When Sen. Marco Rubio (R-Fla.) quietly reintroduced a bill to ban U.S. oil exports to China in January, it garnered little support or fanfare. But after the public learned that a Chinese spy balloon had traversed portions of the continental U.S. before our military shot it down off the South Carolina coast, political pressure to retaliate against China started to build — and U.S. energy exports to China are a convenient target.
The House already passed legislation to ban oil sales to China from the U.S. Strategic Oil Reserve (SPR) and the Senate is expected to follow. Banning SPR sales to China will be a symbolic action, but banning the sale of petroleum or liquified natural gas (LNG) to China would have real consequences. In the case of LNG especially, U.S. oil and gas producers would suffer much more than China, American consumers would not see lower energy prices, and closing off this avenue of trade would make diplomacy with China more challenging.
It has taken a long time for U.S. LNG to penetrate the Chinese market. For many years, Chinese companies wanted to buy U.S. LNG but shied away from signing the long-term contracts with U.S. producers that are extremely important in this capital-intensive industry. Instead, Chinese companies bought U.S. LNG through intermediaries or on the spot market. Because LNG plants are so expensive to build and run, American LNG producers depend on long-term contracts to stay operational, build new facilities and expand current LNG plants.
In 2018, Chinese companies finally started executing long-term contracts with American LNG companies. This was a huge boon to the U.S. LNG industry and is why, in 2021, America rose to became China’s second largest supplier of LNG (behind Australia but above global LNG powerhouse Qatar). China was America’s single largest purchaser of natural gas exports in 2021, responsible for nearly 50 percent of the export market.
U.S. companies have made plans, secured loans, and invested money with the surety that Chinese buyers would be purchasing their product for 20 years. Congress could jeopardize contracts that would affect a major segment of the American business community by banning LNG sales to China. These contracts cannot be replaced with sales to Europe because Europeans continue to shun 20-year contracts for LNG even though they need to replace Russian natural gas with LNG. In addition, banning LNG sales to China so soon after executing long-term contracts would send the message to other potential customers that the U.S. isn’t a stable provider. If Congress cuts off gas to China, it could cut off gas to other would-be customers.
Some organizations have argued that exporting U.S. natural gas makes energy prices higher for American consumers and businesses. However, banning LNG sales to China will not help lower domestic energy prices. We produce more natural gas in the U.S. in certain areas than we can use domestically. But because of infrastructure and shipping constraints, we cannot transport that natural gas to other parts of the country. If this gas doesn’t get liquified and exported, it will create supply gluts in certain gas-producing regions of the country. Natural gas prices in those regions would become depressed, hurting the ability of natural gas producers in those areas to remain solvent.
This problem could even spill into America’s oil industry, because if natural gas storage facilities fill up in Texas and Louisiana, this could impact the oil industry and hurt U.S. oil production. A good deal of natural gas is produced as a byproduct of oil production, but environmental regulations prevent companies from flaring that gas. Instead, they need to capture it and bring it to market. If there is nowhere for that natural gas to go, they will have no choice but to reduce oil production and produce less associated natural gas to comply with environmental regulations. The result: higher oil prices for American consumers.
Banning LNG sales to China also would hurt America’s ability to engage diplomatically with China by reducing America’s economic and diplomatic leverage. In 2022, the annual goods-trade deficit with China grew 8 percent to $382.9 billion. America imports more manufactured goods from China than China buys from us. Energy exports to China help even up the trade imbalance and make America’s economic relationship with China less lopsided. LNG is one area where the U.S. supplies a product that China needs. Eliminating that would close off an important avenue for economic relations with China, in which the U.S. is a supplier rather than a consumer. The more the U.S. narrows its interactions with China and closes off commercial avenues, the more we lose our leverage to address China’s adversarial practices against U.S. interests. We can alleviate conflict by deepening economic ties, not cutting them off.
American LNG helped de-escalate the trade war with China during the Trump administration. We shouldn’t undo that hard work by cutting off the LNG trade with China just because politicians face political pressure to act against China. Without American gas, China will buy more from Russia, allowing this adversary to reap the economic benefits that American companies could be accruing. Congress should consider the negative consequences American companies and consumers will face before proposing a ban on LNG sales to China.
Ellen R. Wald is a senior fellow at the Atlantic Council’s Global Energy Center, and president of Transversal Consulting, a global energy and geopolitics consultancy. She is the author of “Saudi, Inc.,” a history of Aramco and how the Saudi royal family controls this multitrillion-dollar enterprise. Follow her on Twitter @EnergzdEconomy.
