I'm Movin' Out - Oil and Gas Exports, Trade Wars, and the Implications for U.S. Producers

All this talk of trade wars is one more thing for U.S. oil and gas producers to worry about. That’s because overseas exports are the only thing balancing natural gas and NGL markets, and increasingly crude oil also relies on exports to clear light-sweet volumes from U.S. shale plays. More than half of propane produced in the U.S. already moves out of the country via ship, with China, Japan and South Korea among the highest-volume destination markets. Only about 3 Bcf/d of natural gas has been exported as LNG over the past few months, but there was only one lower-48 LNG export terminal operating until last week. In a year there will be six terminals pumping out LNG to overseas markets. And so far this year, an average of 1.4 MMb/d of crude oil — one-seventh of U.S. production — has reached the waterborne export market, not including all the gasoline and distillate exports. As exports assume an ever-larger role in U.S. hydrocarbon markets, it is important to consider ramifications of possible constraints on exports, including the potential for trade retaliation in response to President Trump’s recently announced tariffs on steel and aluminum. Exports, one of the key topics we’ll consider at our upcoming School of Energy — Spring 2018, is the subject of today’s blog.

It’s hard to say where all this trade-war talk may lead. Possibly nowhere. But with U.S. energy producers highly dependent on exports for market balancing, the topic surely is raising some angst in places like the Permian and the Marcellus/Utica. The obvious question is, what if there’s retaliation? (Which is sort of like asking if you’ll get stung if you stick your hand in a hornet’s nest.) China is the world’s largest steel producer; Japan ranks second. Both also are among the largest importers of U.S. crude, LNG and propane. What if they decide to respond to a threatened 25% tariff on steel imports by slashing their hydrocarbon purchases from the U.S. and buying what they need elsewhere? And then there’s Canada, Brazil and South Korea, which export more steel to the U.S. than anyone else. They’re important buyers of U.S.-sourced energy too. How might they retaliate to U.S. tariffs on one of their most important products?

Aluminum, which faces a possible 10% tariff, is a similar story. China is the world’s #1 aluminum producer by far; followed by Russia and Canada. The U.S. is a huge importer of aluminum; 90% of the lightweight metal Americans use in everything from cans of Bud Light to fighter jets comes from foreign sources. Canada accounts for about half of all U.S. aluminum imports, followed by Russia, the United Arab Emirates (who knew?!) and China. Canada in particular is ticked off. Both its prime minister and foreign minister have used the same very un-Canadian phrase to describe the threatened steel and aluminum tariffs: “Absolutely unacceptable.” There’s a chance that Canada may be exempted from the aluminum tariff — the U.S. military likes being able to turn to its (so far) friendly northern neighbor for the high-grade aluminum it needs. But in this very heated environment, all bets are off.

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