The U.S.-China Phase One trade deal is set to be signed today, January 15. Details have not yet emerged, but the two parties have confirmed such commitments since a tentative agreement was reached on December 13. Between them, the US will start dialing back tariffs and lift its “dollar manipulator” label–a big source of tension–in return for PRC commitments to buy a $200 billion package of US goods and services over the next two years.
But with these assurances, China may not be able to absorb this much more U.S. oil and gas – at least not without the complete removal of import tariffs, the termination of contracts with existing suppliers, or a sudden surge in demand – none of which seems possible.
Complimentary Energy Partners
The United States is the world’s largest producer of crude oil and natural gas, while China is the world’s largest user of energy making the two partners in the natural energy trade. Nevertheless, over the past month, the US production averages 12.9 million barrels of oil per day (bpd), far ahead of Russia’s 11.2 million bpd and Saudi Arabia’s 12 million bpd–their official maximum sustained ability.
It is also possible to export US natural gas production, which can be supercooled and converted to liquefied natural gas (LNG) for maritime shipping, including to China. U.S. producers are pumping out 95 billion cubic feet of dry natural gas per day, due to the US shale revolution (bcf / d). By the end of 2020 US LNG export capacity will hit 9.0 bcf / d, up from 4.9 bcf / d in 2018.
In October, China’s LNG imports hovered at 7.5 bcf / d, around 45 percent of their daily consumption. No country imports more LNG than the PRC which makes it a promising US gas market.
And while the US produces record hydrocarbon quantities, China’s appetite for oil and gas continues to grow faster than any other nation. China’s General Customs Administration announced that the country’s daily crude imports had reached a record 11.13 million bpd in November, 10.72 million bpd in October, and 9.61 million bpd in November last year.
Given that Chinese oil demand is 13.5 million bpd, 11 million bpd of international purchases represents an abnormally high import dependency ratio of 70 percent, despite efforts by the Chinese National Petroleum Corporation (CNPC) to increase domestic output. China slipped from the fourth-largest producer of crude oil in 2015 at 4.3 million bpd to today’s seventh-largest at 3.8 million bpd–its lowest production level since 2007.
Tariffs have ruined everything
With the lifting of the ban on US exports of crude oil in 2015, American shipments of hydrocarbons to China have surged. This trend continued until June 2018, ending abruptly after the announcement by President Donald Trump in Spring 2018 of unprecedented tariffs on imported Chinese goods
The PRC replied with a six-month moratorium on imports of US oil. In particular, China’s share of total US crude oil exports dropped from more than 20 percent in the first half of 2018 before the trade war to nearly 5 percent in the first half of 2019. September 2019 saw China’s first-ever US crude tariff–a 5-per-cent tax that remains in effect.
The same can be said for US liquefied natural gas (LNG) exports to China. Around February 2016, when the U.S. started exporting LNG from the Lower 48 states, and July 2018, when trade war began, China was the third-largest buyer of U.S. exports. Now, China isn’t in the top 15, either. The PRC applied a 10 percent punitive duty on all U.S. LNG shipments in November and followed up with a tariff of 25 percent this September, which has yet to be removed.