Tariffs and Sanctions: A New Energy Trade War?

The Trump Administration trade policy is nowhere so clear as in the energy area.  For years it was thought that the younger Bush Administration was one of the most energy industry friendly in history.  But the Trump Administration has gone far beyond that.

Hiring Ray Tillerson, the former CEO of ExxonMobil, as US Secretary of State, sent a strong signal to the entire industry, even though his tenure proved to be temporary.

Prior to that, the Administration withdrew from the Paris Climate Agreement, a long held priority of Exxon and the entire oil industry.  Following hard upon that, the Environmental Protection Agency (EPA) has reduced or eliminated regulations limiting carbon and other pollutants.

Exxon has for more than a decade underwritten the now discredited, right wing attack on climate change as a hoax.  Although the energy industry has now publicly acknowledged climate change as a global threat, in practice the subject is still largely ignored.

Going further, the Trump Administration has removed and reduced regulations that hampered the industry expansion, including allowing drilling on both ocean coast, while easing safety regulations that were brought into effect after BP’s Gulf of Mexico disastrous spill, the worst in US history.

Regulations have also been relaxed for flaring of natural gas from oil drilling sites, a major contributor atmospheric carbon.

Government protected nature preserves are being opened to exploration and drilling for the first time in generations. Added to that was the dropping of regulations that for many years prohibited export of US crude. Since then, the US has become a major player in the global energy industry.

The Administration currently plans to rescind and lower fuel efficiency standards for autos and trucks. That is likely to encourage increased purchase of larger SUVs, increased oil consumption, and rising gasoline prices.

The Administration corporate tax cut, one of the largest in US history, also strongly benefitted  the energy industry, as it did other industries.

From the moment he chose to run for President, Trump has embraced the new shale revolution in the US as a major contributor to the country’s economic growth and energy independence.

Increasingly, Trump has become the top promoter for  increasing exports of  US Liquid Natural Gas (LNG) to world markets.  He openly threatened to place economic sanctions on Germany if it went ahead with the deal for Russia’s new Nordstream 2 pipeline, that would nearly double natural gas supplies from Russia, Germany’s largest  supplier.

As most observers noted, the US sanction threat was accompanied by the offer of US LNG to Germany and Europe, as a replacement for Russian gas.

No doubt that Trump’s outrageous bullying offended European sensibility, but despite the German protest regarding outside interference in its domestic  economic affairs, and its intention to complete the Russian pipeline, Germany is quietly building up LNG importing facilities, “as a gesture to American friends.”

Most energy experts agree that it is inevitable that US LNG will eventually become a component of European markets, despite its significantly higher price to Russian and Norwegian gas, if for no other reasons to keep the peace with America, Europe’s largest ally, and assure Europe’s access to the US market.

This will also serve to assuage the US complaints about unfair trade.  It matters little that the US trade deficit with Germany centers on its auto industry rather than energy, if the sale of natural gas serves to reduce the US trade deficit.

The same could be said about the US/China trade deficit. China, the largest energy consumer, is the one country where solutions to the trade deficit is clearly at hand, involving increased US LNG imports. China already has a longterm, 20 year deal to import LNG from the leading US LNG company, Cheniere Energy.

China could easily reduce the amount of gas imports from variety of other suppliers (i.e., Qatar, Australia, New Guinea, Iran, Russia) and replace these with US supplies. That would be a near costless transaction for China, as it is already paying other producers for natural gas and LNG supplies.

Consider the effects of a possible LNG deal could have on the trade dispute.  In terms of the current deficit, China sales to the US is estimated at around $350 billion, while US sales to the China is around $150 billion.

Last May, the China signed a  $25 billion deal for   importing US LNG. If we assumed that in current negotiations the two countries could strike a modest deal for another $25 billion in annual US LNG sales to China, US sales to China increases to $200 billion, reducing China’s surplus to $300 billion.

If that were to take place, the trade deficit would reduced to around $100 billion, and Trump would no doubt return to the election campaign trail to boast of the first US trade victory over China.

The risk to this scenario is the presumption that everyone involved really wants a solution to the trade dispute, but there is widespread suspicions that US tariffs on China may be less about fair trade and more about economic warfare to contain China’s growth.

George Friedman’s “Geopolitical Futures” recently noted that  “The U.S. is beginning to see it [tariffs] more as a strategic opportunity to contain Chinese assertiveness than as a play to invigorate U.S. manufacturing.”

There remains a stalwart band of left wing journalists, led by the ever brilliant, Pepe Escobar, who maintain that Europe, Russia, China, and Iran will band together to thwart US sanctions on Iran, and that ‘Iran’s oil sales will be totally unaffected. They also hold strongly to the opinion that China will not yield to US threats and ultimatum.

This despite the fact that major energy companies, like Royal Dutch Shell and Total have already fled Iran in fear of US sanctions, while major countries are severely cutting Iran imports.

Currently, Japan and India have agreed to major reductions of energy imports from Iran.  Recent news  has it that Sinopec, China’s largest oil and gas refiner, under threats of US sanctions, also agreed to severely cut imports from Iran.  It’s no secret that nearly all of Iran’s competitors, it’s OPEC ‘partners’, will go after those under supplied markets, as will the US.

Sanctions against Iran will certainly reduce its exports substantially, with the worst case estimates of a loss to the markets of 1.5 million barrels of oil per day. This will also open opportunities in under supplied  markets that will almost certainly be exploited by US and other competitors.

Some observers believe that because the upcoming election is uppermost in the minds of both US political parties, a trade victory with China is extremely important  to the Republican election campaign. If so, their thinking goes, a deal will result in easing tariffs with China by November.

Trump himself recently stated that he’s ready to talk trade with China, but continues to add the qualifier, “not now.” Many Trump watchers interpret this to mean that getting tough with China’ plays well to Trump’s base, boosts the Republican election prospects, and afterwards a trade deal is likely to be struck.

Any trade deal with China could also be used by the US as a template for deals with Japan, India, and South Korea, the next largest Asian importers  of natural gas. It can hardly be coincidence that, as in Europe, these energy importing countries are threatened by US tariffs over unfair trade.

However, Geopolitical Futures states that “the broad impression in China appears to be that Trump isn’t actually interested in a deal – certainly not one that China could accept – and that this is just the first major salvo in an emerging Cold War and that instead … the world needs to get ready for a new cold war with China.

In a recent speech, Richard Haas, President of New York-based think tank, Council on Foreign Relations, stated that “…the Trump administration initially focused just on trade, “but now it’s broadening, and it almost seems as if the administration wants to have something of a cold war with China.”

What about Venezuela, a country estimated to have the largest oil reserves in the world, also laboring under US sanctions? It’s also a country about which the Administration has made no secret of its plans for a possible US military invasion to topple the Maduro government.

Why go public with that story now, with only a little more than a month towards US Congressional elections?

There is widespread speculation that this announcement may be a trial ballon, as part of the preparation for laying the ground work for an invasion aimed at bolstering Republican election prospects. To date, there has been no sign of opposition to these threats from Democrats.

Conclusion:

It’s no accident that sanctions are aimed at the US largest energy competitors, Russia and Iran, nor is it coincidence that the largest energy importers, Europe, China, Japan, and South Korea are also under threat of US tariffs or sanctions.

Instead, it clearly shows that the US is using the threat of economic warfare and possible military conflict as leverage to open markets to the newest player on the world’s energy market, American LNG.

If the US is successful in these deals, it’s likely that in future, there will be a parallel attempts to make inroads for US crude export to the very same oil importing countries, relying upon the very same LNG game plan.