The Unforeseen Energy Consequences of the U.S. Trade War

The Unforeseen Energy Consequences of the U.S. Trade War

by | published July 24th, 2018

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Domestic oil producers may have thought they were following the intensifying trade war talk as passive observers.

In the past few weeks, however, that has changed dramatically.

Evidence is quickly building that U.S. trade policies may be doing more harm than good for producers. Many companies, including Kinder Morgan and Royal Dutch Shell, await rulings from the Commerce Department on orders of steel imports, which would go toward pipeline construction.

In fact, the Commerce Department has been flooded with pleas from U.S. companies to exclude certain products from the new steel and aluminum import tariffs. So far, the government has denied 452 of these exclusion requests and approved only 267.

It’s only a matter of time before this affects the bottom lines of the stalwart companies set to lead the American energy industry into the future.

Let’s review the broader picture for a moment, then take a look at where the U.S. trade scenario could go from here…

How We Got Here

All of this began back in March when Washington declared that the government would ratchet up tariffs as a means of furthering international policy.

Currently, the U.S. is initiating tariffs against China, Canada, and Mexico, while threatening to apply them against the European Union. In addition, the White House indicated it will consider broadening coverage against China to include all the $500 billion in annual Chinese exports to the U.S.


Tariffs aren’t the only way China has been waging a war against the U.S.

In fact, satellite footage has confirmed China has a type of Electromagnetic Bomb that could knock out sophisticated U.S. defense systems in a matter of seconds.

Now, the Chinese think they can take us down hard – but I promise you, they’re about to learn a very hard lesson.

Surrender isn’t in our national DNA.

In fact, the Pentagon has quietly been funneling billions into a new generation of defense contractors… one of them has top-secret technology straight out of a science fiction novel.

I’ve compiled footage of it in action… click here to see these unbelievable satellite images and learn more.

Traditionally, such actions typically followed when a nation found that another nation was involved in unfair trade practices against the U.S. market with the intention of punishing specific actions (for example, dumping steel below what cost to produce it) with a targeted penalty for a singular commodity.

Now, there are occasions in which such actions are warranted. Yet these have always been in response to product-specific targeted trade, not as the weapon against the rest of the world in general.

The underlying assumption in imposing tariff walls is that the move will assist domestic producers over imports. By taxing a cheaper imported raw material (initially, solar panels and equipment with China, then steel and aluminum with China and Canada) to be more expensive than what is locally produced, tariffs are likely to have a very short-term internal benefit.

Unfortunately, in an integrated global economy, that benefit will not survive long for one simple reason: cost is the main factor in determining market usage.

When tariffs raise imports above the cost of domestic production, they have another unwelcome result…

All prices for products utilizing the raw material become more expensive.

The cost factor results in loss of sales and employment further downstream. And that results in a larger negative economic impact than the effect on raw material production to begin with.

Realize that the issue here is not quality; both imports and domestic production are at the same level. When that is the case, it becomes all about cost.

For some time, costs have benefited some countries as providers while discouraging others. Upon occasion, governments have placed their thumbs on one side of the scales to assist national companies over outsiders.

However, for the last several generations, no American administration has decided to use blanket tariffs as a tool to manage the domestic market.

Until now.

[Warning]: The economy is on borrowed time (Are you prepared for disaster?)

Even when heavy tariffs or quotas (limiting the number of a product allowed in) have been applied, they have been roundly unsuccessful. For example, extensive tariffs on foreign shoes did not save the U.S. shoe manufacturing sector from disappearing.

Other countries less diversified and strong as the U.S. have attempted such broad tariff measures before. It results in something called import substitution – replacing products which had been imported with local production.

When this happens, there are usually two outcomes…

First, the product available in the local “protected” market is often not as good as the outside competition.

I recall years ago when manufacturers like Sony were not allowed to import sharper picture sets and “PIP” televisions into the U.S. I could watch a TV in Moscow or Paris providing multiple live channels at the same time on a striking matrix picture tube while folks back in the states made due with models considerably less attractive.

Second, to the extent that the tariffs last for any period, consumers end up shortchanged.

Open markets always provide for the necessary ingredient of competition, and that always improves the choice facing the buyer. In the absence of competition, domestic producers merely serve a hostage audience with whatever they feel like producing.

These days, such factors are being augmented by yet another. This one encompasses reprisal tariffs directed at those U.S. products rendering the clearest political damage.

Here, China has laid down the gauntlet.

In response to the tariffs already laid down by the White House, China has applied their own on American agricultural exports and one other having a clear connection to the president…

I’m talking about the U.S. oil industry…

China Just Made a Huge Move Against American Oil Producers

Beijing has put both American crude oil and oil product exports on its tariff list.

I have recently been advising those in the sector on this matter. China does not import much crude from the U.S., although it is bringing in more oil products from American refineries. The importance of this move goes beyond the U.S. volume coming into the Chinese domestic market.

Through its developed network of oil traders, buttressed by its leverage over production in other countries, the attack on U.S. oil exports will become more of a concern. That leverage includes foreign oil fields under Chinese ownership combined with Beijing’s widening control over other countries’ oil export revenues (as pay back for large loans provided to other central governments, national oil companies, or both).

Since late May, sources have been telling me that a Chinese strategy is afoot that includes heavy use of contract swaps, futures, redirection of other region’s exports, and derivatives out of Singapore, Hong Kong, Dubai and elsewhere. This is meant to limit access by American exports in several markets, or the ability of those exports providing enough of a profit to justify the trade.

The U.S. oil sector is poised to increase production beyond 11 million barrels a day, while daily crude exports have surpassed 3 million barrels.

Increasing exports – either of crude oil or refinery product – is necessary to justify further expansion of American production.

It is here a tariff war that began with solar panels and steel could have a major negative impact on the U.S. oil patch.

This is something I’ll be keeping a close eye on in the coming weeks and months, as the unpredictability of the White House could very well result in a more exacerbated endgame in the U.S. oil sector.



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