Assessing the Domestic Energy Price Impact of LNG Exports

This commentary is part of U.S. LNG: Defining National Interests, a project from the CSIS Energy Security and Climate Change Program analyzing the economic, geopolitical, climate, and market implications of the U.S. LNG export boom.

U.S. liquefied natural gas (LNG) exports have boomed in the last decade, but the Biden administration has now paused export authorizations for new terminals as the Department of Energy (DOE) undertakes a review of whether newly proposed projects are consistent with the public interest. A key factor under consideration is the effect that increased exports will have on domestic natural gas prices. This commentary examines this issue and how new factors might influence the DOE’s study.

LNG exports represent a large and growing source of demand for U.S. natural gas supplies. In markets, all else being equal, additional demand places upward pressure on price. Increased domestic prices for natural gas are naturally a concern for the government as it considers additional terminals, and the DOE has studied the question a few times before.

The DOE’s most recent study on the subject, published in 2018, found that increased exports place upward pressure on prices at Henry Hub, the key domestic pricing index for natural gas. This upward price pressure creates “dampening economic effects . . . including slightly slower output growth of some natural gas intensive industries.” Despite this effect, this study and the four studies preceding it have all consistently found that these energy intensive industries continue to grow, and more broadly, that on net the public benefits of U.S. LNG exports exceed the economic costs of higher domestic prices.

The 2018 study concludes that the key determinant of upward price impact is the trajectory of domestic natural gas production: “U.S. natural gas prices are far more dependent on available resources and technologies to extract available resources than on U.S. policies surrounding LNG exports.” Accordingly, in a high supply growth scenario, the study finds that Henry Hub prices can remain cheap even with significant growth in LNG exports. The inverse is also true—low supply growth scenarios create large upward shifts at Henry Hub even if export volumes are restricted.

Market Outcomes Since 2018

The DOE studies are forward-looking attempts to model impact, but consistently acknowledge the scale of uncertainty. Given the boom in exports since 2018, it makes sense to start by looking at what has happened. Recent history has demonstrated that growth in demand does not necessarily drive up prices.

The last decade has seen U.S. LNG exports grow rapidly without driving up the domestic price of natural gas. In 2023, record high LNG exports coincided with low average prices at Henry Hub of $2.57 per million British thermal units (MMBtu), well below the 2010–2015 (pre-LNG exports) average of $3.64 per MMBtu.

Cy McGeady
Fellow, Energy Security and Climate Change Program
Remote Visualization

This outcome is explained by a matching rapid expansion of U.S. natural gas production. Even the bullish supply scenario identified in the 2018 DOE study, projecting 35 trillion cubic feet (tcf) of annual dry gas production for 2023, was surpassed by all-time high U.S. dry gas production of 37 tcf last year. The basic conclusion established by the DOE’s studies—that supply is central variable for price—has been confirmed by actual outcomes. For policymakers, the lesson is clear: the key enabling factor for low domestic prices amid an LNG export boom is robust domestic gas supply.

What Has Changed

As the DOE reconsiders its analysis of the public interest, the domestic price impact question remains fundamentally a question of future supply and demand balances. Excessive growth in demand without matching supply growth will drive up domestic prices. On both sides, things have changed since the DOE last studied the issue.

LNG exports have grown considerably, and the future trajectory of exports has shifted upward due to a surge of interest in new export projects. In 2023, gas exports, including LNG and pipeline volumes, will likely total about 7.5 tcf, which exceeds consumption by either the domestic commercial or domestic residential sectors. Combined with about 3 tcf a year in export capacity for projects currently under construction, and additional capacity from projects awaiting a final investment decision (FID) or DOE authorization, exports in the future could grow to 12 tcf annually and surpass consumption in the power sector as the single largest destination for domestic production.

Remote Visualization

As a larger share of total domestic production is consumed by international buyers, the degree to which fluctuations in global market balances and prices impact domestic prices will likely grow. Henry Hub pricing results in 2022 averaged $6.45 per MMBtu, the highest since 2008, and may serve as an important case study of this phenomenon. One factor in this result was the Russian invasion of Ukraine, which created a massive surge in international demand and prices for LNG. But coincident domestic supply weakness and demand strength also played a role in the formation of higher prices. As the DOE reconsiders domestic price impacts, a detailed look at this case study could be useful. Looking ahead, as international buyers grow to represent an ever-larger share of total demand for U.S. gas supplies, U.S. policymakers need to understand if this market position could allow short-term global events to create volatility in domestic prices.

Assessing the Supply Side

Regardless of the short-term international market gyrations, the most important policy objective is the long-term level of domestic gas prices. Here, as stated by the in the 2018 DOE study, the single most important variable remains domestic production volumes and production costs. The central question then for the DOE, and policymakers more broadly, is whether supply growth can continue on its current trajectory.

