China Is Thirsty For American Liquefied Natural Gas, But Trump's Tariffs Are Messing It Up

America is blessed with an extraordinary opportunity. China is an emerging great economic power, and that should be good news, because in order to maintain its economic dynamism, China must recognize that the United States is in a remarkable position. China’s rising hunger for more oil and natural gas from a secure source of supply means that it will depend more on energy exports from the United States.

But the flip side of the coin is that the U.S. also needs China as a major trade partner. Especially for U.S. liquefied natural gas, a critically important energy resource. So much natural gas is being produced in the prolific Permian basin in West Texas and New Mexico that it’s currently selling at below breakeven prices. Energy experts estimate that the Permian may hold 500 trillion cubic feet of natural gas, which could supply more than 50 years' worth of gas. Because this is associated gas that comes from the production of oil, a major market for the natural gas is needed to enable further oil production. Without a market like China, energy production in Texas’s Permian and Eagle Ford Regions (which together produce more oil than either Iran or Iraq) would be disrupted.

China craves U.S. natural gas, and it has emerged as the most important and fastest-growing market for America’s LNG. China needs the gas to sustain economic growth and reduce air pollution from the burning of coal for electricity production. Chinese companies have shown their willingness to pay a higher price than their European counterparts for the security of LNG supply. Eager to obtain LNG, Chinese companies are investing billions of dollars in new Gulf Coast terminals and tankers to support the shipment of LNG to China. The U.S. Energy Information Administration projects that China’s demand for natural gas in the coming decades will grow the fastest worldwide, nearly tripling to 57 billion cubic feet a day by 2040.

However, there is a fly in the ointment. President Trump recently announced plans to impose a 10 percent tariff on $200 billion worth of Chinese goods. In retaliation, China said it would impose a 25 percent tariff on U.S. LNG if the Trump administration goes ahead with its threat to escalate a trade war. Much of the U.S. LNG destined for shipment to China could wind up going to other countries, such as Japan and South Korea, but a trade war could undercut the competitiveness of American LNG and the new export terminals planned for the Gulf Coast. Instead of buying American LNG, China could purchase it from Australia, Qatar, and other exporting countries.

Trump should rethink his harmful protectionist trade policies that have already hurt U.S. energy companies through earlier U.S. tariffs on steel, which have raised the cost of building facilities like LNG terminals, gas processing plants, and pipelines.

Energy trade with China is in our economic interest, providing significant benefits for both countries. Natural gas trade, with its expensive infrastructure and long-term contracts, tends to naturally tie suppliers and customers together.

Fueled by economic growth and the desire for cleaner air, natural gas consumption in China is reaching new peaks. As a business proposition, shipping American LNG to China could be worth hundreds of billions of dollars in the years ahead. Let’s not allow political disagreements over trade and a damaging trade war to jeopardize access to the world’s greatest market for America’s abundant LNG.

Mark J. Perry (@Mark_J_Perry) is a contributor to the Washington Examiner's Beltway Confidential blog. He is a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan's Flint campus.

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