China has suddenly become one of the biggest markets for U.S. oil

July 21, 2017, 7:24am

Five years ago, the U.S. exported just 67,000 barrels of oil per day, a relative drop in the bucket compared to the roughly 19 million daily barrels the U.S. consumes. This year, however, U.S. exports have pushed past 1 million barrels per day, and a huge amount of that crude is going to a relatively unlikely customer.

China.

America’s greatest rival leapt over Canada to become America’s No. 1 foreign oil market in the month of February, according to U.S. Energy Information Administration data. Then in April, the most recent month for which the EIA has figures, China was again in first place, receiving from the U.S. 323,000 barrels per day — or 30 percent of all U.S. oil exports.

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That’s also about 4 percent of China’s total oil imports for the month, according to data released by the Chinese customs agency. In other words, U.S. crude is now vying for meaningful market share in China.

“This is a huge shift,” said Ellen Ward, a professor at Jacksonville University who specializes in energy and geopolitics. “And the U.S.-China energy relationship could expand from here.”

Thanks to the fracking boom, U.S. oil production has grown 80 percent in the past decade, and soaring U.S. oil exports to China are just one example of how much America’s role in global energy markets has changed. Only one-fourth of America’s oil consumption is currently made up of net imports of foreign oil and refined products, the lowest share in almost half a century. And the U.S. is rapidly becoming a major supplier to other oil-hungry countries, with daily U.S. oil exports exceeding the 2016 averages of five members of the OPEC oil cartel: Algeria, Ecuador, Gabon, Libya, and Qatar.

China recently bypassed the United States to become the world’s biggest oil importer, and it may view American crude as a crucial way to reduce its reliance on the world’s oil-exporting leaders, Saudi Arabia and Russia.

“China has always been worried about diversifying supply,” said Robert Godby, director of the Center for Energy Economics and Public Policy at the University of Wyoming. “American production adds to that diversity.”

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It is an important new plot twist in the geopolitics of oil: rising concern over energy security in China, and newfound optimism about energy independence in the United States, according to Michael Klare, author of “The Race for What’s Left: The Global Scramble for the World’s Last Resources.”

“Chinese officials are concerned that their growing dependence on oil imports is an Achilles heel for them,” said Klare, professor of peace and world security studies at Hampshire College. “For U.S. leaders, that’s a source of confidence and even cockiness because their own dependence is diminishing.”

This new dynamic is reshaping the world. China is expanding its international presence in places like Africa and the Middle East, and building up its navy in part to protect oil imports, Klare says. Vital shipping lanes like the South China Sea, where China has made controversial territorial claims that have inflamed regional tensions, become even more strategically important as China’s reliance on seaborne foreign oil grows.

The country’s flagging domestic oil output also creates a huge incentive for it to invest in renewable energy, while the U.S., particularly under President Donald Trump, looks to drive economic growth by boosting fossil fuel production, Klare says. These diverging incentives help explain China’s strong support for the Paris Agreement and Trump’s total lack of support for it.

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“If you were the Chinese leadership faced with this strategic situation,” Klare said, “you’d do everything you could to suppress demand for oil and move in the direction of renewable energy.”

U.S. oil exports were forbidden by law, with few exceptions, for almost four decades after the 1973-74 OPEC oil embargo, a crisis that sent American gasoline prices skyrocketing. By 2015, the U.S. was exporting oil to only 10 countries, almost all of it to Canada. That year, China got almost no crude oil from the U.S.

But soaring U.S. production prompted Congress to scrap the prohibition in December 2015, which caused a shakeup in America’s role in global energy markets and an explosion in U.S. exports. The following year, the U.S. shipped oil to 26 countries — and China quickly began vying with Canada to become America’s premier export destination.

Oil prices are now hovering around $50 per barrel — they were twice that just a few years ago — and last year the OPEC oil cartel, along with non-member Russia, agreed to reduce output by about 1.8 million barrels a day in an attempt to boost prices. That worked for a little while, but it also encouraged American oil producers to produce more.

“Other countries have tried to put the genie back in the bottle by reducing output to force prices back up, but American oil producers have just kept pumping,” Godby said. “The only way OPEC could keep their prices up was to reduce production and cede more market share to U.S. oil.”