China's Oil Trade Retaliation Is Iran's Gain

Authored by Tom Luongo,

I’ve told you that once you start down the Trade War path forever it will dominate your destiny.

Well here we are.  Trump slaps big tariffs on aluminum and steel in a bid to leverage Gary Cohn’s ICE Wall plan to control the metals and oils futures markets.   I’m not sure how much of this stuff I believe but it is clear that the futures price for most strategically important commodities are divorced from the real world.

Alistair Crooke also noted the importance of Trump’s ‘energy dominance’ policy recently, which I suggest strongly you read.

But today’s edition of “As the Trade War Churns” is about China and their willingness to shift their energy purchases away from U.S. producers.  Irina Slav at Oilprice.com has the good bits.

The latest escalation in the tariff exchange, however, is a little bit different than all the others so far. It’s different because it came after Beijing said it intends to slap tariffs on U.S. oil, gas, and coal imports.

China’s was a retaliatory move to impose tariffs on US$50 billion worth of U.S. goods, which followed Trump’s earlier announcement that another US$50 billion in goods would be subjected to a 25-percent tariff starting July 6.

It’s unclear as to what form this will take but there’s also this report from the New York Times which talks about the China/U.S. energy trade.

Things could get worse if the United States and China ratchet up their actions [counter-tariffs]. Mr. Trump has already promised more tariffs in response to China’s retaliation. China, in turn, is likely to back away from an agreement to buy $70 billion worth of American agricultural and energy products — a deal that was conditional on the United States lifting its threat of tariffs.

“China’s proportionate and targeted tariffs on U.S. imports are meant to send a strong signal that it will not capitulate to U.S. demands,” said Eswar Prasad, a professor of international trade at Cornell University. “It will be challenging for both sides to find a way to de-escalate these tensions.”

But as Ms. Slav points out, China has enjoyed taking advantage of the glut of U.S. oil as shale drillers flood the market with cheap oil.  The West Texas Intermediate/Brent Spread has widened out to more than $10 at times.

By slapping counter tariffs on U.S. oil, that would more than overcome the current WTI/Brent spread and send Chinese refiners looking for new markets.

Hey, do you know whose oil is sold at a discount to Brent on a regular basis?

Iran’s.  That’s whose.

And you know what else?  Iran is selling tons, literally, of its oil via the new Shanghai petroyuan futures market.

Now, these aren’t exact substitutes, because the Shanghai contract is for medium-sour crude and West Texas shale oil is generally light-sweet but the point remains that the incentives would now exist for Chinese buyers to shift their buying away from the U.S. and towards producers offering substitutes at better prices.

This undermines and undercuts Trump’s ‘energy dominance’ plans while also strengthening Iran’s ability to withstand new U.S. sanctions by creating more customers for its oil.

Trade wars always escalate.  They are no different than any other government policy restricting trade.  The market response is to always respond to new incentives.  Capital always flows to where it is treated best.

It doesn’t matter if its domestic farm subsidies ‘protecting’ farmers from the business cycle or domestic metals producers getting protection via tariffs.

By raising the price above the market it shifts capital and investment away from those protected industries or producers and towards either innovation or foreign suppliers.

Trump obviously never read anything from Mises, Rothbard or Hayek at Wharton. Because if he did he would have come across the idea that every government intervention requires an ever-greater one to ‘fix’ the problems created by the first intervention.

The net result is that if there is a market for Iran’s oil, which there most certainly is, then humans will find a way to buy it.  If Trump tries to raise the price too high then it will have other knock-on effects of a less-efficient oil and gas market which will create worse problems in the future for everyone, especially the very Americans he thinks he’s defending.

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Comments

Juggernaut x2 Wed, 06/20/2018 - 23:11 Permalink

it must drive the Tribe crazy that they aren't getting the skim on Iran's oil on the NYMEX not to mention that Iran's oil is traded with China outside the USD. The death-knell for Saddam was when he toyed with the idea of trading his oil in Euros.

