In a Houston Chronicle article published on March 7th, BGS Advisor Jeffrey Kupfer discusses the impact of the trade war with China on U.S. energy.
Trade war with China keeps U.S. energy in crosshairs
By Jeffrey Kupfer March 7, 2019, 2:00 PM
As originally appeared in Houston Chronicle
The late U.S. Sen. Everett Dirksen, R-Illinois, famously quipped about federal spending, “A billion here, a billion there, and pretty soon you’re talking real money.” The same phrase is appropriate for the constant drama surrounding our trade relationships, especially with China, and their impact on the American energy industry. An increase in tariffs here, a delayed investment decision there, and pretty soon you have a cumulative effect that makes a real difference for businesses, consumers and communities.
That reality is critical to remember as the United States works toward a comprehensive trade agreement with China. President Trump delayed the self-imposed March 1 deadline for tariff increases. Multiple press reports, moreover, suggest that negotiations would continue in advance of an expected visit by Chinese President Xi Jinping. That’s helpful. And in the coming weeks, as U.S. officials address legitimate concerns about unfair Chinese trade practices, it’s vital that they recognize the importance of continuing to facilitate energy exports and develop energy infrastructure.
To his credit, President Trump has done much to accelerate American energy production. Domestic oil production in 2019 is poised to surpass the 1970’s record of 9.6 million barrels per day, and imports have fallen to a 30-year low, according to the Energy Information Administration. But at the same time, the president’s aggressive trade actions and the imposition of protectionist tariffs have taken some of the shine off of these developments as the U.S. energy industry suffers under the weight of an uncertain trade environment.
What could happen if we don’t strike a US-China trade deal? The news isn’t good, particularly for the energy sector and for energy-intensive economies like Texas.
Last year, for example, oil markets saw substantial swings in export volumes as a result of trade uncertainty. In 2017, China accounted for 19 percent of total US oil exports. But in 2018, U.S. oil exports to China stalled — and then plummeted — as Chinese importers shied away from American producers. China received an average of 378,000 barrels per day of crude in the first seven months of 2018, before dropping to virtually zero in August and September. And while the Chinese have resumed a much smaller level of U.S. oil imports, any further reduction in sales to the Chinese market could have a significant negative impact.
The same dynamic holds true for natural gas. China is currently the world’s second largest importer of liquefied natural gas (LNG) and it is projected to overtake Japan as the number one importer in the early 2020s. In September 2018, in retaliation for U.S. tariffs, China imposed a 10 percent tariff on US LNG. The impact was immediate and dramatic. Only six LNG cargoes went from the United States to China during the last six months of 2018, down from 25 during the same period in 2017, according to Reuters.
The trade tension not only affects current exports — it also threatens new energy projects. For example, Australia-based LNG Limited halted construction of the Louisiana Mongolia LNG Plant late last year, reportedly due to uncertainty with Chinese customers. And experts say the trade war could hold up other projects, too, threatening to sideline billions in investment. As Katie Bays, head of energy and utilities at Height Capital Markets, explained, “They’re just the elephant in the room and until there’s clarity on where China is going to source their natural gas, then it’s hard for other buyers to make decisions about which projects to attach themselves to.”
Additionally, a trade war harms the development of pipelines and other necessary infrastructure. With the cost of steel from China up 25 percent since the imposition of tariffs in 2018, material costs for U.S. oil companies have risen by more than 8 percent. This means that the cost of a typical pipeline project could rise by $76 million. TransCanada’s proposed Keystone XL expansion, for instance, is estimated to cost an extra $300 million.
Besides the short-term impacts, there are even more significant long terms implications. In its annual Energy Outlook, BP outlines alternative scenarios – a base case in which global trade continues on the same trajectory as the recent past versus a scenario in which global trade disputes persist and worsen. In the status quo case, U.S. energy exports are projected to rise to 243 million tons of oil equivalent by 2040. In the greater trade dispute case, those exports would drop by two-thirds, to just 80 million tons. And BP finds that the detrimental impact would be comparatively worse for the United states than other energy exporters such as Russia.
It’s time for President Trump to recognize the impact of his trade policies on the energy sector. By reaching a comprehensive, bilateral trade deal with the Chinese, he can help to ensure the continued growth of the industry. This would deliver benefits to workers and consumers throughout the US, and especially in Texas.