Trade war with China won’t be easy on New Mexico

September 4, 2018

New Mexico prospers on the new and innovative. Oil and natural gas production in shale formations has given us both. Starting about a decade ago, producers began to unlock massive new supplies of oil and gas from shale basins, using hydraulic fracturing and horizontal drilling, allowing the oil and gas to flow. This had led to a remarkable increase in U.S. energy production.

Thanks in large part to shale production in the Permian Basin in Texas and New Mexico, U.S. oil production last year reached its highest level in 14 years, and it’s expected to keep rising. Natural gas production is projected to grow 44 percent by 2040. In coming years, these trends are likely to keep oil and gas cheap and plentiful, and a great source of jobs, revenue and economic growth that already are resulting in profound changes, especially in New Mexico. For starters, lower energy prices have saved the average household more than $700 a year. When it comes to electricity, the economics increasingly favor natural gas and renewables.

The Permian Basin might hold nearly 500 trillion cubic feet of natural gas — enough not only to meet domestic needs for decades but also export to markets around the world. But this doesn’t necessarily mean the United States will be able to cash in on its energy abundance.

Politics can create problems. Regrettably, President Donald Trump’s trade policies threaten to undercut the competitiveness of U.S. liquefied natural gas and new export terminals planned for the Gulf Coast. Hundreds of billions of dollars could be lost in the escalating trade war with China. China holds the cards. China has proposed a 25 percent tariff on U.S. liquefied natural gas exports in retaliation against Trump’s trade policies. The tariff would impact U.S. energy companies that have already been hurt by earlier U.S. tariffs on steel that have raised the costs of plant construction, pipelines and production activity.

China isn’t just another customer. The U.S. Department of Energy says that China, as it accelerates its transition from coal to cleaner-burning energy sources, will be the fastest growing market for liquefied natural gas in the world. The U.S. needs China’s business far more than China needs our liquefied natural gas. Instead of buying natural gas from the U.S., China may decide that the U.S. is an unreliable trade partner and turn instead to other liquefied natural gas suppliers, particularly those in the Middle East, Australia and Russia.

There are indications that Chinese investors already are backing out of deals to build liquefied natural gas terminals on the Gulf Coast, potentially leading to the loss of thousands of construction jobs and undercutting the Trump administration’s goal of achieving energy dominance in the world.

Without China as a market for liquefied natural gas, U.S. energy production would be derailed. The natural gas being produced in the Permian is associated gas from oil production. Right now, the glut of gas is so great that gas is being sold for next to nothing. Without a major buyer such as China, the gas glut will continue to grow, destabilizing the entire U.S. energy sector. Policymakers and business leaders will need to tread carefully.

Jim Constantopoulos, Ph.D., is a professor of geology and director of the Miles Mineral Museum at Eastern New Mexico University.

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