One can hardly call it a trade war just yet—posturing for a trade war may be a more apt label—but the U.S. Shale industry, which has enjoyed a mighty good run in the last year, may soon find itself the next target as China and the United States face off in the fight to flesh out new trade terms.
Not a day has gone by in the last couple of weeks without hearing the latest round of threats, promises—and analysis of said threats and promises—as the Trump administration clamors for better trading terms between the two nations. It’s a trade war. It’s not a trade war. China has too much to lose. The United States has more to lose than it thinks. It’s merely the start of negotiations. It’s the end of negotiations. The stock market plummets. It rallies. It plummets again. But in this continued tit for tat, the potential effects on the US shale industry should not be underestimated.
U.S. oil exports are at an all-time high, and with this prestige comes a unique vulnerability—a vulnerability that was nonexistent in the days of domestic-use only. Back in 2013, the United States was exporting between 43,000 and 58,000 barrels per day—with Canadabeing the only recipient, thanks to an export ban implemented by the United States in 1975. In late 2015, however, the United States removed the ban, opening up its oil exports to other nations. For week ending March 30, 2018, US crude oil exports reached an average of 2.175 million bpd—a meteoric rise for a nation that for years kept its oil close to home.
This rise in U.S. oil exports has shifted the global oil industry. Where the United States was once, for the most part, a non-entity in global price setting in the industry, now it has achieved major price-setting prowess. In fact, US crude oil production, and its subsequent exports, is giving OPEC and Russia, et al, a run for their money as the production cut pact tries desperately to rebalance the market overhang. But this newfound power is also fraught with challenges, as the United States finds itself susceptible to geopolitical risks as it ships more crude abroad.
One large importer of U.S. crude oil is none other than China—the third largest importer of U.S. crude behind Canada and Mexico, at 15.7 million barrels in January—the latest data available from the EIA.
While China may be the third largest importer of U.S. crude oil, the volumes exported to China still represent less than 10 percent of the total volume exported. Still, that volume represents a value of over $1 billion per month, and that doesn’t even touch on the hundreds of millions taken in from China for LNG shipments.
So the impact of tariffs, which U.S. President Donald Trump has threatened to levy on the fuel, would be felt by the United States—just after it had regained some ground on China’s trade surplus thanks to increasing oil shipments to China which went from zero to one billion in just a few short years.
And it’s not like China doesn’t have other options. China’s oil imports from the United States may have risen in the last couple of years, it still takes almost $10 billion in oil shipments from OPEC member countries. But just days after the trade row ensued, Saudi Arabia confounded traders by raising the price of its Arab Light to Asian customers, when almost everyone expected The Kingdom to cut prices, according to both Reuters’ and Platts’ surveys. The price hike may make the U.S. oil habit even tougher to quit for the Asian nation.
The trade terms are unlikely to be settled overnight, and the United States will have to navigate previously unchartered waters as its oil exports reach more nations.