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Robert Berke

Robert Berke

Robert Berke is an energy financial analyst with experience as a government consultant to the State of Alaska.  

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Is The U.S. Using Force To Sell Its LNG To The World?

The Trump Administration trade policy is nowhere so clear as in the energy area. For years it was thought that the younger Bush Administration was one of the most energy industry friendly in history. But the Trump Administration has gone far beyond that.

Hiring Ray Tillerson, the former CEO of ExxonMobil, as U.S. Secretary of State, sent a strong signal to the entire industry, even though his tenure proved to be temporary.

Prior to that, the Administration withdrew from the Paris Climate Agreement, a long-held priority of Exxon and the entire oil industry. Following hard upon that, the Environmental Protection Agency (EPA) has reduced or eliminated regulations limiting carbon and other pollutants.

Exxon has for more than a decade underwritten the now discredited, right wing attack on climate change as a hoax. Although the energy industry has now publicly acknowledged climate change as a global threat, in practice the subject is still largely ignored.

Going further, the Trump Administration has removed and reduced regulations that hampered the industry expansion, including allowing drilling on both ocean coast, while easing safety regulations that were brought into effect after BP’s Gulf of Mexico disastrous spill, the worst in U.S. history.

Government protected nature preserves are being opened to exploration and drilling for the first time in generations. Added to that was the dropping of regulations that for many years prohibited export of U.S. crude. Since then, the U.S. has become a major player in the global energy industry.

The Administration currently plans to rescind and lower fuel efficiency standards for autos and trucks. That is likely to encourage increased purchase of larger SUVs, increased oil consumption, and rising gasoline prices.

The Administration corporate tax cut, one of the largest in U.S. history, also strongly benefitted the energy industry, as it did other industries.

From the moment he chose to run for President, Trump has embraced the new shale revolution in the U.S. as a major contributor to the country’s economic growth and energy independence.

Increasingly, Trump has become the top promoter for increasing exports of U.S. Liquid Natural Gas (LNG) to world markets. He openly threatened to place economic sanctions on Germany if it went ahead with the deal for Russia’s new Nordstream 2 pipeline, that would nearly double natural gas supplies from Russia, Germany’s largest supplier.

As most observers noted, the U.S. sanction threat was accompanied by the offer of U.S. LNG to Germany and Europe, as a replacement of Russian gas.

No doubt that Trump’s bullying offended European sensibility, but despite the German protest regarding outside interference in its domestic economic affairs, and its intention to complete the Russian pipeline, Germany is quietly building up LNG importing facilities, "as a gesture to American friends."

Most energy experts agree that it is inevitable that U.S. LNG will eventually become a component of European markets, despite its significantly higher price to Russian and Norwegian gas, if for no other reasons to keep the peace with America, Europe's largest ally, and assure Europe’s access to the U.S. market.

This will also serve to assuage the U.S. complaints about unfair trade. It matters little that the U.S. trade deficit with Germany centers on its auto industry rather than energy, if the sale of natural gas serves to reduce the U.S. trade deficit.

Related: U.S. Will Not Release Oil From SPR To Offset Iran Sanctions

The same could be said about the U.S./China trade deficit. China, the largest energy consumer, is the one country where solutions to the trade deficit is clearly at hand, involving increased U.S. LNG imports. China already has a long-term, 20-year deal to import LNG from the leading U.S. LNG company, Cheniere Energy.

China could easily reduce the amount of gas imports from variety of other suppliers (i.e., Qatar, Australia, New Guinea, Iran, Russia) and replace these with U.S. supplies. That would be a near costless transaction for China, as it is already paying other producers for natural gas and LNG supplies.

Consider the effects of a possible LNG deal could have on the trade dispute. In terms of the current deficit, China sales to the U.S. is estimated at around $350 billion, while U.S. sales to the China is around $150 billion.

Last May, the China signed a $25 billion deal for importing U.S. LNG. If we assumed that in current negotiations the two countries could strike a modest deal for another $25 billion in annual U.S. LNG sales to China, U.S. sales to China increases to $200 billion, reducing China’s surplus to $300 billion.

