Oil, gas, and trade

Feb. 26, 2018
Because energy regulation must work in concert with, rather than separately from, foreign policy, US President Donald Trump threatens to compromise his achievements in an important area. It's an area in which mistakes can be economically and politically devastating.

Because energy regulation must work in concert with, rather than separately from, foreign policy, US President Donald Trump threatens to compromise his achievements in an important area. It's an area in which mistakes can be economically and politically devastating.

In domestic energy policy, Trump has accomplished much. He has reversed a costly course onto which his predecessor steered the country. He has removed unnecessary regulations imposed on hydrocarbon energy during the Obama administration and unbridled oil and gas leasing of federal land. Under Trump, mitigation of climate change no longer is the energy priority, worthy of economic sacrifice. Trump has returned the development of oil and gas resources to favor for the simple reason that it helps the economy grow.

Welcome change

The change in orientation is welcome. The federal government now embraces oil and gas supply surges that began during Obama's presidency in defiance of a hostile regulatory regime. Thanks to new and growing supply from unconventional resources such as shales, the country's trade position is changing fundamentally. Dependence on oil and natural gas from abroad, once a founding assumption of US energy policy and diplomacy, is shrinking fast.

In its Annual Energy Outlook 2018 published this month, the Energy Information Administration projects that the US will become a net exporter of energy under all but two of seven sets of assumptions, beginning as early as 2020. In EIA's reference case, the US-already a net exporter of oil products-becomes a modest next exporter of total oil on a volume basis in 2029 and retains the status through 2045. In that scenario, the US soon becomes a major net exporter of natural gas.

A decade ago, when the unconventional-resources boom was beginning, such a shift in US energy trade was unimaginable. The government had to calibrate foreign policy to the country's chronic need to import oil and gas. Although it could and did try to punish miscreant exporters by banning purchases of their oil, it had to tread carefully with other sellers. Now, motives have changed. The US still must import oil and gas. But it has a strengthening interest in the free movement of energy in trade and a growing need to defend its ability not just to buy but also to sell oil and gas abroad.

Trump's approach to trade in general therefore creates concern. The president has begun to act on the nearly xenophobic rhetoric on which he campaigned. He withdrew from the Trans-Pacific Partnership last year and forced a renegotiation, now in progress, of the North American Free Trade Agreement. In January, his administration imposed tariffs on washing machines and solar cells and modules. And on Feb. 16, the Commerce Department recommended tariffs on imported steel pipe and aluminum.

This combative approach to trade is clumsy, ineffective, and dangerous. The tariff on solar panels, for example, targets heavily subsidized manufacturers in China. But it comes too late. Beijing overstimulated its solar-equipment industry and forced several Chinese manufacturers into insolvency. The tariff thus responds to a mistake with a mistake, inviting Chinese retaliation and raising prospects for a trade war.

Unwanted outcome

That's the last outcome Trump should want. Trade wars cause recessions. The president's more inward-looking supporters might not care. But the economy is global now, and they must get over it. Trump himself might be inclined, as the grand dealmaker he fancies himself to be, to pressure trade partners to see who blinks first. If so, he'll be gambling with too much. Indeed, he'll be gambling with his presidency.

Trump's political support comes from an uneasy partnership of base supporters who think he cannot err and economic conservatives who like his policies but not his bluster. The bonding agent is economic growth. Recession triggered by an unnecessary trade war would dissolve the alliance and weaken the president politically. So why accept any risk at all for recession amid an energy renaissance? Only Trump can answer that question.