China is lining up retaliatory tariffs against the US to hit one of its most successful export industries in recent years: energy.
Sales of US oil, gas and coal to China have been rising sharply, and the US energy sector has been running a bilateral trade surplus. But most of those exports, with the exception of liquefied natural gas, now face the prospect of a 25 per cent Chinese tariff, as part of a second wave of new duties threatened by the economy ministry at the end of last week.
The impact is likely to erode US oil producers’ profitability. Oil is a liquid global market, and crude that is shut out of China will be able to find buyers elsewhere. The issue will be the discounts that US oil exporters will have to accept to find those new customers.
One executive at a commodities trading house said it was unclear when and how China’s tariffs on crude would take effect, and his company’s response remained “wait and see”.
Aaron Padilla of the American Petroleum Institute, the industry group, said US companies were already being hurt by the escalating trade dispute.
The duties on US steel imports imposed by the administration in March have raised costs for energy companies, and the new tariffs on imports from China cover some products they buy, including parts for offshore facilities. Now a third blow is looming in the retaliatory tariffs from China.
Mr Padilla said the API was talking to the administration to raise its concerns. “We want them to understand that the tariffs have a negative impact on the US oil and gas industry,” he said. “You can’t be promoting and maximising the production of energy while also imposing tariffs.”
China is the world’s largest oil importer, and US exports of crude have risen sharply since 2016, after Congress lifted restrictions on the shipments. After a slow start, China’s purchases averaged 358,000 barrels a day in the first three months of 2018, ranking it alongside Canada as a top destination for US exports, according to the Energy Information Administration.
Chinese imports of liquefied petroleum gases from the US, including propane, have also built up in recent years as new production from shale formations made the US a competitive supplier.
LPGs are practically identical around the world, making it easier for China to replace any lost US volumes with supplies from elsewhere such as the Middle East. But crude oil varies widely in characteristics such as weight and sulphur content, and different refineries are optimised for different grades.
China imported 9.2m b/d of crude oil in May, with a large proportion of sales made to state-owned enterprises such as PetroChina and Sinopec. Giovanni Serio, global head of research at Vitol, the energy trading house, said the world market would adjust by redirecting oil flows.
China could replace barrels lost from the US from sources such as west Africa.
However, the “US would find it hard to find an alternative market that is as big as China”, said Suresh Sivanandam, senior manager of Asia refining at Wood Mackenzie, a research group.
Jacob Dweck, a Washington-based energy lawyer at Eversheds Sutherland, said that if the tariff on crude oil took hold, “it essentially is going to require 300,000-400,000 barrels a day of US oil to be diverted to other places. That’s not so easy. Clearly it can be diverted, but it could be less lucrative to US producers.”
US producers are already having to accept discounted prices for their oil, partly because pipelines are full between the booming Permian Basin and the refineries and ports along the Gulf of Mexico. Prices for US West Texas Intermediate crude in Midland, Texas, were $56 a barrel on Monday, $19 a barrel below the global benchmark Brent.
Some observers believe that any additional pain for US oil companies created by China’s tariffs was unlikely to last.
Colin Fenton of Blacklight Research argued that while rising tariffs raised memories of the Smoot-Hawley act of 1930 and the Great Depression, they could also be seen as a negotiating tactic that would ultimately result in an improved trading relationships. The US remained a highly attractive supplier because of its stability, he added.
“When cooler heads prevail”, China could import 500,000 b/d from the US, he said.