Such is the oil boom in Texas that the state would count as the fourth largest member of OPEC if it were a member country, behind Saudi Arabia, Iran and Iraq. Indeed, the Lone Star state could pump more oil than Iran and Iraq next year, HSBC has suggested.
But might that forecast come under threat as the trade row between Washington and Beijing worsens?
Oil products like jet fuel and naphthalene were part of the tit-for-tat response to the tranche of tariffs introduced by the White House in June. But crude itself wasn’t targeted, reportedly at the request of Sinopec, China’s main oil importer.
Liquified natural gas, or LNG, was another of the energy commodities initially cited for action. Beijing then had a change of heart, earmarking it as a target only if the confrontation worsened in the ways that Trump was threatening.
Sure enough, LNG came fully into the firing line on this week. In reaction to the $200 billion of Chinese exports now slapped with new tariffs, China said on Tuesday it would tax American products worth $60 billion. This includes a 10% tariff on LNG shipments from the US.
Surprisingly, the share prices of the American LNG firms then climbed in early trading, although that was because the duties were lower than the previously mooted 25%. In the longer term, the prospect of tariffs is clouding the outlook for the sector, especially for the new export terminals in states like Louisiana and Texas, which are predicated on hikes in demand from China.
Instead the Chinese are set to shift to alternative suppliers: gas sales from Australia have already grown substantially this year, while PetroChina has just finalised the terms of its biggest-ever contract with Qatar, the world’s largest LNG exporter. The 22-year deal will see state-owned firm Qatargas supply around 3.4 million tonnes of LNG to China every year.
In contrast, deliveries of US gas have shown signs of slowing with tankers disbursing much smaller shipments in July and August than earlier in the year, according to ClipperData, a vessel tracking service.
Beijing is holding off on tariffs on American crude for now, although the broader risk for US producers is that the trade war torpedoes the oil price by dragging down economic growth in general.
The Chinese buy about $1 billion a month of American oil, which accounts for about 4% of their oil imports. That already makes China the Americans largest customer, taking about a fifth of exports in the year to April. So on the face of it, the US oil industry seems more exposed to China than vice versa.
However, Beijing has seemed cautious about taking a tougher line, especially at a time when the Chinese economy has looked a little fragile. The tensions over tariffs have also reignited longer-running concerns about energy security. The sensitivity is greater when foreign oil is forecast to make up about 70% of national consumption this year, up from 64% in 2016, according to forecasts from PetroChina. The share of foreign gas is increasing much faster, from 29% six years ago to 39% last year.
Policymakers have pondered how to reverse these trends for years, with no obvious successes. Domestic oil production has been stagnant for more than a decade, despite output almost doubling in the US over the same period. The trade tensions are putting the onus back on the Chinese oil majors to deliver, which is probably why the state media has been trumpeting data from August which showed the first increase in domestic production for nearly three years. That apart, the country’s oil firms really don’t have much to crow about.
Longer term China might be able to increase its offshore supplies from the South China Sea.
Beijing and Manila are close to inking a deal to jointly develop gas fields in the disputed waters. Last month the Philippines foreign secretary said that both sides would “set aside the issue of our claims” in order to break the logjam.
Officials in Manila have indicated that some kind of deal could be announced when Chinese President Xi Jinping visits the Philippines on a state visit that is expected to occur next month.
However, joint development between the two countries will have its opponents, comments the Wall Street Journal, as it “legitimises China’s assertion that it has historic rights over almost the entire South China Sea”.
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