To bring down gasoline prices, start a (trade) war

This article first appeared in The Edge Financial Daily, on July 16, 2018.
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FRUSTRATED with Opec’s inability to help him, US President Donald Trump may have inadvertently found a way of bringing down gasoline prices: Step up the trade war to cut oil consumption. The snag is that it may not work in time for the midterm elections.

The threat of 10% tariffs on an additional US$200 billion (RM810 billion) of Chinese-made products helped propel Brent crude to its biggest daily loss in dollar terms since 2011 last Wednesday, before the new tariffs had even come into effect.

China will respond to this latest escalation as the president continues to fume over trade deficits, escalating a trade war that no one will win (see chart — Unbalanced Trade).

There are two ways that trade wars impact oil demand and prices: one direct and immediate, and the other indirect but potentially more profound in the longer term.

The imposition of tariffs by the US will raise the cost of imports, while retaliatory levies imposed by China, Canada, Mexico and the European Union will hit key exports. China is already considering a 25% tariff on imports of US crude.

Higher costs will inevitably reduce the flow of things across the world’s oceans and skies.

With fewer goods moving around the globe, a smaller number of ships, planes and trucks will be needed to shift them, something that will have an immediate and direct impact on oil demand.

But raising barriers to trade also risks undermining global economic growth and the livelihoods of those directly affected — farmers across the Midwest or autoworkers everywhere, for example.

Increased tariffs mean goods will cost more, hitting the pockets of consumers.

With less money left to spend, driving will inevitably get hit, it always does.

Depending how long the trade war lasts, the effect could be twofold.

First, motorists will examine their driving habits, reducing the number of kilometres they drive.

This year has already seen the first annualised declines in the monthly number of vehicle miles driven since 2014, suggesting that the high gasoline prices in the early part of the year have already had an impact on habits.

But this is only the first part of the correction.

If drivers feel the pinch for too long, they will start to consider the types of vehicles they use and perhaps move to more economic models.

The US has the least efficient car fleet among the G-20 group of countries, according to data from the Global Fuel Economy Initiative.

On average, US drivers get 11.64km per litre from their cars. Their European counterparts can travel around 60% as far again on the same amount of fuel.

Of course, the impact of trade restrictions will only be felt over time. The supply constraints that have bedevilled the market and pushed up oil prices are much more immediate.

An announcement from Libya that the national oil company had regained control of the country’s terminals and would immediately resume exports came just hours before Trump’s unveiling of the additional import tariffs and contributed to last Wednesday’s price fall.

But Venezuelan oil production shows little sign of stabilising, much less recovering, and the impact of renewed sanctions on Iran is only just starting to be felt in lower export volumes.

Saudi Arabia and its allies are doing their best to get ahead of the decline — but even if they do boost output to record levels, that will leave them little spare capacity to deal with any other unforeseen disruptions.

So while Trump’s trade wars will eventually take some of the heat out of the oil market, supply concerns will probably keep it simmering away over the summer. — Bloomberg