For the American oil industry, which President Donald Trump has declared is entering an era of “energy dominance,” an escalating trade fight with China would represent a lost opportunity for U.S. efforts to break into a strategic market.
China has been the biggest new buyer of the millions of barrels of oil unlocked by U.S. shale companies from dense rock formations. Now the second-largest consumer of U.S. oil exports after Canada, China has seen its demand rise 200-fold over past two years and last year bought a fifth of American crude-oil exports. That booming growth leaves U.S. oil exporters vulnerable in the trade fight between the world’s two biggest economies.
For now, U.S. oil isn’t among the 545 U.S. exports, from sea urchins to soybeans, that China has imposed retaliatory tariffs on in response to the Trump administration’s tariffs on more than $50 billion of Chinese goods. But crude oil is on China’s list of 114 exports targeted for tariffs should the trade battle intensify.
“From the U.S. perspective, China is a significant market, but [U.S. shipments are] just 3% of Chinese imports,” said Suresh Sivanandam, Asia refining senior manager at consultancy Wood Mackenzie. “There’s more of the U.S. losing out here than China.”
The shale bonanza gave the U.S. a means to tap into the world’s second-largest market for oil consumption. American exports to China rose sharply after Washington lifted a ban on crude exports in 2015, and are still up strongly in the first half this year.
Asian refineries, including those in China, are mostly configured to process crude typically produced in Russia and the Middle East: medium sour, a classification derived from its asphalt and sulfur content.
But Asian plants had been starting to diversify in recent years to handle the strain of light sweet petroleum the U.S. produces. China’s embrace of U.S. oil was simple economics: U.S. benchmark prices have been running at a significant discount to global counterparts for more than a year.
Two years ago, China’s economic slowdown and vows to embrace renewable energy stoked fears that its demand was peaking. But the growing popularity of sport-utility vehicles and air travel point to the tenacity of China’s oil demand.
Far from receding, China’s crude imports have surged in recent years, reaching a record 298 million barrels in January. It surpassed the U.S. as the world’s top oil importer early last year. The Middle Kingdom now depends on imports for 70% of its needs, and the International Energy Agency estimates that reliance will climb to 80% by 2040.
China is constrained from ramping up output at home due to aging oil fields and the remote location of potential shale reservoirs, which otherwise could enable extraction of oil from rocky formations.
But the growing trade in oil between the U.S. and China is now at risk. The threat of Chinese tariffs on U.S. oil, combined with a recent decision by the Organization of the Petroleum Exporting Countries to lift output, suggest more cargoes from Russia and Saudi Arabia, already China’s largest suppliers, are soon bound for the Asian giant.
If tariffs are imposed, American oil exporters would likely lose the large and consistent destination they have developed in China and find smaller and more scattered buyers abroad. “A less optimal pattern of trade is good neither for consumers nor for consumers,” said Erik Norland, senior economist for CME Group. “When you start putting up barriers, there will be inefficiencies.”
That would also deprive the U.S. of the benefits in building a strong market share in China’s market: the chance to influence other areas of national interest, such as foreign policy, defense ties and domestic innovation. China’s thirst for oil is unlikely to dry up soon: Analysts now say the idea that the country’s oil demand could peak is unlikely, and that it will likely keep growing for at least a couple more decades. More than anything, the trade war is poised to underline another reality: Old energy is again dominant, but its epicenter is gravitating east.
Write to Chuin-Wei Yap at chuin-wei.yap@wsj.com and Kara Dapena at Kara.Dapena@dowjones.com