September 2018

The last barrel

Big stick diplomacy
Craig Fleming / World Oil

When Theodore Roosevelt was Governor of New York, and running for U.S. Vice President in 1900, he said his policy was to, “speak softly and carry a big stick.” After becoming the 26th President of the U.S. (1901-1909), Roosevelt described this style of diplomacy as “the exercise of intelligent forethought and of decisive action, sufficiently far in advance of any likely crisis.” While the twitter President doesn’t speak softly and is unable to act in advance, due to decades of poor foreign trade policies by previous administrations, he is leveraging U.S. economic power with decisive authority. Although Trump’s actions are meeting mixed reviews, he appears to be leveling the playing field to give American industries a fair chance to compete for markets inside the U.S.

China not as strong as bravado? Although China’s leaders have projected confidence in the face of President Trump’s tariffs and trade threats, there are signs of unease inside the communist country. Starting in mid-August, officials from the Commerce Ministry have summoned exporters to ask about plans to lay off workers or shift supply chains to other countries. With stocks slumping and the yuan dropping 9% against the dollar since mid-April, censors have been deleting a torrent of online criticism, some of it directed at President Xi Jinping’s leadership (The New York Times).

Luck or incredible foresight? On Aug. 9, China removed U.S. crude imports from goods targeted by tariffs. The actions were taken after the nation’s refiners began shunning American supplies to avoid the risk of tariffs (Bloomberg). China’s original plan to target U.S. crude came at an inopportune time for the country’s buyers. The country’s largest refiner, Sinopec, was in a dispute with Saudi Arabia, saying the producer’s prices were too costly and was cutting purchases, just as it was boosting American crude imports.

Adding to the turmoil, China was faced with the risk of supply disruptions from Iran westward to Venezuela. “With geopolitical threats increasing, U.S. crude offers Chinese refiners an abundant alternative,” said Sophie Shi, IHS Markit, Beijing. “Imagine if this ideal resource was cut off. It would leave China solely dependent on Saudi Arabia, which seems too risky.” President Xi is urging China’s state-owned companies to boost domestic oil and gas output, as the country’s dependence on imports grows. However, the nation’s attempts to establish its own crude benchmark have faltered. Wild swings in the yuan and punitive storage costs are making oil traders leery about placing orders in China’s fledgling oil futures market.

Calming effect. At a high-level meeting on July 31, Xi stressed that his priority for the second half of the year was to ensure stability of the financial system, enhance foreign trade and domestic investment. To his credit, Xi is obviously more concerned with his country’s economic stability and energy security than the need to “win” a trade war with the U.S., according to ESAI Energy’s ChinaWatch report.

Although a recent survey of U.S. business leaders showed 91% of respondents said current tariffs were having “unfavorable consequential impacts” on the domestic economy, China and the U.S. are preparing for their first major trade talks in more than two months.

Iran feels sting of the big stick. The U.S. reimposed economic sanctions against Iran that were lifted under a 2015 nuclear accord. The sanctions are a consequence of President Trump’s decision in May to withdraw from an international deal that sought to limit Iran’s nuclear program, in exchange for easing pressure on the country’s shaky economy. The Trump administration is betting that the review pressure will force Iran to shut down its nuclear enrichment efforts, curb its weapons program and end its support of brutal Middle Eastern governments.

The sanctions have been beneficial already for U.S. oil exporters, as India, one of Iran’s biggest oil customers, is buying more U.S. crude. State-run refiner Indian Oil Corp., which had been buying U.S. crude in the spot market, signed a tender to purchase U.S. crude for delivery every month between November and January. The new order will double the company’s shipments from the U.S., compared to last year.

Additionally, China’s shipowners are shunning Iran’s oil, forcing the OPEC producer to use its own tankers to supply customers. All 17 ships used to ferry oil from the Islamic Republic to China in July and August are owned by the state-run National Iranian Tanker Co (Bloomberg).

No stick necessary. Canadian Prime Minister Justin Trudeau had a recent “run-in” with Mr. Trump’s foreign policy. After the U.S. imposed tariffs on Canadian steel and aluminum, Mr. Trudeau said he was “disappointed” at the reasoning behind the sanctions and didn’t understand “in what universe” they could be considered a national security threat.

Sensing the riff, Saudi Arabia moved to penalize Canada for criticizing their treatment of women activists by cutting diplomatic ties and freezing new business deals. Many Canadians were surprised by the intensity of the Saudi response. So, by simply withdrawing support, Mr. Trump gave the novice prime minister a lesson in foreign policy. It begs the question, “in what universe” is Canada anything more than a client state of the U.S.?

It’s about time. Soren Skou, CEO of A.P. Moller-Maersk said, “the U.S. economy will be hit many times harder than the rest of the world by an escalating global trade war.” If that’s true, why do U.S. stocks continue to climb, while European and Asian markets falter? Although tariffs have the potential to damage the world’s economy, it’s time for the U.S. to defend itself from other countries who have benefitted from decades of unfair trade practices. The rest of the world will have to fend for themselves, as Trump puts “America First.” wo-box_blue.gif

About the Authors
Craig Fleming
World Oil
Craig Fleming
Connect with World Oil
Connect with World Oil, the upstream industry's most trusted source of forecast data, industry trends, and insights into operational and technological advances.