President Donald Trump’s newest tariffs on Chinese imports – a hefty 25 percent levy for steel and 10 percent for aluminum –is already fueling speculation about an impending trade war.
However, the Trump administration isn’t likely to stop with steel and aluminum but is also considering limiting Chinese investment in the U.S. and imposing tariffs on a broad range of products in a push back against both the massive trade deficit between the two countries and intellectual property theft.
“The U.S. is acting swiftly on intellectual property theft. We cannot allow this to happen as it has for many years!” Trump said in a Twitter post on Wednesday. In an earlier tweet, the president said China had been asked to develop a plan to reduce their “massive trade deficit with the United States.”
China, for its part, responded on cue yesterday. An op-ed in the Beijing-based Global Times, which often expresses the views of the Chinese Communist Party (CCP), fired back.
Particularly irked over Trump’s tweet that China has been asked to develop a trade deficit plan, the op-ed said that China won’t be “bullied” by Trump’s trade war threat.
“US trade protectionism has become the No.1 hot spot in the world, even stealing the thunder of the North Korean nuclear crisis. The US may be the first country to have clamored for war against the entire world, although the battlefield is the economy,” the op-ed said.
The piece then shifted to what has been on everyone’s mind – will China retaliate?
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“China should face trade friction with the US in a calm manner. Meanwhile, it must retaliate against US tariffs that forcibly interfere with Sino-US trade and violate World Trade Organization rules. China must show it won't be bullied,” it added.
Oil and gas market intersection
And, that’s the question isn’t it? Will Beijing retaliate or not, and if so, how much will it match Trump’s actions? Moreover, will that relation include U.S. crude oil and liquefied natural gas (LNG) shipments?
Currently, the U.S. exports just over 2 million barrels of crude oil per day, much of it finding its way to Asia and particularly China, as the U.S. slowly eats away at Saudi market share in the region and the country. Since West Texas Intermediate crude prices trade at a discount to Brent and other crudes, the U.S. usually has a pricing advantage over its competitors in the region. Saudi Arabia for its part uses Oman and Dubai prices as an underlying benchmark for its official selling price (OSP) in Asian markets.
While U.S. oil exports to China is still small, it has grown from nothing before 2016 to a record 400,000 barrels per day in January, worth almost US$1 billion. Meanwhile, that amount will continue to grow amid increased U.S. shale oil production and as U.S. output reaches near 11 million bpd, effectively bypassing Russia at the end of the year or the start of next year to become the top global oil producer.
Yet, trade retaliation from Beijing could potentially include U.S. oil imports, particularly since Beijing has a plethora of oil export suitors all vying for the country’s lucrative oil market.
However, natural gas is more complicated. While China does have plenty of crude oil options and gas options too for that matter (both LNG and piped gas), the country may be more pressed to not include U.S. LNG on any list of trade retaliatory measures.
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The most pressing reason for this: As Beijing rushes headlong with its mandate to make gas 10 percent of the it’s power generation mix by 2020 and more by 2030, China needs long term U.S. LNG supply agreements as part of its energy security mix in addition to supply from Qatar, Australia, Malaysia and in time Russia.
Since U.S. LNG is priced against the Henry Hub benchmark in Louisiana instead of an oil indexation like other producers (offering the opportunity to lock in lower prices for long-term off-take agreements) and since the U.S. will have five major LNG export projects operational by 2020 (becoming the third largest global LNG producer with a shot by the middle of the next decade of even rivaling top producer Qatar and Australia) - China might want to leave the U.S. gas part of its energy equation intact and pick another sector to use in retaliation.
By Tim Daiss
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By imposing hefty tariffs on Chinese steel and aluminium and also considering limiting Chinese investment in the US, President Trump is trying, in my opinion, to provoke a showdown with China in order persuade it not to launch on the 26th of this month its long awaited crude oil futures contract on the Shanghai Energy Exchange (INE) denominated in Chinese yuan (petro-yuan). The United States will be trying to bargain away the tariffs for the withdrawal of the crude oil futures contract.
However, China will go ahead with the launching of its crude oilfutures contract and will also retaliate against US tariffs.
China could also impose similar tariffs on US imports and stop buying any crude oil or LNG from the US. Ultimately, it could start offloading part of its holdings of US Treasury bills estimated at $1.2 trillion.
China’s refineries have been purchasing an average of 200,000 barrels a day (b/d) of US shale oil but this small volume could be easily substituted with oil from from Russia, Saudi Arabia, Iraq or many other sources. Moreover, China does not need to import US LNG. It can easily source it cheaply from Qatar, Australia, Russia and Malaysia. In 2017 the US exported an estimated 14 mt of LNG compared with 70 mt by Qatar and some 45 mt by Australia.
China’s impending launch of its crude oil futures contract is starting to worry the United States hugely because of its impact on the petrodollar. Moving oil trade out of the petrodollar into the petro-yuan will take initially between $600 billion and $800 billion worth of transactions out of the petrodollar. Maintaining the petrodollar is America’s primary goal. Everything else is secondary.
The petrodollar system provides at least three immediate benefits to the United States. It increases global demand for US dollars. It also increases global demand for US debt securities and it gives the United States the ability to buy oil with a currency it can print at will. In geopolitical terms, the petrodollar lends vast economic and political power to the United States.
The launching of the crude oil benchmark on the Shanghai exchange could mark the beginning of the end of the petrodollar. The US is not going to take this potential threat lying down.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London