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Sunday, May 14, 2017

The Key To The China Trade Deal

This past week, the USA and China announced the first trade deal since President Trump took office.  It's a deal that is the result of the constant focus that Trump has put on the issue both during the campaign and after taking office.  Most of the deal is small stuff, but it remains a good deal nevertheless.  One item has gotten a lot of attention:  China is opening its market to American meat.  This will likely help USA ranchers and related companies, but it's not the most important part of the deal.  The key term in this deal is that China is opening its market to importation of natural gas from the USA.  It's no big deal today, but it has the potential to be truly enormous.

To understand the importance of China importing American natural gas, you need to consider the following:

1.  The USA has enormous reserves of natural gas.  Because of fracking, America now has the world's largest reserves of natural gas.  There are estimates that America has a 300 year supply of gas even if no new fields are discovered.

2.  The USA is also developing the infrastructure to export nat gas.  Until recently, the only way to move natural gas out of the country was by pipeline.  That let America sell nat gas to Canada or Mexico, but nowhere else.  (Gas Pipelines don't run under oceans.)  Now, however, gas is being liquefied and transported in special ships designed to carry liquid natural gas or LNG.  There are marine terminals being developed on the Gulf of Mexico and in Delaware Bay among other places.  There are also shipping companies that are devoted to transporting LNG.  For example, Dorian LPG in Connecticut has 22 ships designed specifically to carry this cargo.  There are also ports for receiving the LNG in Europe and elsewhere.

3.  The price differential between nat gas in the USA and elsewhere is huge.  Because there is a huge supply in the USA, the American price is roughly $3.25 per unit.  In Europe, where the bulk of the natural gas is shipped in from Russia, the price is more than ten dollars per unit higher.  Similarly, the price of natural gas is much higher in China as well.

4.  China is a voracious consumer of energy.  Right now, it is coal that powers much of China's energy production.  On average, China is completing 40 or more coal fired electricity plants each year.  As the country modernizes, that rate of construction is expected to continue.

5.  The Chinese have a major problem with smog.  Beijing has seen weeks and even months during which the smog has been so bad that it is a major health hazard.  Coal fired power plants are one of the main causes of this smog.

6.  Selling American natural gas to China will result in a number of benefits for both countries:

     a.  Increased demand for US gas will mean more production and more jobs in the USA.
     b.  Higher American sales of gas will increase profits to companies and landowners in America.
     c.  Chinese construction of natural gas plants for electricity will reduce emissions and smog.
     d.  Chinese increased use of natural gas will mean lower costs for Chinese electricity consumers.
     e.  Chinese reliance on American natural gas will make China dependent on the USA.
     f.  Chinese switching to natural gas will greatly reduce carbon emissions (for those who care about that sort of thing.)

This has the potential to be a really big economic move.  It could add tens of billions of dollars to US exports to China each year.

This is the first true "win" in American/Chinese trade in a long, long time.

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