Ten years ago, officials of the US government would have thought twice about imposing sanctions on three of the world's top 12 oil-producing countries. They would have worried about oil supply. Markets, similarly fretful, would have become nervous. The mere possibility of retaliation in the oil market would have increased prices.
When the US this month toughened sanctions on countries with combined output of 17 million b/d of crude oil, supply drew scant attention. Markets shrugged. Clearly, concern about oil supply does not constrain US decisions in international affairs to the extent it once did.
Officials from the US, Canada, and Mexico should consider this new geopolitical latitude when they renegotiate the North American Free Trade Agreement-starting as early as Aug. 16.
Complacency and desperation
Complacency is never in order. But the sanction targets-Russia, Iran, and Venezuela-need desperately to sell oil and would hurt themselves more than others by cutting production for political reasons. Their desperation results from prices stubbornly low in a market sated by development of unconventional resources in the US and Canada. In the past decade, US production of crude oil has jumped to 9.2 million b/d from 5 million b/d, Canadian output to 3.8 million b/d from 2.6 million b/d. Production in Mexico has fallen by 1 million b/d to 2.1 million b/d, but prospects there are brightened by fiscal reform and encouraging bid rounds.
Well-developed and expanding energy trade among the three countries facilitates the net production rise and amplifies the geopolitical benefits. Further gains in output of crude oil, natural gas, and gas liquids soon will make the trilateral bloc a net energy exporter.
Testifying last month before the US Senate Committee on Energy and Natural Resources, Manhattan Institute Senior Fellow Mark P. Mills underscored the global significance of this development. He noted that among the world's five major economic regions, accounting for three fourths of global gross domestic product, China, Europe, Japan, and India all are net and rising importers of petroleum and natural gas. "Only North America is essentially energy self-sufficient and moving rapidly towards becoming a net exporter," he said. "…Until very recently, the Middle East and Russia were the primary sources of new marginal supply in world energy trade."
The extent to which Mexico, Canada, and the US benefit from their growing prominence as energy suppliers, individually and collectively, depends greatly on the extent to which they continue to trade energy freely. Logistical efficiencies related to trade increase options for regional exports and lower costs of resource development, boosting production. Much, therefore, is at stake in NAFTA renegotiation.
Although US President Donald Trump has retreated from the protectionist rhetoric of his campaign, he told Congress on May 18 that he wanted to modernize NAFTA, initiating a 90-day comment period. On July 17, the Office of the US Trade Representative published objectives for NAFTA renegotiation, a step required 30 days before talks can begin. The objectives cover a range of subjects and seek, according to a press statement, "a much better agreement that reduces the US trade deficit and is fair for all Americans by improving market access in Canada and Mexico for US manufacturing, agriculture, and services."
Industry concern
The American Petroleum Institute, Asociacion Mexicana de Empresas de Hidrocarburos, and Canadian Association of Petroleum Producers responded with a position paper focusing on economic issues important to oil and gas. The statement warns, "Any changes that disrupt energy trade across our North American borders, reduces investment protection, or reverts to high tariffs and trade barriers that preceded NAFTA could put at risk the tens of millions of jobs that depend on North American trade and interdependent energy markets."
NAFTA can be improved. Market and technological changes occurring since the agreement's implementation 23 years ago necessitate updates at least. But change must be prudent. Mistakes would have geopolitical as well as economic consequences.
"Do no harm," implores the joint industry statement. That's good advice.
