Coronavirus Lets China Off the Hook in Energy Trade Deal
The recently-signed US-China Phase One trade deal is already imperiled: not by politics, but by the novel coronavirus outbreak. Beijing was set to buy $18.5 billion worth of American energy products in 2020 and additional $34 billion next year, but with the virus threatening the Chinese energy sector, Beijing may renege on the agreement.
Energy Consumption Declines Due to Coronavirus
Research from IHS Markit estimates China’s energy demand could fall by up to 73 billion kilowatt-hours due to a reduction in manufacturing. The 1.5% decline may seem small, but it is the equivalent of the entire energy consumption used by Chile, Al Jazeera reported.
Worse, the effect of the novel coronavirus will be endured across the entire Chinese economy, IHS forecasted. If the virus is not contained by March, or its effects at least limited, the nation’s economic growth rate could fall to 4.2% compared to a pre-virus estimate of 5.8%.
“The main uncertainty is still how fast the virus will be brought under control,” said Xizhou Zhou, global head of power and renewable energy at IHS.
The effect on the power grid has already been measurable. The outbreak happened in Hubei province, which has consequently used 21% less power than initially forecasted, Wood Mackenzie energy consultants reported.
Manufacturing industries, such as plastic producers, are operating at significantly less than their full potential with no end in sight.
Already, Beijing has reduced its energy expenditures. The International Energy Agency predicted global demand to fall by 435,000 bpd in the first quarter of 2020. The decrease will be the first since the 2009 financial crisis, it said.
Presently, analysts have downplayed the significance and impact on the global energy market.
“But at this point it’s marginal,” said US Secretary of Energy Dan Brouillette. “If the Chinese market is off by half a million barrels, that is 0.5% of total market, we are not going to see that impact on pricing very dramatically.”
No Longer Beholden to Unrealistic Goals
More critical to American interests is the threat the coronavirus poses to the US-China trade deal. The agreement was hailed as a the first positive breakthrough in Washington’s standoff with Beijing. However, even after the deal was signed, analysts questioned the feasibility of the $50 billion in energy purchases.
The provision called for $50 billion in addition to China’s current energy purchases. Experts questioned the need for it, citing that it would be a 275% year-over-year increase for Beijing.
“Even before the virus, these goals were completely unrealistic. It’s as if children were writing those numbers, completely divorced from the way that business and international trade works,” said Gal Luft, an energy expert and co-director of the Washington-based think tank Institute for the Analysis of Global Security.
Furthermore, oil industry experts questioned American’s ability to even provide those levels of energy products. The target numbers were beyond the projected growth of the US oil industry.
Additionally, the crude type that China typically demands is heavier grade, which is more commonly sourced from the Middle East. Chinese tariffs on crude oil also serve as a deterrent to increased energy purchases from the US.
“It is unlikely that China could both meet its existing contractual obligations and sufficiently increase its purchases from the United States,” analysts from Fitch Solutions said.
Finally, China’s policy of increased independence raises questions about its commitments to rely more on the US. The move to purchase US energy and agricultural is counter to national policies of the Communist Party of China.
Luft said the novel coronavirus represents a way out from the energy purchases. Now, both sides can claim that part of the agreement failed, not due to ill will on either side, but on uncontrollable circumstances.
US President Donald Trump benefits more as he can lay claim to striking a deal and point the finger at China. And in truth, his administration was not at fault for its failure, even if it pushed for unobtainable goals from the onset.
Now, China has an excuse for failing to meet import quotas, likely with no repercussions – and Trump can save face. Had the coronavirus not imperiled Beijing’s industry, both sides would be caught trying to explain away the lack of an economic boost to the US energy market.