US stance on trade limits freedom to export its gas around the world
As Trump administration’s trade war widens the energy industry is now embroiled on four fronts
The American energy system “allows for molecules of US freedom to be exported to the world”, its Department of Energy touted on the opening last week of the Freeport liquefied natural gas export (LNG) facility. But as the Trump administration’s trade war widens, George Orwell might have observed that one person’s freedom gas is another person’s slavery. The energy industry is now embroiled on four fronts in this mercantile struggle.
Last January, the US imposed tariffs on solar panels, and in March 2018 added steel and aluminium, vital for pipelines and other parts of the energy industry. Those on imports from Canada and Mexico were withdrawn more than a year later, this May. In July, broad categories of goods from China were hit with 25 per cent tariffs, which retaliated with levies of its own.
China has mulled restricting the export of rare earth elements, important in electronics, electric vehicles and renewable energy. Its dominance in production and processing of these minerals give it an advantage, but this is only likely to be temporary, as I have recently explained.
So, Beijing has sought to strike at US energy exports. On Saturday, its tariff on US LNG came into effect. LNG prices generally are depressed owing to a wave of new supply, particularly from America, and China is the fastest-growing large market. But US exports there have virtually dried up, as tariffs make them un-competitive. New American projects will increasingly struggle to secure sales contracts to underpin financing, in a crowded market outside China.
US oil exports to China have also plummeted – about 700,000 barrels per day up to June 2018, down to just 150,000 bpd subsequently. Given the Middle Kingdom’s huge demand and the US’s swelling supply, energy had seemed an obvious area for a deal to narrow the bilateral trade deficit – a meaningless metric but one the White House trade cabal focuses on.
But now, even in the event of a deal, China is not likely to rely on Washington for overtly-politicised energy. The ability of the US Treasury’s leverage over the financial system to cut off supplies from select countries, and its potential control over sea-lanes, is a warning for Zhongnanhai. Its own shale gas, and other gas exporters, in Africa, Australia, the Middle East, central Asia and Russia, will benefit as China varies its providers.
That reinforces the US desire to squeeze its LNG into Europe at the expense of Russian pipeline gas. Europe is glad to diversify its sources and has been worried for some years about over-dependence on Moscow. But Washington’s threats to sanction the Nord Stream II pipeline, running under the Baltic to Germany, uncomfortably blur political and commercial motives.
Another growing outlet for US gas has been Mexico, to which exports have soared from about 1 billion cubic feet per day in 2010 to about 5 billion cubic feet daily. But on Thursday, President Donald Trump suddenly announced escalating tariffs on all imports from Mexico, unless it halted a fictitious wave of illegal immigration. If Mexico retaliates, that would be a further deterrent to buying American gas.
The tariffs pose a problem for refiners. The US exports about as much refined oil products to Mexico as it imports crude. With its light shale oil output booming, American refiners need to import heavy crude to mix to get a suitable blend, and Mexico is one of the key suppliers.
Of the comparable grades, Canadian pipelines are maxed out, Venezuelan output is in freefall, Russian exports are still suffering from chemical contamination on its main pipeline to Europe, and Middle Eastern production is restricted by Opec quotas. The US has not imported Iranian oil since 1979, but its sanctions on the country take more medium-grade crude off the world market.
In the longer term, Mexico has been opening its oil sector to private investment to turn around declining production, with significant initial success. But new president Andrés Manuel López Obrador is sceptical of the reforms and unlikely to award more contracts to foreign firms. His letter responding to Mr Trump’s tariffs invoked Mexico’s 1938 nationalisation of – mostly American – oil interests. The Maduro administration in Venezuela has already fallen into the orbit of Moscow and Beijing; now the left-leaning Mr Obrador may also turn to China.
So far, such trade skirmishes may seem promising for other energy exporters. The costs of US energy production will be raised, and its export markets constrained.
But a full-blown trade war is worrying, especially if it spreads to other countries. The infamous Smoot-Hawley tariffs of 1930 were blamed for triggering or at least deepening the Great Depression. Oil prices in today’s money fell to $10.46 per barrel by 1931, and the price in the mid-1920s was not attained again until 1974.
The prospect of protectionism has already worried markets. The S&P 500 index of stocks had its second-worst May since the 1960s. Despite numerous supply hiccoughs, Brent crude was down about $10 per barrel on its April high, to $64.5 on Friday, as concerns over the economy threaten future oil demand.
Along with aluminium and steel, big hydrocarbon producers might face trade barriers on their other main exports, notably petrochemicals, denting their efforts to diversify their economies. It is a worrying thought that, after a golden age of trade liberalisation, they may have missed the boat on export-led growth. Both the leading energy importers and exporters must beware they are not bound in the chains of America’s freedom gas.
Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis
Updated: June 3, 2019 12:06 PM