Contributed By: Robbie Fraser, Commodity Analyst | Schneider Electric Energy & Sustainability Services
If you’ve been following financial news headlines over the past year, you’ve likely seen dozens (or maybe hundreds) of uses of the same ominous term: trade war. The idea of a trade war is far from a new concept. You may vaguely recall the infamous 1930 Hawley-Smoot tariffs form your high school history class – if not, here’s a hilarious refresher – but the concept has seen a resurgence over the past two years.
Trump’s Trade Policies
That’s primarily due to the Trump administration’s trade policies. From the campaign trail to the White House, President Trump has shown far greater skepticism of open markets and far more support of protectionist policies than both his Republican and Democratic predecessors. While the nuanced pros and cons of various trade policies could fill a small library, today’s energy market typically demands a more direct approach. Specifically, those tasked with managing corporate energy spend are faced with three core questions:
- Will a trade war impact energy supply or demand (and thus prices)?
- If so, how significantly?
- How much uncertainty remains?
For those looking for a summary, the answers are (in order):
- Almost certainly
- With a potential for highly significant impact
- With a high degree of remaining uncertainty.
For a slightly more detailed version, the ongoing trade tension between the U.S. and China is perhaps the best (and most impactful) case study.
China-U.S. Energy Trade Today
To start, let’s examine the nature of existing energy trade between China and the U.S. Generally speaking, U.S. supply heads across the Pacific to meet Chinese demand. With U.S. oil and gas production at record highs, U.S. exports are surging. Meanwhile, China’s economy continues its rapid growth, which means their energy needs keep growing, too. As a result, China is a leading importer of U.S. energy, including crude oil, LNG, refined products, and various NGLs. Not only that, but China is the main source of demand growth for those exporters going forward, which is a key metric in determining how valuable access to a particular market might be.
As an example of China’s importance as a U.S. energy importer and the impact of a rapidly expanding economy, nearly 10% of all U.S.-produced propane over the past year has been exported to China vs. essentially 0% only 5 years ago.
So far, despite the ongoing threat of increased trade protectionism, the U.S. and China have actually made some progress in the other direction. China has agreed to allow companies to commit to buy U.S. LNG in exchange for the U.S. easing certain import restrictions on Chinese commodities.
Targeted U.S. Tariffs
However, with the U.S. considering tariffs on $150 billion in Chinese imports, the tone could soon change. U.S. tariffs targeting China would almost certainly be met with retaliatory tariffs where China’s U.S.-sourced energy imports stand out as a primary target. Though any resulting drop in U.S. exports to China could at least partially be absorbed by other countries, the size and scale of China’s energy demand means there is no easy replacement. That could mean more supply left to be absorbed by domestic demand in the U.S., which could pressure energy prices lower for affected commodities.
At the same time, there are other policy specifics that could prove bullish for prices. The most prominent example would be the already-planned U.S. tariffs on imports of foreign steel and aluminum. More expensive imports mean higher costs for projects with a heavy reliance on steel and aluminum, including the large number of pipeline projects at various stages of completion across the U.S.
Ultimately, because the U.S. is a consistent net exporter of energy to China, new barriers to that trade should leave more supply within the U.S. system. That would be expected to prove price bearish for wholesale energy costs in the U.S. But, as the last six months have demonstrated, the future of global trade is capable of changing quickly, and the long-term outcome is far from certain.
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