PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Global Markets: Big U.S. Benefits from Trade in Energy

By at 26 March, 2018, 11:02 am

by Raymond J. Keating-

The U.S. economy, including small businesses and consumers, derive enormous benefits from international trade on the energy front, and policymakers need to appreciate this economic fact of life and not undermine such trade with misguided measures, including any undermining of free trade with Mexico and Canada via NAFTA renegotiations.

The U.S. Energy Information Administration recently released a few reports spelling out some positive trends on trade.

Natural Gas Production and Exports Up

First, U.S. natural gas production continued its decade-plus growth in 2017 (up 1 percent over 2016 and just slightly below the 2015 record level). Recall that the U.S. surpassed Russia as the world’s top natural gas producer in 2009.

As noted in the following chart (courtesy of the EIA), U.S. natural gas exports have grown dramatically.

On natural gas exports, the EIA reported:

“U.S. natural gas pipeline capacity into Mexico has also increased over the past few years, driven by growth in demand for natural gas from Mexico’s power sector and favorable prices compared with natural gas supplied by LNG shipments. U.S.-Mexico natural gas pipeline capacity is currently 11.2 Bcf/d, with another 3.2 Bcf/d of capacity scheduled to be added later in 2018. Pipeline exports to Mexico have grown along with pipeline capacity, more than doubling since 2014 and averaging 4.2 Bcf/d in 2017.

     “U.S. LNG exports increased dramatically over the past two years as new liquefaction capacity has come online. The only liquefaction terminal previously operating in the United States—the Kenai LNG terminal in Alaska—ceased operations in 2015. In 2016, as the Sabine Pass LNG terminal in Louisiana began to ramp up operations, U.S. LNG exports increased. Sabine Pass now has four operating liquefaction units, with a fifth currently under construction. 

     “The Cove Point LNG facility in Maryland exported its first LNG cargo on March 1, 2018. Cove Point is the second currently operating LNG export facility in the United States, after Sabine Pass. Four other LNG projects are under construction and expected to increase U.S. liquefaction capacity from 3.6 Bcf/d to 9.6 Bcf/d by the end of 2019, further increasing U.S. natural gas exports.”

The approval and building of LNG export facilities have been big economic plusses for the U.S.

Crude Oil Production and Exports Up

Second, U.S. crude oil exports have jumped dramatically since limits of crude exports were lifted in December 2015 (see the following chart from the EIA). In fact, crude oil exports nearly doubled in 2017 compared to 2016.

In terms of destinations, the EIA noted, “U.S. crude oil exports went to 37 destinations in 2017, compared with 27 destinations in 2016. Similar to previous years, Canada remained the largest destination for U.S. crude oil exports, but Canada’s share of total U.S. crude oil exports continued to decrease, down from 61% in 2016 to 29% in 2017. U.S. crude oil exports to China accounted for 202,000 b/d (20%) of the 527,000 b/d total increase. China surpassed the United Kingdom and the Netherlands to become the second-largest destination for U.S. crude oil exports in 2017.”

And in terms of crude production and the ability to export, the EIA reported, “Increasing U.S. crude oil production and expansions of U.S. pipeline capacity and export infrastructure facilitated increased crude oil exports. U.S. crude oil production reached 9.3 million b/d in 2017, a 0.5 million b/d increase from 2016.”

U.S. Energy Exports to Mexico Up

Third, an EIA analysis zeroed in on U.S. energy exports to Mexico exceeding imports for the third year in a row. But the level of exports relative to imports isn’t the key economic point. Instead, the standout point in this analysis is the dramatic recent growth in U.S. energy exports to Mexico, with a particular big jump higher in 2017 over 2016.

The big factor is petroleum products, as explained by the EIA:

“Petroleum products such as finished motor gasoline, distillate fuel oil, and propane account for most of the value of energy exports from the United States to Mexico. In 2017, Mexico was the destination for more than 1 million b/d of petroleum products, up from 880,000 b/d in 2016. This level was 24% of all petroleum products exported from the United States. These exports were valued at more than $23 billion dollars in 2017. In 2017, petroleum product exports to Mexico rose in both amount and value. Changes in Mexico’s utilization of petroleum refineries have created a widening gap between its domestic supply and demand, and U.S. gasoline exports now make up more than half of Mexico’s gasoline consumption.”

A second significant factor is on the natural gas front:

“Natural gas exports to Mexico from the United States—either shipments by pipeline or liquefied natural gas (LNG) cargoes—were 4.6 billion cubic feet per day (Bcf/d) in 2017. This natural gas trade is dominated by pipeline shipments to Mexico, which made up about half of total U.S. natural gas exports in 2017. Increasing shipments of natural gas by pipeline to Mexico are contributing to the United States’ emerging status as a net natural gas exporter. Natural gas pipelines currently under construction or in planning stages are expected to nearly double the pipeline natural gas exporting capacity from the United States to Mexico by 2018. Much of this natural gas will likely be used to generate electricity, as Mexico’s energy ministry expects to add significant natural gas-fired electricity generating capacity through 2029.”

For good measure, Mexico ranks as the top destination for U.S. LNG exports.

Expanding Energy Production and Exports Good News for Small Businesses

As we reflect on these energy trade numbers, two reminders are needed. First, energy very much is an industry about small business. When it comes to the number of employer firms in key sectors, energy is overwhelmingly a small business industry. For example, as SBE Council has noted before (and according to the latest data from the U.S. Census Bureau (2015):

● 89.6% of employer firms among oil and gas extraction businesses have fewer than 20 employees;

● 77.3% of employer firms among drilling oil and gas wells businesses have fewer than 20 workers;

● 80.7% of employer firms among support activities for oil and gas operations businesses have fewer than 20 employees,

● 58.2% of employer firms among oil and gas pipeline and related structures construction businesses have fewer than 20 workers,

● and 51.5% of employer firms among oil and gas field machinery and equipment manufacturing businesses have fewer than 20 employees.

Increased energy production, thanks to a significant degree to expanding export markets and opportunities, is great news for small business.

U.S. Leadership For Free Trade Needed

Second, and finally, this energy trade story should make it clear that U.S. policymakers should be working to reduce barriers to trade by entering into and expanding free trade agreements. That includes strengthening and modernizing – not undermining – NAFTA, given the noted importance of U.S. energy trade with Mexico and Canada.

If NAFTA were to go away, the resulting higher tariffs and other trade barriers would mean reduced U.S. energy production, jobs and growth in the United States. Indeed, that goes for trade more broadly. If the U.S. imposes tariffs on other nations, those countries inevitably will retaliate, and given U.S. global energy leadership, U.S. energy exports will likely become targets for such retaliation, including U.S. refined petroleum products.

On the governmental front, a coherent energy agenda features the reduction of onerous taxes and regulations – that process has been moving ahead over the past year-plus – and reduced governmental barriers to international trade via free trade agreements.  The Trump administration has not accelerated the pace on negotiating free trade accords (and unfortunately the U.S. has exited the Trans Pacific Partnership); has created uncertainty around existing trade accords, such as NAFTA and the U.S.-South Korea accord; and will be imposing tariffs and is threatening more.

Raising taxes and imposing more regulations – whether domestically, or on entrepreneurs and businesses in the international marketplace – work against prosperity for U.S. businesses, workers and consumers.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

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