Foreign Investment, Supply Chains and Consumers
Posted July 29, 2020
A metric that bears watching as we gauge energy markets, trade, manufacturing and supply chains – all of which contribute to global economic growth and prosperity – is FDI, foreign direct investment, especially for energy projects in the U.S. and other nations.
Recent data indicate that FDI has dropped by half since its peak in 2015, and experts believe that various factors, including the pandemic and escalated trade tensions, could continue or accelerate this decrease. This is potentially significant for the construction of new infrastructure, plants, processing facilities and other projects that have a direct bearing on better serving U.S. consumers and harnessing American energy.
Indeed, recent FDI trends signal a potential turning point.
Will FDI as we know it re-normalize, or could conditions work toward bringing important parts of integrated supply chains back home? The latter could potentially raise consumer costs with the unwinding of many of the efficiencies that helped advance the U.S. energy revolution as well as the U.S. position as a preferred provider of energy and goods made from it.
Critically, trade in energy and manufactures – from crude oil and liquefied natural gas (LNG) to refined petroleum products, petrochemicals and other intermediate goods – has also been a hallmark of the U.S. energy revolution and a key to its outlook, since most of global energy demand growth is expected to continue to occur in emerging markets.
As the global economic and energy market impacts of COVID-19 have become clearer since April, however, the state of play for FDI inflows has also evolved. The gist is that the United Nations Conference on Trade and Development (UNCTAD) recorded FDI falling significantly over the past five years, and it expects things to get worse before they get better.
Before the onset of the pandemic, UNCTAD’s data showed that the rise in trade frictions slowed global FDI inflows by about $0.5 trillion in 2019 compared with the peak level in 2015. This year the group estimates global FDI inflows to fall by about $1.1 trillion or nearly half versus 2015. The most immediate effects have resulted from the COVID-19 pandemic.
Importantly, UNCTAD’s outlook speaks to more than the fallout from COVID-19. It highlights how the profit margins associated with investments have historically produced local income re-investment. But with a decrease in the prices for energy, petrochemicals and many other goods, the lower profitability has diminished the prospects for this form of follow-on investment activity.
Next, at least some of the queue of multi-billion dollar capital projects has entered a holding pattern as even many of the largest global energy companies have assumed defensive postures to strengthen their balance sheets and weather the economic storm.
At the same time, however, some major capital projects appear poised to stay the course, like for example the prospective Ohio ethane cracker and derivatives complex that could be transformational for the state and provide an additional market for ethane produced as part of natural gas drilling within Appalachia.
In total, API has monitored and tracked a queue of $344 billion backlog in U.S. capital projects as of Q1 2020. These are the kinds of multi-billion-dollar capital investments the likes of which the U.S. hadn’t seen in more than a generation. Just prior to the pandemic, more than half of the $344 billion represented LNG projects and supporting pipeline infrastructure that could be at risk due to due the recession and decreased domestic oil & gas production and export potential.
Final point: UNCTAD observes how supply chains have been evolving in response to lessons learned through the COVID-19 pandemic. We often think of supply chains – efficient integration and interrelationships of inputs and processes through production processes – in terms of their efficiency, cost effectiveness and leveraging comparative advantages by specializing functions in different geographies.
Now, whether you call it a need for resilience, control, autonomy or continuity, a key takeaway has been that COVID-19 served as a wake-up call and has many industries reconsidering how they will operate and invest in the future. UNCTAD is hardly alone in this thinking, as the future of globalization has recently escalated as a hot topic, resisting the changes that Thomas Friedman and others argued were we inevitable in a so-called flat world.
Trusted trade relationships combined with diverse and economically advantaged energy feedstocks have been crucial to the rise in U.S. energy interdependence and all the economic benefits that accompany its development and enabling infrastructure.
Since the United States is largely a saturated market for many forms of energy – and in fact became a net energy exporter in September 2019 for the first time in more than 60 years – much of the economic growth enabled by the U.S. energy revolution needs to leverage the growing international markets for light sweet crude oil, natural gas liquids (NGLs), LNG as well as high-quality refined products and petrochemicals.
The stakes associated with a potential break in global supply chain development are therefore high, and this is a critical time for the U.S. energy industry, international trade, and cogent energy policies to foster U.S. energy opportunities, economic growth and interdependence.
About The Author
Dr. R. Dean Foreman is API’s chief economist, specializing in energy and global business. With a Ph.D. in economics from the University of Florida, he came to API from Saudi Aramco Strategy & Market Analysis in Dhahran, where he managed short-term market monitoring and the long-term oil demand outlook. Foreman has more than 20 years of industry experience in corporate strategic planning, forecasting, finance / risk management and regulatory policy at ExxonMobil, Talisman Energy and Sasol North America.
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