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Gregory Brew

Gregory Brew

Gregory Brew is a researcher and analyst based in Washington D.C. He is currently pursuing a PhD at Georgetown University in oil history and American…

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Why A Trade War Won’t Derail U.S. Energy Exports To Mexico

Oil rigs dusk

Fierce rhetoric from the Trump Administration, including promises to build a border wall and threats of a twenty percent tax on imports from Mexico to pay for it, have fueled speculation of a possible trade war between the United States and its third-largest trading partner. American goods and services trade with Mexico in 2015 equaled more than $500 billion. For Mexico, the border trade is even more important: the US is Mexico’s single largest trading partner and American demand for Mexican goods is the chief reason the country has been able to run a trade surplus.

Now, concerns are growing that restrictions on trade between the US and Mexico could affect the growing energy trade between the two countries. The bad news is that, after a somewhat chaotic exchange in which the Mexican president cancelled a visit to the US and the Trump Administration responded with threats of an import tax, only to backtrack on that threat, it’s tough to know what will come next in US-Mexican relations.

The good news, however, is that should US-Mexican trade be re-negotiated or a replacement to NAFTA, the 1994 trade agreement, be put into place, it’s unlikely to affect the growing cross-border energy trade.

Since moving to privatize its energy industry in 2013, Mexico has become heavily dependent on supplies of energy, particularly natural gas and gasoline, from the United States. The EIA reported that during 2016, American gasoline exports account for eighty percent of all Mexican gasoline imports, growing as a share of total Mexican gasoline consumption from thirty percent to over fifty percent since 2014.

The reason for the increase in Mexican demand for US gasoline is tied to the country’s energy reform plan. Over the course of 2016, gasoline prices in Mexico have increased by as much as twenty percent, triggering protests and increased political pressure to improve the country’s access to cheaper fuel.

Since 2014 the Mexican government has ended the state energy company Pemex’s monopoly on upstream operations and opened the country up to foreign investment. This has led to an increase in gasoline prices, as the Mexican domestic market became more competitive and domestic refinery yields fell, as a result of periodic outages in the country’s production of heavy crude sour oil.

So, until Mexico succeeds in expanding domestic production and refinery capacity through attracting foreign investment, it seems likely Mexican demand for cheaper US gasoline will continue.

Natural gas, as well as gasoline, is tying the two countries together. The shale boom in the US made American natural gas extremely attractive for Mexico, which depends on it for nearly sixty percent of its total electricity generation, a twenty percent increase from 2005. The EIA estimates that between 2016 and 2020, around sixty percent of Mexico’s electricity additions will come from natural gas. The agency predicts that this demand will be met mostly through imports, as it will take several years before Mexico is able to increase domestic production. That production has fallen off since the 1990s, according to the BP Statistical Review, and since 2010 have been in steady decline. Related: Iran To Export More Oil In February

The increase in natural gas imports from the US has been staggering. In 2015 Mexico imported 1052 BCF from the United States, an increase of nearly three-hundred percent over five years.

 

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LNG exports from the US to Mexico have also jumped, as Mexico now ties Chile as the major destination for shipments delivered from the US export terminal at Sabine Pass, LA. Related: Large Rig Count Gains Rock Oil Markets

With the situation as it is, experts predict that new trade negotiations between the US and Mexico, and even a potential trade war, likely won’t stop the flow of energy across the border. Demand from Mexico helps keep the price of natural gas from the US buoyant and supports the shale boom against faltering prices worldwide. Of course, if the relationship between Mexico and the US moves away from the free-trade of NAFTA, entire economic sectors will be affected. Cheap US energy helps Mexican manufacturing stay competitive, and a falling peso helps even more.

Given the degree to which Mexico depends on its trade with the US, President Trump appears to be in a strong position to negotiate a completely new deal. But the ties that bind US energy to the Mexican market means the sector could be left out of negotiations, as any trade restrictions will be selective, rather than sweeping.

President Trump himself has an interest in EnergyTransferPartners LP, which is involved in constructing a new pipeline to Mexico. Of course, should he decide to divest from his interests, it may alter his attitudes towards assisting US oil and gas companies from pursuing deals in Mexico. After proposing the twenty percent import tax and then just as suddenly backing away from it, the Trump Administration has signaled that it is not, as yet, ready to commit to a new specific trade policy with Mexico. This uncertainty will likely continue, but there’s a good chance oil and gas will be spared major disruptions.

By Gregory Brew for Oilprice.com

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