The phase 1 trade deal with China has been signed at the White House and includes the Chinese promise to ‘strive’ to import $50 billion worth of oil and natural gas from the U.S. this year and next. Although that sounds wonderful, the truth, while positive, is somewhat less beneficial for the industry.
First, it must be acknowledged that U.S. oil and gas exports (the later liquified natural gas) have dropped sharply since the trade war began in 2018, as the figure below shows. Revenue had peaked out at something like $1.5 billion per month, or about $18 billion per year, close to what China is promising for this year, implying the target should be easy to reach. Next year’s target of $34 billion is much more ambitious, at least on paper. (See the second figure.)
First, it is worth noting that only a minor part of U.S. crude oil and petroleum product exports have gone to China, as the next figure shows. The loss of China as a market had little impact on the U.S. oil industry or the world price, although sophisticated econometric analysis or modeling might detect some losses on the margin. After all, any interference in the free market typically imposes costs on producers and/or consumers.
And, as American philosopher Dogbert noted years ago, oil is fungible: Chinese oil purchases were switched to other producers, U.S. oil sales went elsewhere, and the overall costs were relatively small. China could easily meet the 2021 target for energy purchases from the U.S. by buying one million barrels per day, which is about triple the earlier peak, but still only about 10% of their total oil imports. The oil China doesn’t buy from other sellers would simply go elsewhere and the market impact would be minimal. (Maybe extra tanker usage.)
At first blush, the same story holds for U.S. LNG exports: China made up a small but growing market for U.S. exporters, and the loss of the market did not reduce overall export levels. At least in theory. The reality, however, is that U.S. LNG exporters are more interested in the potential sales which are enormous: China accounted for 50.5% of world coal consumption in 2018, an enormous source of greenhouse gas emissions, to say nothing of local and regional pollution. Increasing imports of LNG would have many benefits locally, nationally, and globally. The U.S. LNG export industry would be doing well by doing good.
But while the Chinese government is working to increase gas consumption and reduce coal usage, price matters. (I’m considering having that tattooed on my forehead, but I can’t decide the appropriate font.) And this is where the trade war comes in: the Chinese have put a 25% import tariff on U.S. LNG purchases, which makes it more difficult to compete with both other exporters and Chinese coal. Removing the tariffs would mean more displacement of coal consumption as well as higher sales for U.S. exporters. Unlike oil, LNG is not perfectly fungible because a lack of specialized unloading and regasification equipment restricts sellers’ ability to switch supplies between buyers.
Without a removal of the Chinese tariffs on LNG imports, the U.S. petroleum industry will not receive major new sales to that market, much of which could be incremental to global consumption, not displacing of other imports. This should provide a very clear target for U.S. negotiators, and hopefully the Chinese government will recognize the value to itself and its people of removing these tariffs.