There is a lot of talk about Mexico in the news. Wall or no wall, a 20% tax on imports could be retaliated and hurt our natural gas exports.
We are just over 10 days with a new administration in the Oval Office and we see Donald Trump, for better or worse, doing a lot of disrupting; not that there’s necessarily anything wrong with that. I am not here to discuss the politics or to speculate on President Trump’s stances; there is already way too much of that everywhere you look. Still, I don’t like the idea of new tariffs on imports from Mexico, which are only likely to produce new Mexican tariffs on our natural gas exports to that country.
What is interesting about the Mexico trade (and immigration) issue is the potential ripple effect on energy. Wall and trade debate turns some heads no matter where you sit and with the back and forth with Mexico, we are seeing how this may play out with natural gas exports to our disadvantage.
Mexico is a player in natural gas production to the tune of being in the top 20 producers. However, like many countries, they have a healthy demand exceeding their production. Just as the case with our neighbors to the North, the U.S. sends about 4 billion cubic feet per day over the border. That is around 5% of our daily production – up from 0.9 Bcf/d back in 2010.
Surrounding this increase is at its heart, a lot of jobs. As the projections for daily exports of natural gas increases, capacity to keep up with demand is going to be challenging. We currently have a 7.3 Bcf/d cap and since we are already sending 4 Bcf/d, the demand is expected to nearly double in the next three years. Mexico’s electrical generation additions, coupled with more manufacturing needs, is swelling their natural gas needs. Jude Clemente, Contributor at Forbes, correctly states:
“Over the next 25 years, Mexico’s power use is expected to double: the average Mexican consumes just 1/3 of the amount of electricity that the typical Organization for Economic Co-operation and Development (OECD) citizen consumes. Mexico’s electricity demand is booming at three times the rate of the OECD average. Mexico has just a few days of gas storage, versus almost three months for the OECD average. Moreover, Mexico has roughly 550 trillion cubic feet of shale gas that requires outside investment and expertise to develop. In future, natural gas will account for almost 70% of the growth in primary energy demand in Mexico.”
It is safe to say the demand for gas in Mexico is high and growing higher. Moreover, they depend on our gas to fuel their manufacturing. If the cost of gas rises too much from our pipeline liquid natural gas, then they may consider other sources. We all know Russia would be happy to take that one on.
President Trump’s decree to move the Keystone and Dakota Access Pipeline forward shows he is favorable to pipelines and energy exports. However, with the recent talk of a 20% tax on imports from south of the border, the Mexican government could very well turn around and impose a tax of its own – wall or no wall. I would hate to see the United States get into a tariff war with Mexico as companies like ONEOK Partners, Energy Transfer Partners and Kinder Morgan employ a lot skilled tradesmen and women. I haven’t been able to find job numbers for these projected projects, but if they are anything in line with the Dakota Access and TransCanada, expect construction on the multi-billion dollar projects to rake in 12,000 and 42,000 jobs, respectively.
Pushing the buttons a bit harder, is a tariff war with Mexico over illegal aliens worth threatening that many projected jobs and such a big chunk of our natural gas exports? I fully understand the pleas for immigration control and appreciate the need for a wall in that regard, but can’t we find other ways to pay for it?
Taxing earnings remitted to Mexico or paying for it ourselves would seem to make a lot more sense than a tariff sure to matched with a Mexican tariff on our natural gas exports to them. The opportunity costs alone could be staggering. From a gas perspective, we have a lot of risk and need to be extraordinarily careful. Tariff talk is dangerous and only raises US consumer prices. There has to be a better way to pay for a wall than walling ourselves in on trade.