Inside, confidential and off the record
Free trade has been a boon for Energy Independence.
for the U.S., Canadian and Mexican oil and natural-gas industries.
As turbulent as Donald Trump's political career has been thus far, he has always been consistent about two things: First, that the U.S. should aggressively pursue energy independence; second, that the U.S. is getting short shrift on its trade deals, including the North American Free Trade Agreement.
As the administration moves to modernize Nafta, however, it should remember that free trade with Canada and Mexico is vital to securing America's energy independence in the long run.
North America now leads the world in energy production, largely because the U.S. has become the No. 1 producer of crude oil and natural gas. This outcome was by no means obvious when Nafta became law in 1993. But by creating a free-trade zone for energy, the agreement helped all three countries' energy sectors flourish.
In 2016 the three North American economies produced a total of 22 million barrels a day of crude oil, associated liquids and biofuels, according to the Energy Information Administration, with 14.9 million barrels coming from the U.S. Saudi Arabia produced 12.4 million barrels a day and Russia 11.2 million. The fourth-largest producer, China, has less than half of Russia's production.
When it comes to natural gas, the numbers are even more skewed toward the U.S., which produced 27.1 trillion cubic feet in 2015 compared with Russia's 21.1 trillion. Third-ranked Iran extracts one-quarter of what the U.S. produced. Canada comes in fifth, after Qatar. Altogether, North America produced about 33.8 trillion cubic feet of natural gas in 2015.
But these solid figures, dominated by U.S. production, should not obscure an important point: Each of the three North American economies, and its energy sector, depends on the other two.
Canada and Mexico need the U.S. to buy their excess crude oil, and the U.S. needs its neighbors to cover its own shortfall. According to the EIA, the U.S. consumes about six million more barrels of crude oil and related products a day than it produces. The U.S. imports about three million barrels a day from Canada, its largest energy trading partner. Although total Mexican crude-oil production has been declining, Mexico still exports about 688,000 barrels a day to the U.S. With U.S. technology and investment, Mexican production and exports could be significantly higher—perhaps enough, together with Canada, to close the U.S. gap.
Canada depends heavily on U.S. refineries, especially in the Midwest and on the Gulf Coast, which specialize in processing Canada's heavy crude. Mexico also depends on the U.S. to refine its crude, which Mexico buys back as gasoline and diesel.
Another important result of Nafta is that more natural-gas pipelines are being built so the U.S. can help Mexico turn to cleaner-burning natural gas for its electricity generation. In 2016 the value of U.S. energy imports from Mexico was $8.7 billion, while U.S. energy exports to Mexico were $20.2 billion, for a positive energy trade surplus of $11.5 billion, according to the EIA. While most economists don't put much stock in international trade balances, the Trump administration cares a lot about them, and under Nafta the U.S. energy sector has a positive trade balance with Mexico.
Nafta's elimination of virtually all tariffs on energy-related goods has greatly enhanced North America's energy potential, but there is still room for improvement. A modernized Nafta should include a labor provision that allows workers in the oil and gas industry to travel to any of the three countries, especially in emergencies. Mexico needs U.S. technology and assistance to modernize and expand its energy sector, while the U.S. might need more workers in oil fields in places like West Texas.
A modernized Nafta should also recognize the threat that could emerge for North America if other major energy exporters tried to punish the U.S. for its foreign policies. Such an agreement might give Nafta countries preference for oil and gas purchases if, say, Iran blocked U.S.-bound tankers from passing through the Strait of Hormuz.
Free trade in energy across North America has transformed the industry, putting the continent on track to self-sufficiency while boosting economic growth for all three countries, especially Mexico. And if Mr. Trump really wants to reduce the flow of illegal aliens to the U.S., a thriving Mexican economy is the best way to do it.
Energy independence for the U.S. alone is still years away. But thanks to free trade, energy independence for North America is within our grasp. A modernized Nafta can help make that goal a reality very soon.
Merrill Matthews /The Wall Street Journal / January 1, 2017
( Mr. Matthews is a resident scholar with the Institute for Policy Innovation in Dallas. )
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