Trump’s trade war hits oil and gas
Although Trump exempted oil and gas from tariffs, LNG could still become ensnared in trade retaliation, analysts say. And, of course, an unprovoked trade war could bring about economic recession.
President Trump’s global trade war wiped $2.5 trillion off of equity valuations on Wall Street on Thursday, the worst performance in five years.
Wall Street analysts are now ratcheting up their expectations that the U.S. — and perhaps the world — falls into an economic recession.
“The risk of recession in the global economy this year is raised to 60%, up from 40% earlier. Scenario where rest of world muddles through a US recession possible but less likely than global downturn,” J.P. Morgan analysts said.
There are two views on what comes next. Those that think Trump’s tariffs are here to stay, and those that think he is using them as leverage to negotiate trade deals on a country-by-country basis. Either way, Trump’s trade war is inflicting immense damage to the U.S. and global economy, and he has already pushed trade relations with many countries to breaking point.
Looking more narrowly at the energy sector, the impacts remain highly uncertain — much depends on the duration of the trade war, and to what extent other countries respond. But it is safe to say that Trump’s trade war will be damaging to both the clean energy and fossil fuel industries.
Crude oil prices fell by 7 percent, a meltdown that was magnified by OPEC’s decision to accelerate a return of crude oil production to the market.
Even before the debut of Trump’s trade war, the oil and gas industry had been uneasy about all the trade turmoil. At the CERAWeek conference in Houston in mid-March, trade uncertainty and tariffs dominated the conversation. Trump’s tariffs gave executives heartburn even as they simultaneously praised him for decimating U.S. climate policy and deregulating the energy sector.
But just a few weeks on from that conference, the industry’s concerns seem quaint, as they mostly concentrated on tariffs on foreign steel. At this point, the oil and gas sector has much bigger problems. A global recession is now on the cards, and global demand forecasts are quickly getting revised down.
Even still, the energy sector got somewhat of a reprieve from Trump’s assault on global trade. Trump exempted oil and gas from the tariffs, a recognition that the U.S. remains a massive consumer of fossil fuels. In particular, the U.S. imports more than 4 million barrels per day of oil from Canada.
U.S. natural gas prices did not move as much as crude oil. The completion of new LNG export terminals in the next few years will absorb a lot more of U.S. gas production. American LNG exports are expected to increase by “19% to 14.2 billion cubic feet per day (Bcf/d) in 2025 and by 15% to 16.4 Bcf/d in 2026,” according to the U.S. Energy Information Administration.
But the next wave of LNG projects is more vulnerable to shifts in sentiment. Several projects on the Gulf Coast are seeking buyers, and will need to obtain financing. These are sensitive times for such projects, and those that are struggling to drum up commercial interest could become casualties of the trade war.
“Retaliation by trade partners could result in counter tariffs on US LNG in the short term and impact long-term LNG contract discussions/investments. Potential levers to replace US LNG are Qatari LNG and more Russian pipeline gas (for China),” S&P Global Commodity Insights said in a statement.
Steel and aluminium tariffs are going to impose much higher costs on LNG terminals, which require enormous volumes of steel. Already, some LNG projects, such as Venture Global’s CP2 in southwest Louisiana, are reportedly trying to renegotiate prices with buyers because construction and labour costs are soaring. Steel tariffs will inflate costs further.
And those conversations are going to be a lot more difficult after the eruption of a full-blown trade war. What company will want to sign long-term contracts to buy U.S. LNG when the Trump administration has shown itself to be so unpredictable and unreliable? It is not difficult to imagine a scenario at some point in the future where Trump decides to curtail gas exports if domestic prices rise too high.
Likewise, how can banks have the confidence to make billion-dollar investments that have long-term payback periods on projects that could face retaliatory tariffs? After all, China decided to put tariffs on U.S. LNG earlier this year in response to U.S. tariffs, and China has now essentially stopped importing American gas.
“There is more at stake than meets the eye here as the future of the US LNG industry still hinges on large off-take agreements with buyers in Europe in Asia, who were just hit by sweeping tariffs,” Rabobank strategist Florence Schmit told Bloomberg.
Moreover, Trump saved some of his most painful tariffs for countries in Southeast Asia, where much of the global growth in LNG demand is expected to be concentrated. He put a 46 percent tariff on Vietnam, 37 percent on Thailand, and 32 percent on Indonesia. The U.S. is a key export market for those countries; tariffs are going to be a painful hit. As economic growth slows, that will diminish the need to import LNG.
The larger but more mature LNG markets of South Korea and Japan were not spared either. Trump slapped a 26 percent tariff on South Korea and 24 percent on Japan.
Trump has been pressuring Japan into supporting Alaska LNG in some way, either by signing on to long-term contracts or taking a stake in the project. Up until recently, the $50 billion project was thought to be economically unviable. It is unclear if the heavy-handed pressure on U.S. allies will yield any benefits for that project.
The situation facing the European Union is similar, although the EU has a larger scope for retaliation, if it chooses. For months, the European Union has suggested that it would be willing to buy U.S. LNG to smooth over trade tensions with the U.S., but the Trump administration has failed to clarify what precisely it wants. According to Politico, European diplomats hit a “wall of bureaucracy and disinterest in Washington.”
Despite European overtures, Trump hit the EU with a 20 percent tariff.
In fact, one through-line with the Trump administration is his antipathy towards Europe.
“They rip us off very badly,” Trump said on Wednesday when he unveiled his trade war, referring to the European Union. “It’s so pathetic.”
That echoes the language used by members of his inner circle. The still unfolding scandal involving top members of Trump’s cabinet who accidentally included a reporter on a signal chat regarding military strikes in Yemen reinforced the notion that Trump’s personnel genuinely hold anti-European views.
The EU will likely continue to try to use the prospect of larger LNG purchases as a bargaining chip. If talks do not make progress, top European officials have stated they are preparing calculated responses to hit back. A failure to ratchet down the tension would severely undercut the odds of commercial LNG deals between the two sides.
The best-case scenario for the industry is that the economic pain becomes so severe that Trump decides to cut deals and pull back on the tariffs. One obvious way to placate Trump, who has repeatedly pointed to country-specific trade deficits with the U.S., is to buy oil and gas. But as the efforts by the EU to discuss LNG purchases demonstrate, it is not clear that Trump even wants a deal.
In short, the trade war will impose serious headwinds on the oil and gas industry, which was already staring down a future of weak oil demand, and in the case of LNG, several years of oversupply. A global recession will sap demand, and the decision by Trump to abruptly shatter longstanding trade relationships will seriously complicate efforts by U.S. LNG developers to find customers around the world.