When Trump announced his latest tariff measures earlier this week, China, as promised, retaliated in kind -- imposing 10% (granted not 25%) tariffs on $60 billion worth of American goods imported. There is not much that China imports from the U.S., but there is one area that can come back to haunt Trump. Included among the list of American goods was a 10% tariff on LNG imports. Well played, Beijing; a swift down-the-line, cross-court, top-spin return back to Trump.
China has become the world's largest LNG importer. Their desire has been to replace coal (dirty fuel) with gas (clean fuel) to generate power. China was the third-biggest destination in the first half of 2018 for U.S. LNG exports. According to Platts, China is expected to make up a third of global demand growth through 2023, with consumption rising by 154% over 2017 levels.
While the tariffs themselves have little economic effect on the LNG producers for now, a more dire warning lies ahead, as LNG is a big growth area for U.S. energy companies (many of whom have been Trump donors). If U.S. LNG gets priced out of the market due to higher duties, then perhaps these companies will not be as lucrative bidding for projects or having a high enough price incentivizing them to build more LNG terminals. Nor would they be incentivized to build plants that convert gas into its liquefied form to take in all the U.S. shale that is being produced to then export it.
I am not entirely sure if Trump's advisors have informed him of the adverse effects of his "proposed tariffs," especially as it cuts close to the bone. If U.S. energy income and revenue is threatened, that can cause a severe slowdown in the U.S. economy, given its increased dependence on energy exports. China, on the other hand, has plentiful LNG/gas suppliers if it decides to move away from the U.S. Australia, Qatar, and Russia, to name a few.
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China has now also surpassed Canada as the largest buyer of U.S. crude, close to 500,000 barrels per day. Chinese companies spent nearly $2 trillion to import American crude oil in the first quarter of this year. U.S. Oil (WTI) trades at a discount to Brent, given the latter's pipeline/infrastructure problems, but with these tariffs imposed, it will make it more expensive to buy U.S. oil vs. other sources of crude.
With WTI trading about $71/bbl, adding in the 10% tariff would imply a price that almost wipes out the discount vs. Brent, making American oil uncompetitive. Good thing they did not go ahead with the 25% number, as WTI oil could stop being imported altogether. Wood Mackenzie projects that U.S. crude exports to China could double through 2023 in a free trade environment. With these tariffs in place, that number is at risk.
What does this mean for U.S. regional oil prices? To compensate for these tariffs, they will need to move even lower vs. foreign crude prices to make them more attractive to foreign buyers. Sure, other countries like India, South Korea and Taiwan can make up for the slack for barrels that are lost to China, but let's not kid ourselves, the growth comes from China. U.S. energy companies cannot afford to lose China as their key customer. If there are no grounds for impeachment, surely, on this topic alone he could be pushed out by his key sponsors, if he bites the hand that feeds him.
Resource revenues dictate the way of the world -- and certainly foreign policy. Perhaps these calculations were not made available to Trump during his daily rants, which appear born out of pure desperation to show that he is not backing off.
The market may be rejoicing on a slightly lower tariff rate imposed than the one implied over the summer. But perhaps there is more rejoicing to be seen as the U.S. may be about to cave in (or rather forced to) by showcasing an agreement in the near future as "some sort of victory" to save face with the American people. As they say, better to be liquid than be too smart.