Last year saw a round of corporate consolidation in the shale patch, capital discipline is still the watchword for the industry, and debates continue over the timing of peak shale production. It is crucial to note that the future of shale oil production is entwined with but distinct from the future of shale gas production. In fact, declining shale oil wells tend to produce a higher ratio of natural gas relative to oil, driving up associated natural gas production.

An overlooked driver of current and future supply growth is the way that export outlets induce new supply. In recent decades, a major problem for the U.S. natural gas industry has been rock bottom prices and limited prospects for demand growth that acted to discourage upstream and midstream investment. Since most LNG facilities are financed with long term offtake agreements, the outlet provided by LNG export terminals has created new long-term incentives for drillers to invest in expanded production.

Midstream capacity constraints are another important check on production growth. Gas must be piped from remote drilling sites to end consumers or export terminals on the Gulf Coast. Many fields operate at or near maximum takeaway capacity. Though some expansion of the pipeline network is underway in the Gulf Coast region, additional capacity is likely needed, especially if Marcellus shale is to serve growing LNG demand. With the overall size of the U.S. gas market growing, expansion of supporting infrastructure like pipelines and storage capacity is needed ensure a stable market and dampened price volatility. Given longstanding political hurdles to pipeline expansion, midstream capacity may be the biggest risk to supply growth and low prices. 

Broadly, the sentiment in the gas industry is that vast reserves of latent gas supply exists—confirmed by Energy Information Administration figures showing ever growing proven reserves—waiting only for an economic signal and enabling infrastructure to expand. Insofar as policymakers seek to preserve cheap domestic natural gas prices and reduce energy burdens, direct supply-side policy matters far more than any decision on LNG exports.

Demand-Side Considerations

The impact of new export volumes may be partially eased by the future path of domestic demand. Should domestic demand for gas decline, for instance in the power sector, supplies are freed for exports and a smaller expansion of supply is required to keep Henry Hub prices stable and affordable.

Electrification and continued improvements in energy efficiency are expected to slowly eat into natural gas demand in the residential and commercial sectors. But the key demand-side question is the future of gas consumption in the power sector. Here, the deployment of new gas-fired power plants has slowed relative to the last two decades of rapid expansion, indicating the rate of power burn growth should likewise slow. Furthermore, the scale of wind and solar energy projects sitting in interconnection queues nationwide suggests that renewables will continue to eat into gas’ contribution to electric supply mix and place downward pressure on power sector demand for natural gas.

This downward pressure is at least partially offset by a large upward shift in electricity demand projections across the country, driven by data centers and new industrial facilities incentivized by the Inflation Reduction Act and other federal legislation. Furthermore, the ongoing retirement of dispatchable coal-fired generation will leave gaps in power supply stack that require backfilling. If interconnection of new clean generation resources lags, new gas-fired capacity will need to be built, or at minimum, existing gas fired power plants will run at higher utilization rates for longer.

Given that LNG exports will grow regardless of future DOE authorizations, policymakers should advance policy which ensures power sector gas consumption plateaus or declines. This includes policies enabling faster and expanded investment in regional and inter-regional transmission, allowing for accelerated interconnection of renewables. Likewise, expanded federal support for new nuclear-fired generation is crucial. Nuclear power acts as a like-for-like replacement of retiring coal-fired plants and would ensure the gaps in the supply stack created by these retirements does not drive-up power sector demand for gas. As an added benefit, both policies would do wonders for reliability concerns in the power sector.

Domestic Policy Conclusions

Those who look to domestic price impacts for a definitive argument for or against LNG export expansion will not find it. The issue is a function of too many market and policy variables for simple answers. Policymakers are right to be concerned about domestic price impact of LNG export expansion, but to date, these risks have largely not materialized. Existing studies show that robust supply growth has offset the upward price risk, and that continued strength in domestic natural gas production would continue to deliver globally competitive prices for domestic consumers.

Restricting LNG exports is not an effective tool to preserve low domestic natural gas prices. If this is the policy goal, policymakers should advance policies that encourage supply-side investment and ensure production levels are commensurate with domestic demand and expanding exports. This includes a regulatory and permitting landscape which allows for adequate expansion of the midstream pipeline network necessary to connect supply to demand.

Since LNG exports will continue to grow with already-authorized projects, policymakers should work to ensure the domestic gas demand plateaus and eventually declines, thereby easing the supply and demand equation and limiting risk for high prices. Nowhere is this more important than in the electric power sector, where the links between transmission, nuclear, and natural gas are clear, and represent an opportunity for more deliberate cross-sector policy coordination.

In short, a strategically coherent basket of demand-side, midstream, and upstream energy policy can deliver low energy prices for domestic consumers, even as LNG exports rise. While concerns about climate and environmental justice issues remain, domestic price impacts alone are not sufficient reason to limit LNG exports.

Cy McGeady is a fellow with the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.