A less open global economy threatens to upend President Trump’s plan to kickstart his plan for US energy dominance.
President Trump and his administration have been ardent proponents of US “energy dominance,” or at least as it applies to the production and exports of fossil fuels. However, some of the administration’s other policies have been having deleterious impacts on that goal.
American energy companies thrive in an open and unfettered economic environment — one in which business decisions are made for economically rational reasons, not politicized ones. We have made some great strides in that direction with the lifting of the market-distorting ban on US crude oil exports at the end of 2015 and President Trump’s decision to grant blanket permission for exports of liquefied natural gas (LNG), lifting President Biden’s moratorium on new approvals.
But broadly speaking, the Trump administration has moved toward a less open global economic system, introducing tariffs on friends and foes alike. While he has exempted most oil and gas imports from US tariffs to prevent a price impact on US consumers, it is not at all clear that other countries will refrain from retaliating in ways that undermine US energy commodity exports.
One of the impacts that has already taken place is the scrambling of global LNG trade flows. With the US-China trade war beginning in February, China imposed a punitive 125 percent tariff on US LNG imports. Since those contracts do not have destination clauses, that caused the Chinese recipients to swap out those volumes in exchange for volumes from other suppliers, leading to somewhat less efficient shipping routes.
The signing of the memorandum of understanding for additional volumes of piped gas from Russia via the proposed Power of Siberia 2 pipeline also could represent a big loss for US LNG exports. It may or may not ultimately come to fruition, but if it does, it would move a large tranche of Chinese gas demand growth away from the global LNG market, which is dominated by the US and Qatar, and hand it to Russia.
In a period of heightened tensions with the United States, China sees the piped gas option as beneficial due to not increasing dependency on imports that come by sea or are sourced from the United States. The other major source of demand growth for LNG is India, whose rate of economic growth has accelerated in the last decade past that of a maturing China. But the United States has stoked new trade tensions with India, imposing punitive tariffs because of India’s continuing purchases of Russian oil. It is not yet clear whether this will last over the medium to long term or impact the potential growth of US LNG exports.
On oil, there are also impacts of this policy that severely distort trade patterns. The United States had become a major supplier of crude oil to China, but punitive tariffs in retaliation for Trump’s measures in February have cut Chinese imports of US crude to near-zero over the summer months. Those volumes are going elsewhere, but if much of the world ends up imposing tariffs on US energy commodities, this could become a much larger problem.
The Trump administration has exempted energy commodities from most US import tariffs, but given the United States’ comparative advantages in energy and the availability of alternate sources, that sector will likely be targeted. Apart from the United States, most other countries are not raising tariff barriers against their other trading partners, which could eventually put US oil and gas exports at a competitive disadvantage.
Ironically, one other major impact of Trump’s trade wars is that they have shifted Canada’s focus from the United States. Where it has previously had only a modest capacity to move oil from its major production centers in Alberta to the West Coast, the Canadian government is now scrambling to add new capacity to get it out to destinations other than the United States. Much of that will eventually go to China.
Another example of a negative impact on the US energy sector is the development cost increases in both upstream and midstream segments. Oil and gas development and transportation use large quantities of steel pipes, the overwhelming majority of which are imported. Japan has a US market share of over two-thirds for this. Other steel equipment is sourced from Asia, Europe, and Mexico. Estimates of the overall impact on production costs have been about two percent to five percent, depending on the exact circumstances. Again, with most other producers in the world not having these costs imposed, they gain an advantage over US producers, who will have lower market share and reduced profitability.
US refined product exports — largely to Latin American countries that lack self-sufficiency in refining capacity — also could be impacted. The US exports over $100 billion in refined products annually. The global refining sector is a generally thin-margin business and is likely to undergo another period of consolidation in the coming years. If petroleum product importers impose tariffs to offset US tariffs on other industries, that will put serious pressure on the continued viability of some of those US refineries, giving the advantage to non-tariffed foreign competitors.
Each of the issues here may be of modest significance to the US economy individually, but as a whole, they combine to seriously undercut the notion of US “energy dominance.” The American industry would be a lot better off if we could return to the now-quaint notion of “free markets.”
About the Author: Greg Priddy
Greg Priddy is a Senior Fellow for the Middle East at the Center for the National Interest. He also consults for corporate and financial clients on political risk in the region and global energy markets. From 2006 to 2018, Mr. Priddy was Director, Global Oil, at Eurasia Group. His work there focused on forward-looking analysis of how political risk, sanctions, and public policy variables impact energy markets and the global industry, with a heavy emphasis on the Persian Gulf region. Prior to that, from 1999 to 2006, Mr. Priddy worked as a contractor for the US Energy Information Administration (EIA) at the US Department of Energy. Mr. Priddy’s writing has been published in The New York Times, The National Interest, Barron’s, and the Nikkei Asian Review, among others.
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