Energy was one of the most freely traded goods in the post-Second World War era, even behind the Iron Curtain. A flood of sanctions has eroded that in recent years. But are the latest EU-US trade deal and Donald Trump’s tariff threats an even greater danger?
Under Thursday’s trade pact, the EU has agreed to buy an extra $250 billion of US energy each year until 2027, and invest $600 billion in the US by 2028.
Separately, Mr Trump has proposed “secondary tariffs” on countries buying Russian oil, notably India. US Treasury Secretary Scott Bessent told China that it would face 100 per cent tariffs if it continued to purchase Russian oil, for which it is the biggest customer.
The reality of the European deal can be dismissed in detail.
Impossible numbers
The bloc imported $76 billion of American coal, liquefied natural gas (LNG) and oil last year. The US exported $318 billion of energy to all its customers, and EU customers imported nearly $407 billion of energy from all suppliers. So, the US would have to divert all its energy exports to Europe, and Europe would in turn have to buy almost exclusively from America.
Yes, US LNG exports are set to rise substantially. Here are some easy gains in energy trade for the EU. The last remnants of the old Russian gas empire will be swept away, as Brussels plans to end imports from its hostile neighbour by 2027.
But prices are likely to fall as new supply comes online over the next five years, from Qatar, the UAE, Canada and elsewhere as well as the US. Japan and South Korea have also agreed to buy more American energy products. Meanwhile, the EU’s bulk energy buys will probably keep falling, as renewables and electric vehicles meet more of its needs.
“Europe” does not buy energy – its companies and consumers do. There is no way for Brussels to redirect energy trade on the massive scale required to meet these commitments. Big chunks of the imports are from Norway, Algeria and Azerbaijan, tied into the EU by gas pipelines. These are not going to be diverted elsewhere, whatever the White House tries to dictate.
Similarly, US companies decide whom to sell to on commercial, not political grounds. Here, admittedly, some combination of arm-twisting and subsidies might divert trade. But that is more likely to relate to large, visible, single inward investments such as Japan’s reported interest in the $44 billion Alaska LNG project.
One-trick trade pony
European companies would invest in renewable, hydrogen and electric vehicle projects in the US – but these are undercut by the current administration’s hostility. The withdrawal of tax incentives, increased barriers to receiving permits, and onerous rules on foreign content, make them unappealing. As Nippon Steel found out in its purchase of US Steel, sizeable foreign acquisitions of American companies are also likely to face unreasonable opposition and an opaque process of lobbying to win approval.
The reliance on energy sales shows the US to be a one-trick trade pony – or at best, three tricks, including agricultural goods and weapons. Its other goods are not very competitive – gas-guzzling cars and planes that fall out of the sky – and will become even less so as tariffs drive up input costs for key materials such as aluminium, steel and copper.
Ultimately, such trade commitments by Europe are not going to raise US oil and gas output. So, even if fulfilled, they just shuffle energy trade around.
Sanctions could be a different matter. Mr Trump could execute his threat of 100 per cent tariffs against India and China if they persist in buying Russian oil. This is a bizarre approach to defeating Moscow’s war against Ukraine, instead of imposing stronger sanctions on specific customers and shippers, which is the same approach used against Iran.
Beijing will not back down; it cannot allow its economic model, its foreign policy, its alignment with Moscow, to be dictated by Washington. It buys about two million barrels per day of Russian oil.
New Delhi might concede, though. It has not changed its policy yet, but Reuters reported that Indian oil refineries had paused purchases of Russian oil while matters are worked out. India’s imports of Russian oil averaged 1.8 million barrels per day in the first half of this year. The third major customer, Turkey, takes about 250,000 barrels daily.
If India and Turkey drop out, China would no doubt step up its purchases of Russian oil, but it would not take all the remainder. This is partly for logistical reasons, but also political. It would gain further leverage over its junior ally, and could extract generous discounts, as it does from Iran, where it is essentially the only customer.
So, there would probably be an overall reduction in Russian oil exports. The gap would be filled by Opec+, depending on its policy decisions, and potentially by higher US output. But US oil production will only increase if prices rise substantially. Mr Trump has shown himself acutely sensitive to inflation and to the concerns of American drivers, preferring lower rather than higher prices, to the discomfort of his supporters in Texas.
So how does this all tie together? Less Russian oil and gas means more room for Gulf suppliers. If they end up sending less to Europe to fill a gap in India, or if prices rise enough to boost American production, the US may then supply more to Europe, cosmetically satisfying part of the trade deal.
The inconsistency and volatile, contradictory messages emanating from the White House make all this very hard to evaluate. There’s a good chance that the impending “secondary tariffs” never materialise. Yet what is clear that a free and liquid energy market is being replaced by a constrained and politicised one.
