China’s Oil Trade Retaliation is Iran’s Gain

Donate

Written by Tom Luongo; Originally appeared on tomluongo.me

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

China’s Oil Trade Retaliation is Iran’s Gain

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.

China’s Oil Trade Retaliation is Iran’s Gain

By slapping counter tariffs on U.S. oil, that would more than overcome the current WTIC/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.

***

Donate

SouthFront

Do you like this content? Consider helping us!

  • javier

    the theory goes that the ptb need to wreck america and the dollar in order to bring about the nwo with one currency. Is this a chapter in that plan? Might be because surely no one reasonably intelligent goes down this trade war route thinking it will end well.

  • Ger

    The pain, the pain to come that will effect the American consumer in ways Wharton never taught. It is easy to teach basic economics when you control the economics of the world through force. There are new players that, to now, have only showed their ‘number’ cards. They still have a hand full of face cards and their ace. The Americans will blame the counter parties for the raging inflation to come….and the sheep will keep grazing until the grass runs out. Can not afford medicine, can not afford adequate food, homes lost to foreclosure by the millions, massive unemployment and the fat cats are much fatter as planned.
    The pain, the pain!

  • Garga

    Should I, an Iranian, thank Trump? Ok, Thank you Trump, there!

    One little tiny thing on the very last sentence of the article: Is Trump really defending America, does what he does for the United States and is his heart beating with never-ending love for it’s people? Because as far as I can see, almost everything he does screws [middle class and poor] Americans but benefits another country’s regime, a tiny one half a world away from the US borders.

    • Siegfried

      LOL!
      Yep. I guess Bibi blows-up now

  • Siegfried

    The best part of this story is that CHINA needs now IRAN badly, because the Saudis and the USA are in the same “team” and the Saudis could cut the OIL-supplies for CHINA.
    And by PUTIN.. you never know what’s next by him, since BIBI was in Moscow.
    SO: IRAN can count on the CHINESE in military support.
    Well, BIBI… things become complicated, what?

    …. Now what is missing in the GULF, is a CHINESE BASE on the Iranian Coast. …
    And in the interior, on Iranian military airports, some of the 6th generation Chinese warplanes, interceptors and -long-range STEALTH- missile-launchers equipped with anti-ships missiles, the newest the CHINESE have now.
    Well done, Trump ! :)))) “Make Iran Great Again” (sic!)

    • Garga

      You know Siegfried, a foreign military base on Iranian soil is something that I can hardly imagine and is very unlikely to happen, unless Iranian psyche (in which, a foreign military base -where Iranian law is not applicable- is equal to losing our independent) changes.
      I can assure you that NOBODY in Iranian administration, parliament or armed forces dares to propose for creation/lease/whatever of a foreign military base and for good reasons. However, if someone is tired of their political/civil servant career, it’s a very quick remedy!

      Before 1979 the US didn’t have an official base here and they were operating inside Imperial Iran Army, Navy and Airforce bases but in reality there were a lot of areas closed to Iranian personnel and even intelligence. The way they interacted with Iranian armed forces, which TBH was not so different to the way they do with Germans or Japanese, caused problems as we do not react like Germans or Japanese in those situations. Shah started to build a massive navy base in Chabahar (Iranian shores on Sea of Oman, not the Persian gulf) with intention of leasing some parts to the US and the revolution didn’t let him to finish.

      Sometimes in military operations it’s needed that foreign ships, aircrafts and such use Iranian airspace, bases, ports and so on. The parliament’s solution is to permit on a case by case basis, something which is done for Russian warplanes and cruise missiles on their way to Syria and as both countries are partners in this struggle, is less sensitive.

      • Ronald

        Question; the naval facility that ships the oil and LNG to China via Burma is that in Iran or Pakistan, and if in Iran, would a Chinese presence on a month to month or year to year basis be conceivable ?

        • Garga

          The facilities for shipping Iranian LPG (LNG? I don’t know), crude or petrochemicals are on Iran shores (A very big terminal on Kharg/Khark Island). A commercial facility is something entirely different than a military one. There are different phases of the South Pars that Iran partners with foreign companies (seldom a state). That’s a usual practice everywhere (BP took a dump all over the gulf of Mexico). A foreign company is allowed to hire it’s internal security (unarmed or armed with non-lethal arms, batons, shockers, spray, cuffs) from other nationalities as long as they have work visa/permit but foreign soldiers, I don’t think so. The security of such facilities is the responsibility of the police or the Navy and a dedicated force of IRGC if offshore.

          The taboo is the foreign presence, not their nationality. It’s root is in the last 2 centuries (Qajar dynasty) and the clashes Iran had with the GB and Imperial Russia when we were at the height of corruption in the weakest point in our history.

  • Barba_Papa

    If this works out this way it wouldn’t be the first time that measures intended to accomplish A will lead to B instead. Real wars, trade wars, it matters not, the point remains that no plan survives contact with the enemy, as the enemy consists of real human beings, not some game AI or robots, and human beings can react unpredictably. And many a country which started a war ended with a different result then originally expected.

  • j. jaxson

    yes to Iran-the first arayan race.