President Donald Trump has done much to support the U.S. oil and gas industry since moving into the White House in 2017, but his approach to trade policy threatens to undo much of the good.
Trump escalated the trade war with China when he announced tariffs on an additional $300 billion worth of imports earlier this month. Beijing retaliated this past week with new tariffs on $75 billion worth of U.S. goods, including a 5 percent tariff on crude oil imports beginning September 1.
China, which is the world's fastest-growing energy market, now has tariffs on U.S. oil, liquefied natural gas (LNG) and liquefied petroleum gas (LPG), which includes fuels like propane and butane.
The trade war has now effectively cut off the U.S., the world's top oil and gas producer, from the most coveted market in the world for energy suppliers.
On the surface, the situation doesn't look so bad.
China implemented the tariffs on U.S. LNG and LPG last year, so trade in those energy commodities has been pretty much dead for a while. Beijing also began reducing purchases of U.S. crude in late 2018, believing, falsely as it turns out, that oil would be a key bargaining chip in negotiations with Trump.
Both sides have made out fine so far. U.S. exports continue to find other markets, and China continues to source crude from a diverse group of alternative suppliers, including Iran.
The most recent data from the U.S. Census Bureau pegs U.S. crude shipments to China at 292,000 barrels per day in June. That's a significant amount, but down sharply from a record monthly tally of 510,000 barrels a day in June 2018.
U.S. crude oil is a drop in the bucket of China's overall imports. According to China Customs data, crude imports from the U.S. averaged around 110,000 barrels a day on a trailing, 12-month basis through June 2019, representing about 1 percent of Beijing's total oil imports of nearly 9.7 million barrels a day over the same period.
But U.S. oil executives are looking a the bigger picture -- and starting to worry, mainly because there's no end in sight for this trade war. Just because the impact is limited now, the same may not be true very soon.
"This escalation of the U.S.-China trade war is another step in the wrong direction, the consequences of which will be felt by American businesses and families," Kyle Isakower, Vice President of Regulatory and Economic Policy at the American Petroleum Institute, the U.S. oil industry's top lobby group, said last week in a prepared statement. "In addition to the impacts on the U.S. economy and jobs, U.S. energy leadership and global competitiveness are threatened as U.S. natural gas and oil exports continue to serve as targets for retaliation."
U.S. crude exports recently reached record levels of more than 3 million barrels a day. India and South Korea have taken higher volumes of American oil as China has stepped back.
But U.S. oil production continues to grow thanks to the prolific Permian Basin and the shale boom. At the same time, the domestic market for more light, sweet shale oil is limited by the refining sector's preference for heavier, sour blends of crude. Refiners are almost maxed out on the shale oil they can process.
That means the vast majority of new incremental barrels of oil must be exported. And there appear to be many more years of U.S. production growth ahead.
U.S. oil output is expected to grow by over 1 million barrels a day in 2019 to an average of12.3 million barrels a day this year, and an average 13.3 million barrels per day in 2020, according to the U.S. Energy Information Administration. The Paris-based International Energy Agency expects U.S. crude exports to double by 2023.
Moving forward, the absence of China's market could weigh down prices for U.S. crude oil and even eventually hamper production growth.
The story is the same for America's natural gas producers, who are also increasingly relying on export markets to sell liquified natural gas (LNG). Nobody knows when China, the world's second-largest LNG market behind Japan, will be open for business again.
About 33 U.S. LNG cargoes reached China in 2018. So far, there have been only three shipments this year. More important for the U.S. industry is the impact the uncertainty surrounding the U.S.-China trade war has on proposed new LNG export projects.
These multi-billion dollar projects typically need committed buyers to sign long-term contracts before being approved by regulators. With China out of the picture, many developers have seen their schedules delayed.
The Federal Energy Regulatory Commission (FERC) has 10 pending LNG terminal license applications on its docket and another six in the pre-filing process. If all of these facilities come online as planned, America’s LNG capacity would nearly triple to 8.9 billion cubic feet a year by the close of 2019 - 2.5 times the current export capacity.
With China expected to account for more than 40 percent of global gas demand growth through 2024, so losing access to that market is a big deal for American producers.
The impact of the US-China trade war extends well beyond shifting trade flows, though.
The price of European benchmark Brent crude oil fell below $60 a barrel recently, into bear market territory on concerns about the strength of global oil demand. Fears about recession have resurfaced among investors, and stock prices are down sharply.
Lower oil prices eat into U.S. producers profits and their capacity to invest, which in turn impacts jobs and economic growth. Lower stock prices make it harder for American companies to access capital. The lesson is that when it comes to the workings of the economy, everything is connected.
Producers are also starting to feel the impact of tariffs on foreign steel. At least one pipeline company is now passing on at least some of the extra costs from tariffs through surcharges to its oil company customers.
How pipeline companies address higher operating costs caused by tariffs is a development worth monitoring closely because of the massive buildout of pipelines in the Gulf Coast region recently. The new pipelines are designed to increase export capacity, but higher costs and fewer markets will have an impact on investment decisions sooner rather than later.
President Trump added to the gloomy market sentiment Friday when he sent out a Tweet "ordering" American companies to cut ties with China.
Given the direction of the trade war, it is no longer unrealistic to think that all U.S.-China business relationships could be at risk – as well as the sanctity of the contracts that underpin them.
American companies want better trade terms with China but they are increasingly concerned that Trump is too far out over his skis. He’s picked too many fights simultaneously with too many adversaries while not looking after America’s historic alliances and now has few friends to come to his rescue. Now those adversaries, including China, are growing increasingly confident in resisting U.S. pressure.
With mounting concerns over the potential for the broadening trade fight to spark a global recession, President Trump may be thinking twice about the impact on his chances of winning re-election in 2020 – something that may already be evident in his attempts to postpone deadlines and strike deals.
Date: Aug 27, 2019