on the basis of criteria that had decidedly weak or nonexistent relationships to “national security.”
Since new importers somehow had to be accommodated – the refining and other relevant industries could not be closed to new firms – the overall quota meant that the existing importers, who had made investments driven by their allowed import levels, would have to import less. Unsurprisingly, this was viewed by the existing importers as “unfair.” In the end, the existing importers were given an extra “historical quota” designed to be phased out. Under the system envisioned by the ten senators, precisely how will firms new to the gas export market be treated?
The allocations of import rights were based in part on historical imports, but firms competing within an industry often had very different importation histories, due to a host of geographic and other factors. This led to (largely incorrect) claims that import quotas based upon historical imports would create competitive disadvantages for those who in the past had imported relatively little. The solution was to allow those using above-average amounts of imported oil to do so, but to limit the economic benefits of the “cheap” imported oil by forcing compensation for those using below-average amounts of imported oil, in the form of higher-priced domestic oil given in trade. But even this compromise was compromised: in order to preserve political support for the quota program, no company was to receive an allocation less than 80 percent of its allocation under an earlier “voluntary” import-quota program. If gas exports or export facilities are to be limited, how will the requisite rights be allocated?
A sliding scale was used to allocate import rights among refiners: small refiners received higher allocations as a proportion of their production than larger ones. This complication was wholly political – “independent” refiners mounted an effective publicity campaign positioning themselves as Davids doing battle with the large integrated Goliaths – but was implemented also as a means of offsetting the inconsistencies created by the quotas based upon historical imports. As with the other administrative fixes already discussed, this had nothing to do with the national security rationale for the program, and no one pretended that it did.
Home heating oil was a particularly sensitive topic in the northeast, and the import restrictions had the effect of raising prices. Under the quota program, only historical imports were allowed as the basis for importing finished products, which prevented new competitors from importing home heating oil. The loud resulting political criticism led to an entirely ad hoc solution: the creation of the Oil Import Appeals Board, which exercised executive authority to give out increasing allocations of import rights over time in response to pressures from innumerable constituencies. Back to our ten senators: How certain are they that their constituencies will win under such a politicized system? And even if they are correct that domestic supplies of natural gas would increase, it is far from clear that the states that they represent would receive much of it given the (largely artificial) gas pipeline constraints afflicting those regions.
As concerns about air pollution grew in the 1960s, allocations increasingly were used to subsidize the production of fuels generating fewer emissions of such pollutants as sulfur dioxide. These allocations of import rights were extended to several electric utilities – consumers rather than producers of fuels – so as to encourage power generation with improved pollution outcomes. What will the ten senators say when the intended increase in natural gas supplies yields a reduction in the available market for unconventional (wind and solar) electricity?
The petrochemical producers were given their own allocations ostensibly because petroleum inputs are a heavy part of their costs; but that condition applied to many industries, and no obvious rationale could explain why the petrochemical producers received this special treatment. Notice that today those producers use large amounts of natural gas as inputs; will the ten senators attempt to impose some sort of regulatory or other penalty as a quid pro quo?
There is the related point that because the quota program had never been authorized by Congress, the federal executive agencies had enormous latitude and powerful incentives to involve themselves in the administration of the program so as to engender benefits for their respective constituencies. Federal bureaus, in short, are interest groups. In the gas export context, the ten senators have asked the Energy Department to do their dirty work for them.
The comedy highlight of the Oil Import Quota Program, ironically, resulted from the “national security” rationale: imports from Canada were not plausibly “insecure,” and so a complex “overland” exemption from the quota restrictions was implemented. That made officials in Mexico, and their allies at the State Department, unhappy in that most Mexican oil at the time arrived by ocean tanker. But an exemption for Mexican oil would have been problematic because it would have increased pressures for an exemption for oil from Venezuela as well.
And so a solution was found: the Brownsville U-Turn, an arrangement under which Mexican oil was shipped by ocean tanker to Brownsville, Texas, pumped into trucks that then drove into Mexico, made a U-turn, and then returned into the U.S., thus qualifying the Mexican oil for the “overland” exemption. It is no secret that U.S. natural gas supplies are increasingly important overseas, for Asia and Europe in particular. Will their allies in the Defense and State Departments and elsewhere have nothing to say?
Yes, the feds in principle could simply auction the rights to export natural gas, which would generate some cold cash to bestow on various spending interests. On the other hand, doing so would highlight the economic costs of the export limitations, and thus put their proponents in the uncomfortable position of having to justify them. It is far more likely that the export rights would be allocated on the basis of political criteria, yielding administrative machinations similar to those described above.
The Brownsville U-Turn was one of the small joys of life in a world in which private interests seek favors from government. The ensuing adverse effects, whether intended or not, metastasize; and thus does big government become bigger still. The ten senators may believe that they are doing their constituents a favor with a simple regulatory constraint. They are wrong on both counts.