USMCA will help us make the most of our energy resources

Natural resources are an important component of national wealth, and the efficient allocation and use of those resources is an economic process yielding enormous benefits for ordinary people.

Also axiomatic is the reality that international trade — the movement of resources, intermediate inputs and goods and services across international boundaries in response to market signals — improves aggregate economic productivity and thus facilitates an increase in efficient resource use.

{mosads}Energy resources are a central component of the natural resource base, and that is why it is essential that the U.S.-Mexico-Canada Agreement (USMCA) be finalized and ratified.

Implementation of the agreement will preserve and expand the integration of U.S., Mexican and Canadian energy markets, reducing system-wide energy costs and facilitating investment flows.

Because energy — petroleum, natural gas and electric power — is an input in the production of a vast array of goods and services, the reduction in energy costs yielded by the North American energy trade has and will yield benefits for all three economies across most economic sectors.

Driven by market incentives to reduce costs, trade of crude oil and refined products among the three economies is about 6.7 million barrels per day; of natural gas, about 14.8 billion cubic feet per day; and of electricity, about 205.6 gigawatt hours per day.

An example of the efficiencies yielded by these trade flows is the U.S. importation of (cheaper) heavy crude oils (not produced in large amounts domestically) from Mexico and Canada, which then are refined in Gulf Coast refineries into gasoline and other products.

This allows lighter, more expensive crudes produced in the U.S. to be used in refineries designed to use them or to be exported, increasing the overall productivity of the petroleum market. A rough estimate (according to my computations based on Feb. 21 market prices) of the economic value of these trade flows is about $450 million per day, or over $164 billion per year .

These efficiencies create incentives for investments designed to minimize production costs for final energy goods and services.

The USMCA contains provisions maintaining the ability of U.S. firms and investors to make capital investments in the Mexican energy market, through a preservation of the Investor-State Dispute Settlement (ISDS) system.

The USMCA also preserves important protections against expropriation of those investments, protections for Americans that have the effect of increasing investment and the efficiencies that result.

For ordinary people, these efficiencies attendant upon an implementation of USMCA mean reduced costs for energy, both direct and indirect increases in energy consumption and production and an increase in national wealth and employment.

The simple correlation between energy consumption (as both inputs and final products) and real GDP is 0.71: a 1-percent increase in one is associated with a 0.71 percent increase in the other.

The correlation between energy consumption and employment is 0.59. The overall correlation between household incomes and energy consumption is 0.92; it rises more-or-less monotonically as we move up among income quintiles.

This means that investments increasing incomes and wealth — education, training, health care, technological improvements, infrastructure, plant and equipment, etc. — have the effect of increasing demands for energy.

That is why opposition to the use of efficient energy resources implies opposition to increasing incomes and thus the aforementioned investment activities as well.

Unsurprisingly, therefore, the correlation between energy consumption and the poverty rate is -0.44; obviously, reductions in energy costs do not “solve” the poverty problem, but neither are they harmful, in that reduced energy costs are consistent with improved living standards.

The simple correlation between energy production and household incomes is 0.17, not particularly strong but still consistent with the observation that energy production and good jobs go together. 

Given that the North American energy sector is very large, reflecting the size and economic value of the geographic energy resource base, these conceptual realities and facts provide a strong case for implementation of USMCA. It would be wise for policymakers to complete the negotiations forthwith and for Congress to ratify it.

Benjamin Zycher is a resident scholar at the American Enterprise Institute.