Is the Petrochemical Industry Full of Gas?

It is perhaps surprising, maybe even shocking, that Dow Chemical and other petrochemical companies are calling for the denial of export licenses for liquefied natural gas (LNG) from North America to the high-priced Asian economies. This no different than the top-hatted monopsonist in the Industrial Age restricting competition so that they can force down input wages paid to labour.

The fallacious public policy argument used by Dow is based on presumed benefits of creating manufacturing jobs that can rely on cheap natural gas. It might be good for Dow but it is not good for other parts of the Canadian economy that can employ resources in better value-creating activities.

This important lesson goes back two centuries to David Ricardo who condemned English Corn Laws that legislated high tariffs to prevent the importation of cheap corn from Europe. His main point, now referred to comparative advantage, is that countries are better off allowing for the free flow of goods of services rather than trying to protect high cost producers from competitive imports. Consumers pay more than they should for protected products and exporters, facing a higher exchange rate due to import restrictions, and lose their cost competitiveness as a result.

Currently, natural gas prices in North America are about $3.50 per million cubic feet, almost one quarter of the price in Asia. Even though LNG plants and transportation are expensive, North American natural gas can be sold at a profit. Export restrictions might keep energy prices low in Canada but this will lower incomes and resource rents accruing to governments to keep some high cost manufacturing jobs here. Overall, Canadians lose more by protecting less profitable petrochemical jobs compared to natural gas production where we have a comparative advantage.

Trade benefits the whole economy by fetching the highest price for goods and services sold in the international market. If Dow and other petrochemical companies cannot make money in Canada at international prices, then it might make sense for us to import petrochemicals that are cheaper than what Dow can produce here. Instead, we produce at what we do best and cheapest.

Of course what is good for the gander might be good for the goose. If Dow wants to play a game of monopsony, maybe we should regulate petrochemical prices so consumers would be better off? These restrictions get us nowhere in the end except hurt the Canadian economy.