If that were to take place, the trade deficit would reduce to around $100 billion, and Trump would no doubt return to the election campaign trail to boast of the first U.S. trade victory over China.

The risk to this scenario is the presumption that everyone involved really wants a solution to the trade dispute, but there is widespread suspicions that U.S. tariffs on China may be less about fair trade and more about economic warfare to contain China’s growth.

George Friedman's "Geopolitical Futures" recently noted that "The U.S. is beginning to see it [tariffs] more as a strategic opportunity to contain Chinese assertiveness than as a play to invigorate U.S. manufacturing."

On various Asian websites, there remains a stalwart band of journalists, led by Pepe Escobar, who maintain that Europe, Russia, China, and Iran will band together to thwart U.S. sanctions on Iran, and that 'Iran's oil sales will be totally unaffected. They also hold strongly to the opinion that China will not yield to U.S. threats and ultimatum.

This despite the fact that major energy companies, like Royal Dutch Shell and Total have already fled Iran in fear of US sanctions, while major countries are severely cutting Iran imports.

Sanctions against Iran will certainly reduce its exports substantially, with the worst case estimates of a loss to the markets of 1.5 million barrels of oil per day. This will also open opportunities in under supplied markets that will almost certainly be exploited by U.S. and other competitors.

Currently, Japan and India have agreed to major reductions of energy imports from Iran. Recent news has it that Sinopec, China’s largest oil and gas refiner, under threats of US sanctions, also agreed to severely cut imports from Iran. It's no secret that nearly all of Iran’s competitors, it's OPEC 'partners', will go after those under supplied markets, as will the U.S.

Some observers believe that because the upcoming election is uppermost in the minds of both U.S. political parties, a trade victory with China is extremely important to the Republican election campaign. If so, their thinking goes, a deal will result in easing tariffs with China by November.

Trump himself recently stated that he's ready to talk trade with China, but continues to add the qualifier, "not now." Many Trump watchers interpret this to mean that 'getting tough with China' plays well to Trump's base, boosts the Republican election prospects, and afterwards a trade deal is likely to be struck.

Any trade deal with China could also be used by the U.S. as a template for deals with Japan, India, and South Korea, the next largest Asian importers of natural gas. It can hardly be coincidence that, as in Europe, these energy importing countries are threatened by US tariffs over unfair trade.

However, Geopolitical Futures states that "the broad impression in China appears to be that Trump isn’t actually interested in a deal – certainly not one that China could accept – and that this is just the first major salvo in an emerging Cold War and that instead ... the world needs to get ready for a new cold war with China.

Related: Gazprom's Bid To Maintain European Energy Dominance

In a recent speech, Richard Haas, president of New York-based think tank Council on Foreign Relations stated that "...the Trump administration initially focused just on trade, “but now it’s broadening, and it almost seems as if the administration wants to have something of a cold war with China.”

What about Venezuela, a country estimated to have the largest oil reserves in the world, also laboring under U.S. sanctions? It's also a country about which the Administration has made no secret of its plans for a possible U.S. military invasion to topple the Maduro government.

Why go public with that story now, with only a little more than a month towards U.S. Congressional elections?

There is widespread speculation that this announcement may be a trial balloon, as part of the preparation for laying the ground work for an invasion aimed at bolstering Republican election prospects. To date, there has been no sign of opposition to these threats from Democrats.

Conclusion:

It's no accident that sanctions are aimed at the U.S. largest energy competitors, Russia and Iran, nor is it coincidence that the largest energy importers, Europe, China, Japan, south Korea are also under threat of U.S. tariffs or sanctions.

Instead, it clearly shows that the U.S. is using the threat of economic warfare and possible military conflict as leverage to open markets to the newest player on the world's energy market, American LNG.

If the U.S. is successful in these deals, it's likely that in future, there will be a parallel attempt to make inroads for US crude export to the very same oil importing countries, relying upon the very same LNG game plan.

By Robert Berke for Oilprice.com

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  • Mamdouh G Salameh on October 07 2018 said:
    It is true that President Trump wants to promote the sale of US LNG in the European Union (EU) and the Asia-Pacific region. Nothing wrong with that given the huge US shale gas production.

