In his speech at the U.S. Department of Energy in June 2017, President Trump made it clear that his administration would pursue not just American energy independence, but “American energy dominance.” He stated that the United States would develop its energy resources, rather than obstruct investment. Now the Trump administration could potentially create a barrier for the energy sector by withdrawing from Nafta. Such a decision would severely handicap the energy industry in all three nations and slow economic growth.
The ongoing energy renaissance has resulted in an unprecedented expansion in the energy sector with decreases in consumer prices and significant increases in employment and wages. In 2015, the oil and natural gas industry accounted for almost eight percent of total U.S. GDP. This renaissance is in part due to states such as Texas that have pioneered new energy technologies such as hydrofracturing.
However, another factor of growth has been the increased role of trade in the U.S. energy market. Trade, specifically with our Nafta partners, has helped pave the way for the United States to become a net energy exporter by 2022 and has made the United States the largest producer of energy in the world. This industry growth is not limited solely to the U.S. market. Global Energy Institute President and CEO Karen Harbert estimated that North American countries now provide 19 percent of crude oil, 28 percent of natural gas, and 12 percent of coal output globally.
Although the United States previously imported large amounts of energy from its Nafta partners, crude oil and petroleum product exports to Canada and Mexico have grown exponentially since 2010, as illustrated in the graph below. From 2000 to 2017, U.S. exports of crude oil and petroleum to Mexico have increased from 131 million to 322 million barrels per year and to Canada from 40 million to 342 million barrels per year.
This rapid increase in exports helped create a $10 billion energy surplus with Mexico and lowered the deficit with Canada to $37 billion in 2016. Innovations in the energy industry, including hydraulic fracturing and horizontal drilling, have led to sharp increases in the supply of U.S. natural gas which are helping to further reduce the deficit with Canada.
Source: U.S. Energy Information Administration, “Petroleum and Other Liquids.”
The integration of our economies has placed North America closer to achieving energy self-sufficiency, a goal espoused by President Richard Nixon and successive presidents thereafter. This energy independence would not be achieved through producing more expensive green energy, as was advocated by many Republican and Democrat presidents, but by providing less-expensive gas and oil from fracking.
As early as 2020 North America will produce enough liquid fuel to satisfy regional demand and to export. This will transform North America into a dominant energy power and decrease the possibility of cost increases due to supply disruptions. The United States will be able to offset the power of those who use energy dependence as a political weapon, such as Russia's withholding of natural gas from Ukraine.
Unfortunately, North American energy dominance could remain little more than a dream if policy leaders fail to reach a Nafta consensus. The agreement made energy trade economically feasible through tariff elimination, investment protection, and a focus on removing trade barriers. The current agreement eliminated tariffs on crude oil, natural gas, and refined products such as kerosene-type jet fuels and distillate fuel oil. Each of these products could cost significantly more if higher tariffs were reinstated.
In addition to lowering prices, Nafta’s market access policies played a large role in decreasing trade barriers for each nation. This allows producers to take their products to the best possible consumers at the lowered price. Investment Protection clauses, such as the Investor-State Dispute Settlement, include provisions that offer investors protection by guaranteeing them timely and fair compensation against expropriation, giving companies the confidence to invest substantial amounts of capital in hopes of strong returns.
The effects of this liberalized energy trade could disappear if the United States fully withdraws from the agreement as President Trump has suggested. The result would be an increase in the price at the pump, a possible rise in industry unemployment, and a stall in future market expansions.
The energy sector, possibly more than any other, would become uncompetitive by any approach that does not focus on a “Do No Harm” renegotiation. The backbone of the American economy is dependent on trade with foreign nations. Nafta renegotiations should reflect this by strengthening the original agreement’s push to eliminate tariffs, increase market access policies, and focus on investment protections.
Jacob Reyes is a contributor to Economics21. Follow him on Twitter @Jacob_DReyes
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