USMCA Solidifies The Best Oil And Natural Gas Alliance Ever

[Tom Kirkman + 8,860]

A bit of perspective during the current panic, when many seem to be losing their minds, and leaders are running around like chickens with acorns bombarding their pointy heads.

USMCA Solidifies The Best Oil And Natural Gas Alliance Ever

Amid the current COVID-19 calamity, let me focus on something very positive in the energy space: the trade alliance between the U.S., Canada, and Mexico. In short, the USMCA is a revamped version of the NAFTA deal and solidifies the greatest energy partnership in the world. It could now go into effect July 1, or hopefully about when our world is getting “somewhat back to normal.”

USMCA makes sure that there are no tariffs on the flow of energy products across North America. It also establishes more flexible rules of origin requirements for oil and natural gas traded between the three countries. This is a great thing because North American energy markets are deeply integrated and interconnected. The free flow of energy products and investments in oil and gas is essential to U.S. “energy dominance” and economic growth. The U.S. easily leads in energy production, in recent years yielding 25% more oil than second place Saudi Arabia and 25% more gas than second place Russia.

There are a number of energy areas involved, namely electricity connections, pipeline links, and oil and gas partnerships. But, let me specifically focus on three, the rapidly growing areas of: U.S. crude oil imports from Canada, U.S. natural gas exports to Canada and Mexico, and U.S. oil product exports to Mexico.

Even though U.S. crude oil production has risen 160% in the shale-era since 2008, imports from Canada have continued to soar. The U.S. shale revolution has yielded a lighter crude, while our refineries are based on processing the heavier grades that have long been imported from Venezuela, Mexico, and Canada. And with the first two of those suppliers facing domestic production declines, Canada has filled the void. And some areas of the U.S. are removed from our shale plays so looking north for supply makes sense. In 2019, Canada accounted for nearly 60% of U.S. crude oil imports, up from less than 20% in 2007.

Indeed, I called it a few years ago: “Canada is North America's Great Oil Security Blanket.” Canada could offer as much as a quarter of new global oil supply in the decades ahead, flows that will be available for export since incremental domestic demand needs are quite low. Oil is the heart of the ~$120 billion in bilateral annual energy trade between the U.S. and Canada.

 

 

... Mexico really needs cheap U.S. gas to keep its own costs low. With falling domestic production amid rising demand, Mexico gets some 70% of its overall gas supply from its northern ally. Gas is being relied upon to lift a mostly poor population out of poverty. Per capita, Mexico still has electricity usage rates that are just a third of its OECD partners and just one-sixth of the U.S. Researchers at Stanford University report the plan: “Reducing Energy Poverty With Natural Gas.” And the International Energy Agency, our OECD advisor, wants us using more gas to lower greenhouse gas emissions.

 

 

 

... With oil production sliced in half over the past 15 years, Mexico needs all the help that it can get. Oil sales account for a quarter of the federal budget. At over $100 billion, Pemex the national oil company is the most indebted energy producer in the world. “Mexico’s state oil company hasn’t paid hundreds of workers for months.” In all ways imaginable, never forget that a prospering Mexico is great for the U.S.

 

The USMCA is vital to the energy sectors and economies of all three partners. In an energy world where Russia wants to supply China and Iran wants to supply India, a united North America energy alliance is increasingly the basis of our national security. COVID-19 is exposing the enormous problem of relying on distant supply chains for such essential goods.

For the U.S., free trade lifts industry and the country as a whole. Americans should know that energy exports are vital markets for U.S. products. They allow for more production, more employment, and help to lower costs here at home. “Overwhelmingly” so, this explains why our exports enjoy bipartisan support, unfortunately a rare amity these days.

Let the era of North American “energy dominance” be upon us.