The much hyped “trade war” that Donald Trump is apparently preparing for the southern neighbor of the U.S. could be over before its starts, as the full extent of the mutual dependency of the two countries is gradually revealed.
One of the major aspects of this mutual dependency is natural gas. The U.S. last year exported some 127.4 billion cu ft of gas to Mexico on a monthly basis, almost twice the amount it used to export two years earlier. This increase has been a boon for shale gas producers who were struggling with falling profits because of a hefty oversupply.
Mexico has helped clear up the glut and its need for gas is nowhere near satisfied: there are projections that demand for U.S. gas will reach 6 billion cu ft daily by 2020, from an average 3.5 billion cu ft daily in the first ten months of 2016. Mexico’s power generation industry needs fuel, and cheap fuel at that, and the U.S. shale producers are happy to supply it.
The situation at the moment looks like a stalemate: Trump wants to build the wall and he wants Mexico – and U.S. taxpayers– to pay for it. Pena Nieto appears unwilling to accept these terms. Then there’s Trump’s stated intention to do away with NAFTA in a bid to get things back to an every-man-for-himself style of regional trade policies. The combination of these is flammable.
It’s difficult to say who needs whom more. Mexico needs natural gas for the bulk of its electricity production: the fuel is responsible for 60 percent of the country’s power output. Last year, imports from the U.S. exceeded domestic production. Although Mexico is working hard towards expanding its own energy industry, this takes time and investments, and U.S. gas is cheap. So, Mexico clearly needs the gas, especially amid rising fuel prices at the pump – part of the government’s energy market liberalization efforts – that sparked huge protests. Related: Fundamentals Be Damned – Oil Price Correction Likely
For the U.S., Mexico was the biggest single export market for its natural gas in the first nine months of 2016. Exports to Mexico stood at 123 billion cu ft monthly for January-September, from a total of 185 billion cu ft exported monthly in the period. The annual increase was 79 percent. Meanwhile, exports to Canada, which is the other big market for U.S. gas, fell by 39 percent due to lower demand and sufficient local supply.
Now, if Trump goes ahead with the wall, despite protests, Mexico could hypothetically refuse to continue buying U.S. gas, which will most likely lead to increased electricity prices – and an urgent search for new sources of gas. These will further undermine the stability of the government, which is having a hard enough time already with unpopular reforms.
If the U.S. stops exporting gas to Mexico, the glut will return, prices will slump, and gas producers will once again have to fight for every breath they take. The problem is that the U.S. is not yet a truly global gas exporter. It has very comfortable pipelines to the north and the south, and although LNG terminals are being built at an unprecedented rate, the global LNG market is currently oversupplied, so the liquefied version is not really a viable alternative at the moment.
For now, all this is entirely hypothetical, but neither side seems to have a lot of useful moves.
By Irina Slav for Oilprice.com
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