Although the Chinese government has not yet gone so far in the ever-escalating trade war as to sanction United States oil, imports are drying up anyway as Chinese buyers shy away from U.S. crude. According to U.S. Census Bureau data released last week, for the first time since 2016, China has halted purchases of U.S. crude, importing zero barrels in August. A major blow coming from the second biggest economy in the world--a blow that is sure to have reverberating repercussions and retaliations.
After Washington lifted restrictions on exports at the end of 2015, China began buying vast quantities of U.S. crude, and has even been giving Canada a run for its money as the number one importer in some instances. Chinese imports represented 23 percent of total U.S. crude exports in 2017 and averaged 22 percent this year--until August. That is definitively no longer the case, as tensions have ramped up significantly in the past months after the Trump Administration began a “trade war” at the beginning of this year.
In just one part of a long series of retaliations, China threatened in June to impose a 25 percent tariff on crude imports. This was in direct response to U.S. President Trump’s hefty $50 billion levy on Chinese imports. China took a shot at U.S. crude despite Trump’s threats that his $50 billion would be followed with more levies in the case of China’s retaliation.
Now, according to some experts, we can expect the trade war with China to continue escalating, perhaps at an even more accelerated rate, when U.S. sanctions officially hit Iran next month. Trump Administration officials have stated that their intention is to slash Iranian oil exports from their current 1.7 million barrels per day all the way down to zero. This objective, however, is likely to be undercut by China, which currently buys around one quarter of Iranian crude and will not be joining a unilateral cut-off of Iranian oil imports. “I don’t expect China to acquiesce to Washington’s demands, given the worsening relations between the two nations,” said Stephen Brennock, oil analyst for PVM Oil Associates. Related: Trump Threatens Iran’s Oil Clients
China is not the only country that is opposed to reinstating sanctions on Iran. Practically all major buyers of Iranian oil have opposed the cut-off. But few, if any, countries have the ability that China does to risk their relationship with the United States. China’s relationship with the Trump administration is already stressed, to put it lightly. They have far less to lose by siding with Iran and endangering the success of U.S. sanctions, adding fuel to the trade war fire.
At the same time, both the U.S. and China have an incentive to deescalate--China in order to stay (or return to) in Washington’s good graces and the U.S. to circumnavigate a potential oil price shock. However, with the impending oil sanctions on Iran just around the corner and very little time for diplomacy, it’s difficult to predict which way they will go.
Regardless of what is coming down the pike, the trade war with China is already having dire consequences. It remains to be seen just how it will impact the U.S. oil industry to lose a massive consumer like China at the drop of a dime, but we know that the impact will be considerable. There have been plenty of think pieces about how the trade war will end up hurting the U.S. but now we will see in real time what the real-life repercussions are, even more so when Iran gets pulled into the mix next month.
By Haley Zaremba for Oilprice.com
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