shortonoil Juggernaut x2 Thu, 06/21/2018 - 08:45 Permalink

China is not buying US crude, which is oil that has an average API gravity of about 34. China is buying LTO (which has an average API gravity of over 45) to be used as a diluent for heavy oil, and a petro chemical feed stock. The US has a shortage of crude, and that is why it is importing 8 million barrels of it a day. It has a lot of LTO which it can't use. To sell this heavily subsidized very light hydrocarbon (which it can't use directly) it sells it at a large discount. China is the least significant buyer of this very light oil. Canada and Mexico take the majority of it. Extra light oil is in no short supply on the world market. Condensate (light oil produced from the gas extracted from an oil well, or condensate field, and which is a better product than LTO because it is more consistent) is produced in large quantities by Russia, Qatar, Indonesia, and many other producers. Trump's tariff is simply pricing US LTO out of the market. If the Chinese can not buy US LTO at a heavy discount they will just go buy its equivalent someplace else! If Trump's tariff authors had known any thing about oil, they would have realized what was going to happen. Apparently they have been listening to the shale industry, and the MSM hype. The world doesn't need an additional 5 mb/d of extra light hydrocarbons. It already has an excess of it, but the US does need the thousands of high paying jobs that are created by the shale industry. SSDD!

http://www.thehillsgroup.org/

In reply to by Juggernaut x2

falconflight Wed, 06/20/2018 - 23:17 Permalink

America must decide whether being the world's bitch is worth it or not.  Bitch very likely wins.  Post American Presidents/Gov'ts has never been more apparent.  Trump is the last American President.  

JibjeResearch Wed, 06/20/2018 - 23:41 Permalink

China BRI and PetroYuan are the keys to stop the US.

It's sad that American leaders are not able to counter the BRI and PetroYuan.

The next step is a military war ...

 

Why are we so incompetent?

It's because we have been cheating, stealing, and coercing others to do something while not practicing the art of innovation; thus, when we need the art of innovation, we fail to come up with a good policy.

 

Pay back is going to be a baitcheeee....!

We bought too much, now it's check out time!

 

louie1 Wed, 06/20/2018 - 23:41 Permalink

The USA is finished. The dollar will be worth 20 cents in 5 years. Then the US can compete. It is a long way down to that point. Note that US sanctions will then be used to stop creditor nations buying up US assets.

US Interest rates will suck the life out of any US recovery. You can see that now.

I think there will be a large pool of unemployed people fighting for jobs. Capitalists, bankers, military, politicians and spies will be laughing. The rest.....starving.

snblitz Wed, 06/20/2018 - 23:47 Permalink

The trade war path was trodden long ago by both the "friends" and enemies of America.

For decades just about every country in the world has put in place advantageous trade polices for itself that are to the disadvantage of the US.

Our politicians and media have allowed this to happen and covered it up as they are simply bought and paid for by foreign interests and foreign countries.

Trump has asked for fair and reciprocal trade.  You can see and hear him do so if you can get past the censors at youtube.  He said if fair and reciprocal trade was not to be had he would impose tariffs to level the playing field.

https://www.finitespaces.com/2018/02/15/taxes-and-trade-wars/

 

JibjeResearch snblitz Thu, 06/21/2018 - 00:23 Permalink

There's no fair trade or free trade...

A BMW is not A Ford Taurus.

An Apple is not An Orange.

An Orange from Argentina is not the same as an Orange from Mexico.

There will be negotiation to settle on trade.

A trade war is just that..., countries try to get the best of the situation...

So we have to go into a trade war until somebody become second.

It's the way to create the pecking order!

When a country becomes second, that country lacks creativity.

We can call that lacks of smartness...

I witness many folks on ZH lack smartness... and most of them are middle/working class.

Rich people and poor people think differently...

The econ/political perspective/world view of a person says a lot about the person.

We need to change the way we think and do business if we are to have a chance...

because our resources are so thin... high debt, high cost of production, low efficiency of labor.

In reply to by snblitz

uhland62 Thu, 06/21/2018 - 00:27 Permalink

" that are to the disadvantage of the US" which was the price to pay for playing Emperor.

 

If the US insists on fair and reciprocal trade that implies some kind of equality, not superiority of an Emperor. Whichever way is chosen, fair and reciprocal = partners, unfair and costing the US = price to have underlings and the Emperor's throne. Take your pick!!!

WTFUD Thu, 06/21/2018 - 01:12 Permalink

With Goldman (& friend, Rothschild) writing Trump's Economic Policy & Israel writing his Foreign Policy the USSofA is up shit creek, way down the Swanee, without a paddle.

With his defunct college and ghost writers for his books, it's a shame he never read one.

Money_for_Nothing Thu, 06/21/2018 - 07:20 Permalink

So Iran gets to buy crappy consumer goods from China now? What a victory for radical-islam. Or is China going to help a radical-islamic nation arm itself with nuclear missiles? China is a lot closer to Iran than than the US is. North Korea was a lot easier to control than Iran would be. China could have snuggled with Iran any time it wanted to in the last 40 years. Wonder why it didn't? Afraid of the US? (sarcasm)