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Vanand Meliksetian

Vanand Meliksetian

Vanand Meliksetian is an energy and utilities consultant who has worked with several major international energy companies. He has an LL.M. from VU Amsterdam University…

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Oil Majors Win Big In New NAFTA Deal

President Donald Trump’s election shook the foundations of America’s alliance with two of its most important allies and trading partners: Canada and Mexico. His campaign promise to build a wall on the southern border of the U.S. and his tense relationship with Prime Minister Justin Trudeau, made renegotiating NAFTA a particularly difficult task. The U.S. had a clear advantage in negotiations due to its economic and political significance on the global stage. Trump’s preference for bilateral instead of multilateral deals increased pressure on the NAFTA signatories. Therefore, when Mexico signed a revised NAFTA or USMCA, Canada had no choice but to follow suit. Big oil, however, seems to be the real winner in this geopolitical battle.

The proportionality clause dies a silent death

NAFTA was signed in 1994 when the U.S. was still very much dependent on foreign oil and global warming wasn’t as big of a topic as it currently. From an American point of view, realizing a steady flow of energy was an important part of the agreement. The so-called proportionality clause, part of NAFTA’s article 605, prohibited restrictions that would cut shipments of Canadian oil below their three-year average.

Negotiators back in 1994 pushed for the clause after Canada approved a national energy program that prioritized domestic supply over exports, according to former Canadian Ambassador to the U.S. Derek Burney. Washington insisted on the provision due to its heavy dependence on foreign oil. Preference was given to Canadian oil, from a neighbor and ally, instead of overseas which could be interrupted or halted as it was during the oil embargo of 1973.

However, North American trade has significantly changed since 1994, a change that has influenced negotiations concerning the USMCA deal. The shale revolution has unlocked vast quantities of oil and gas, making the U.S. energy independent for the first time in decades. The proportionality clause, therefore, has become superfluous. The shackles on Canada’s energy industry have been loosened right at the moment when production is set to rise even further.

Big Oil’s big win

Despite the end of the proportionality clause, a level of cross-border dependence has remained. Oil produced in Alberta’s oil sands is attractive to Gulf refiners that are built to process heavier crude oil. Due to crashing Venezuelan production as a consequence of political and financial problems, dependency on Canadian oil is still present. Fracked U.S. oil is lighter and sweeter than other oils – a fact that refiners are still struggling to adjust to. Related: Russia’s Oil Output Won’t Go Much Higher

Although President Trump vowed to bring jobs back to the U.S., an obvious winner under the new agreement has been Big Oil. The investor-state dispute settlement process of NAFTA gave multinationals in some sectors the right to override domestic laws and regulations. USMCA limits those rights with one important exception: U.S. oil and gas companies. Investments made by American energy companies are protected against threats such as nationalization and tougher environmental safeguards.

American oil and gas companies have achieved another big win domestically. USMCA contains a provision that requires the U.S. government to automatically approve all gas exports to Mexico. This overrules previous rights of American regulators to limit exports in the name of the public interest. Mike Sommers, chief of the American Petroleum Institute said: "We urge Congress to approve the deal… Retaining a trade agreement for North America will help ensure the U.S. energy revolution continues into the future".

Many wins, the environment loses

Despite Trump’s ‘unorthodox’ style of politics and negotiations, he has delivered some of his campaign promises. A renegotiated NAFTA was a high priority, he achieved it. Improving what Trump called ‘unfair competition due to low wages in some countries’, has also been a stated aim of the President. With all the flurry and praising by Mexican, Canadian, and American leaders that the new deal is beneficial to all involved, one quickly forgets the big loser in this context: the environment.

Also, this is one of Trump achievements thus far in his Presidency: he was a climate change denier (until recently) and strongly supported the American fossil fuel industry. U.S. energy firms are now allowed to act unimpeded while also retaining certain rights concerning support against a change of heart in the government. This comes at a time when most of the world is investing heavily in alternative energy sources. North America risks being left behind in the next great energy revolution with leadership on this topic coming from China and the EU.

By Vanand Meliksetian for Oilprice.com

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  • Mike Walsh on October 23 2018 said:
    Good lord, could the liberal bias be any thicker?

    This deal is amazing, greenies are today's chicken little.
  • peter mare on October 24 2018 said:
    it is very clear that trump is a savvy salesman and even politician to those who believe his lies or fake-news. he claims to be no lo ger a climate change denier, but his actions are -and will be- consistently denying his claims. actions speaks louder than words, except for the gullible type.

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