FILE - In this July 4, 2019, photo, Chinese magazines with front covers featuring Chinese President ... [+]
The Phase One trade deal between the United States and China is expected to be signed today, January 15. Details have not yet emerged, but certain pledges have been announced by both sides since a preliminary agreement was reached on December 13. Among them, the United States will begin to dial back tariffs and withdraw its “currency manipulator” designation – a major source of tension – in exchange for PRC guarantees to purchase a $200 billion bundle in US goods and services over the next two years. Included in this – confirmed by Reuters – is $80 billion in U.S. manufactured goods, $35 billion in services, $32 billion in agriculture products, and a whopping $50 billion in US energy exports.
But despite these pledges, China may not have the capacity to absorb this much additional U.S. oil and gas – at least not without the complete removal of import tariffs, the abrogation of contracts with current suppliers, or an unexpected demand surge – none of which seem likely.
Complimentary Energy Partners
The United States is the world’s largest crude oil and natural gas producer, while China is the world’s largest energy consumer, making the two natural energy trade partners. Indeed, the US is averaging 12.9 million barrels of oil per day (bpd) of output over the past month, well ahead of Russia’s 11.2 million bpd and Saudi Arabia’s 12 million bpd – their official maximum sustained capacity.
US natural gas production, which can be supercooled and turned into liquified natural gas (LNG) for maritime transport, can also be exported, including to China. Thanks to the US shale revolution, US operators are pumping out 95 billion cubic feet of dry natural gas per day (bcf/d). US LNG export capacity will reach 9.0 bcf/d by the end of 2020, up from 4.9 bcf/d in 2018. The competition is tough, as Qatar and Australia are the current export leaders, but the United States is expected to surpass both within the next 5 years.
China’s LNG imports hovered at 7.5 bcf/d in October, roughly 45% of their daily consumption. No country imports more LNG that the PRC, making it a promising market for US gas.
And while the United States produces record amounts of hydrocarbons, China’s appetite for oil and gas continues to grow faster than any other nation. China’s General Administration of Customs announced that the country’s daily crude imports hit a record 11.13 million bpd in the month of November, from 10.72 million bpd in October, and 9.61 million bpd in November last year. America, once the world’s most prolific oil importer, peaked at 10.1 million barrels of imports per day in 2005. Today that figure stands at around 6.5 million bpd.
Given that Chinese demand for oil is 13.5 million bpd, 11 million bpd of international purchases represents a dangerously high 70% import dependence ratio, despite efforts by the government-owned Chinese National Petroleum Corporation (CNPC) to increase domestic output. China slipped from the fourth largest crude producer in 2015 at 4.3 million bpd to the seventh largest today at 3.8 million bpd – its lowest level of production since 2007.
Tariffs Ruined Everything
Following the lifting of the ban on US crude exports in 2015, American hydrocarbon exports to China surged. This trend continued through to June of 2018, ending abruptly after president Donald Trump announced sweeping tariffs on imported Chinese goods in Spring of 2018.
The PRC responded with a six month moratorium on US crude imports. In all, China’s share of total US exports of crude oil dropped from over 20% in the first half of 2018 before the trade war to nearly 5% in the first half of 2019. September 2019 saw China’s first ever tariff on US crude – a 5% levy that remains in effect.
US energy exports to China and tariff timeline
The same can be said for US exports to China of liquefied natural gas (LNG). Between February 2016, when the United States started exporting LNG from the Lower 48 states, and July 2018, when the trade war started, China was the third biggest purchaser of U.S. shipments. Now, China is not even in the top 15. In November, the PRC applied a 10% punitive duty on all US LNG shipments and followed up this September with a 25% tariff, which has yet to be removed.
In this time period, energy hungry China was forced to look elsewhere to meet its demand. According to the American Petroleum Institute (API), in 2018 China imported crude oil from 45 different countries, with over half supplied by Russia, Saudi Arabia, Angola, Iraq, and Oman. In 2018, China only received 3% of its crude oil imports and 4% of its liquefied natural gas imports from the US.
Looking Ahead
Notwithstanding some outlier forecasts that China’s oil and gas demand in 2020 will shrink to its lowest levels since 2008, a $50 billion increase in Chinese energy purchases over the next two years seems untenable. For this to occur, China will need to drop all oil, gas, and petrochemical levies in effect. Beijing would also need to renegotiate or outright cancel its standing long-term energy contracts with other suppliers, which would come at a penalty to Chinese importers.
Even if the United States managed to convince China to replace the 200,000 barrels per day of petroleum it purchases from Iran (in violation of US sanctions) with American oil, at the going WTI price of $5 this would only amount to $8.5 billion over through 2022.
Achieving the $50 billion target is therefore highly unlikely, especially given the limited tariff reductions the United States is offering for Phase One. While Trump agreed to suspend a planned December tariff on about $162 billion in Chinese goods and to cut in half an existing 15% levy on imports worth an additional $110 billion, remaining tariffs will still cover $360 billion in Chinese goods. Almost two thirds of products that Americans buy from China will continue to be tariffed, compared with 1% before the trade war.
Today’s trade deal is a bellwether of US-China trade relations. It could potentially pause a dangerous escalation in the geo-strategic conflict between the reigning superpower and its near-peer competitor. However, we should not expect a landmark agreement that ends the trade war — or hostilities. Phase One is merely a temporary cease-fire, and some of its key energy benchmarks are likely not to be achieved .
With Assistance From James Grant
