Under a phase one trade deal signed recently, China would have to buy US$52.4 billion of energy products from the United States in two years’ time, including liquefied natural gas, crude oil and refined products.
This is quite a large amount as China purchased less than US$5 billion of energy products from the US over the past 12 months.
According to data from US Energy Information Administration (EIA), US energy exported to China has remained at a low level as a percentage of its total exports, whereas the US is exporting more of its energy compared to energy stock levels, since the financial tsunami in 2007. No wonder why US President Donald Trump was not happy about the situation.
In the first place, why has the exports-to-stock ratio kept rising over the past decade or so? Didn’t the US have its own reserve needs?
Since the oil price hit the historical high in 2008 and then came down, a lower price has stimulated external demand. On the other hand, the US would have lesser incentive to keep too much energy given the depreciating price.
Yet this is only part of the story. Oil price has been stabilising between US$50 and US$70 for most of the time since 2017. How could this explain an even faster surge of exports-to-stock ratio? There could be several reasons behind this, and such changes might be structural.
One structural aspect is on the supply side. Whenever oil price is above US$50 or US$60, shale oil extraction becomes profitable. This means energy supply would become abundant once oil price goes beyond US$60 or US$70. Naturally suppliers would tend to export more.
Another structural aspect is on the demand side. From 2002 up to the present, the use of renewable energy has doubled, posing a big threat to the demand for traditional energy. The popularity of electric car is another major threat to oil consumption. Given these structural reductions in demand, the motivation to export keeps getting stronger.
The demand for energy would only go up over time, but the types of energy would change. Two centuries ago it changed from wood to coal, and a century ago it changed to crude. In this century, it might be time to change to something else, rendering a long-term subdued oil price outlook.
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