Can China Afford To Slap Tariffs On U.S. Oil?

Oil industry

Chinese refiners and the U.S. oil industry welcomed a decision by Beijing last week to exclude crude oil exports from a list of goods worth US$16 billion, on which China will impose a 25-percent tariff in response to the latest U.S. round of tariffs on Chinese goods with the same value. Since the decision was announced, markets have been rife with speculation over Beijing’s motives for excluding oil exports.

What is known, as per news reports from China, is that the local state refiners actively lobbied the government to have crude oil removed from the tariff list. Chinese refiners are in the middle of a shift from processing heavy and sour grades to sweeter, lighter grades, such as U.S. crude as part of a government initiative to reduce pollution levels, so U.S. oil is important to them.

A Bloomberg report from the end of last week suggested that the exclusion highlighted how important U.S. oil has become for the world as a whole. When China began reducing U.S. crude orders in anticipation of tariffs, other Asian buyers stepped in to buy the cargos. The report does not, however, mention whether these other Asian buyers, including Indian Oil Corp., South Korean SK Innovation, and Taiwanese and Thai refiners, absorbed all the oil that had been shunned by Chinese refiners. This is important for the future implications of China’s oil import policy.

Some believe that China’s move aims to keep oil as a bargaining chip for future negotiations on tariffs or Iranian sanctions. Although China has stated it will continue buying crude from Iran, some analysts are talking about Beijing keeping the oil card as a means to secure sanction waivers. This is an interesting take, given that China may not need to secure such waivers: recent negotiations between Washington and Beijing saw Beijing agree to not boost Iranian oil imports, but to keep taking them in. This strongly suggests that it does not need U.S. sanction waivers to keep buying Iranian crude.

The Bloomberg report seems to suggest that U.S. oil sellers can easily replace China with other buyers from the region. This may be true, since the cost of U.S. crude has fallen enough to make it competitive with traditional suppliers from the Middle East and Russia; the fact is that China is the biggest single buyer of U.S. crude. The latest export data by the EIA shows a monthly 13.227 million barrels of U.S. oil exported to China in May, with Canada a distant second with 8.965 million barrels imported during that month, and the UK an even more distant third, with imports of 6.098 million barrels. The Chinese portion represents more than a fifth of U.S. exports, which in May totaled 62.165 million barrels.

On the other hand, U.S. shipments to China account for just 3 percent of the country’s total imports, and these imports satisfy as much as 70 percent of local consumption. The bulk of Chinese imports actually come from Saudi Arabia and Russia. In other words, U.S. producers depend more on China for their exports than China depends on them for its imports—even Iran imports account for more than twice the portion of U.S. oil, at 7 percent of China’s total.

So why did China leave crude oil out of the latest tariff list? Probably for all of the above reasons. Demand for lighter, sweeter crude is rising in Chinese refineries, so U.S. oil definitely has a place on the Chinese market, reducing the country’s dependence on Saudi Arabia for these crude grades. Yet China will be sure to play the oil card if bilateral tensions continue to deepen and Washington continues to add more goods to its tariff lists. Hailing last week’s decision by Beijing as a win for U.S. oil may be a little premature.

Source: By Irina Slav for