    It is also true that he threatened Germany with economic sanctions if it went ahead with the deal for Russia’s new Nord Stream 2 gas pipeline but the following day German Chancellor Angela Merkel not only gave President Trump short shrift but also announced the start of work on the Nord Stream 2 at the German side. Moreover, it is a plain lie that Germany is quietly building up LNG importing facilities as a gesture to America. The plain truth is that Germany is building LNG terminals not only for diversification of energy sources but also because of fast-rising demand for gas in Germany. Germany and the EU will only buy US LNG if its price matches the cheaper Russian piped gas.

    The US escalating trade war on China has hardly anything to do with China’s trade surplus with the US and allegations of China’s manipulation of the value of the yuan to its own benefit and much more to do with China’s launching of the petro-yuan which is already challenging the petrodollar in the global oil trade. It has also a lot to do with the fact that China’s economy has overtaken the United States’ to become the world’s largest economy based on the purchasing power parity (PPP) used by the IMF and the World Bank as a measuring stick.

    The imposition of tariffs on Chinese goods could be the first shots in the petro-yuan/petrodollar war of attrition. If a trade war between China and the United States erupts, China will not run from a fight with the United States and will retaliate by imposing its own sanctions on US exports. And to punish the United States financially, China could also resort to what is being dubbed as “the nuclear option”, namely offloading its holdings of US Treasury bills estimated at $1.3 trillion.

    China is not averse to buying US LNG but it will never buy it under duress or under the threat of US tariffs. China could secure all its LNG needs from Qatar, Australia, Russia and Malaysia.

    President Trump will soon realize the futility of his escalating trade war against China. It is a war he can’t win.

    As for US sanctions on Iran’s oil exports, market realities indicate that US sanctions on Iran are doomed to fail miserably and Iran will not lose a single barrel from its oil exports. One reality looking everyone in the face is that 95% of Iranian oil exports go to China (35%), India (33%), the European Union (20%) and Turkey (7%) and all of them announced that they will not comply with the sanctions. The remaining 5% goes to Japan and South Korea and both said they will apply for a US waiver and they will get it. Another reality is that China can singlehandedly nullify US sanctions by buying the entire Iranian oil exports of 2.2 million barrels of oil a day (mbd) and paying for them in petro-yuan.

    Under the former President Bush, the US invaded Iraq. And while the US won the military battles, it lost the war. The winners were China (in terms of investments in Iraq) and Iran (in terms of political influence in Iraq).

    Were the Trump administration to commit another folly by deciding to invade Venezuela, it may win the military battles but will lose South America as a whole. The real winners will be China and Russia.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business Scholl, London
  • Douglas Houck on October 07 2018 said:
    Most interesting article which rings true. Will be very interesting to see how all this plays out as it has the other side will not go quietly. High stakes indeed.
  • Dan on October 08 2018 said:
    Being that the planet has undergone cooling, heating, cooling, on and on since the beginning, it's time span for each cycle lasting many life spans thereby leaving the panic stricken, emotional left wing in throws of hysteria throughout history of mankind, I'm reminded of something my teacher taught us in kindergarten. " Keep calm people".
  • Robert on October 09 2018 said:
    Don't agree with many points in this article, and likewise it rambles on about several unrelated things rather than addressing the premise of the title. China just signed deals with Russia and Canada to import a lot of LNG, so while the US will become a major LNG exporter in the coming years, there are many other sources of LNG available to China and others, and LNG pricing will become more competitive - there is already a spot market in LNG, just like natural gas. US has no LNG export terminals planned for the west Coast and no new terminals are anywhere close to FID on the Gulf Coast. The Jordan Cove LNG project will export 75%+ Canadian gas, not US gas. Obvious left leaning author and disagree about US initiatives re China, and Venezuela. The playing field is clearly not level with China trade and tariffs seem to be the only way to get them to be a little more fair. Iran is a serious problem because they are trying to get their own nukes - does anyone besides Iran really want that? And the idea that US would invade Venezuela is baloney.

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