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The gladiators trade war and global petroleum

By Sonny Atumah

It is another gladiatorial trade blow that is about to commence between two global economic giants: China and the United States.

Like the tick tock of a clock, the trade war that may be the largest in recorded history started brewing in February 2018 when the United States Commerce Department recommended a 24-percent tariff on steel imported into the United States.

Trump

Reminiscent of the ancient Rome where a fighter fought another combatant in an arena for entertainment, the proposed combat will be staged in an economic arena. For mortal fear, not one impartial arbitrator would be allowed to give a ruling on this ensuing battle between the titans.  It is a matter by America and China for the world peoples.

Global crude oil and natural gas as instruments of politics and strategy are being deployed in the trade war.   Other economies may be agape in outlook to witness the tariff disputes that may plunge them into possible deflation and recession.

The Chinese that were reluctant to retaliate are considering delivering a punch to announce that they are not lily-livered to face consequences of trade war. It appears the  March 26,2018, launch its oil futures contracts in Chinese currency, the Yuan as a global currency, to probably put an end to the entrenched practice of paying for crude oil in United States dollar may be an undercurrent in this resentment.

Experts believe it is America’s response to China’s monetary maneuvering for the yuan which has been rising against the dollar. America’s response is against China’s hegemonic threat that is undermining American global economic status. The supervening trade war between the two largest world economies apparently may engender economic consequences which analysts predict a drop in jobs, incomes or retaliation by other countries to protect themselves.

The Trump administration last week July 6, 2018 announced higher tariffs of US$34 billion worth of Chinese imports. There was a counter from China imposing a 25- percent tariff on United States goods. The United States has another 25 percent higher duties on additional US$16 billion Chinese imports, which Beijing in a tit for tat is expected to impose 25 percent tariff on American crude. But while crude oil and natural gas are retaliatory options, Chinese liquefied natural gas, LNG especially propane imports may be exempt in this tariff tangle. Reasons are that imposing high tariff on LPG from the United States would trigger inflation and encourage the use of coal that is aggravating carbon emissions from smog in polluted Chinese cities.

Chinese President Xi Jin ping

China accounts for about 20 percent of U.S. crude exports while the U.S. provides about 3.5 percent of China’s oil imports. Tariff on American crude means Chinese refineries would not buy because it would be more expensive even as America is expanding its market share for shale oil. Wood Mackenzie analysis is that China can easily import crude from other countries. China could secure crude from other sources which is not exactly the same with the United States that would find it difficult to find a market that is as big as China.  US light oil can be replaced with other light oils that are plentiful worldwide. And this may create a glut in the United States crude market. Most US crude put for sale are the light shale oil that are not configured for many refineries in Asia.

Chinese refiners have been regular buyers since the United States lifted the ban on the sale of crude oil in 2015. In 2017 American crude was exported to countries in these proportions: Canada (29 percent), China (20 percent), UK (9percent), Netherlands (8percent), South Korea (5percent), Italy (4percent), others (25percent). By May this year, China bought more American crude doubling from a year earlier. An alternative market would now be sought by American crude producers as China also hunts for alternative suppliers from Russia, Kazakhstan Middle East, Brazil, Nigeria, Angola, for Crude oil, LPG, and Soybeans initially sourced from the US. Last week, fears of trade war and production ramp by Saudi Arabia led Gulf Cooperation Council and Russia forced crude oil prices down.

With the completion of the East Siberia-Pacific Ocean pipeline, China may readily get over 30 million tons of crude annually from Russia via pipeline to northeastern China.  India is now becoming an oil bride even when it cannot take as much oil as China does. India imported 4.7 million barrels of crude in May; nine times more than it ever imported from the United States. It is predicted that the price of the American benchmark, the West Texas Intermediate, WTI may also go down if China imposes tariff on American oil; an attraction for India to buy more.

A trade war could affect the LPG market which has soared due to shale gas revolution in America. Even when the oil from the South China Sea starts flowing, China should be cautious on tariff reciprocity. President Trump has threatened many economies with trade restrictions and punitive tariffs, a policy that may be counterproductive if it is to increase America’s role in foreign trade.


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