Shared from the 8/2/2019 Houston Chronicle eEdition

Oil hit hard by planned new tariffs on China

Escalating trade war sends prices tumbling as energy sector struggles to gain momentum

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President Trump said the U.S. would impose tariffs on more Chinese goods next month.

President Donald Trump’s decision to impose tariffs on an additional $300 billion in Chinese goods sent oil markets into a nosedive Thursday, delivering a setback to an already slumping energy industry and a potential blow to a Houston economy still linked to the fortunes of the oil and gas sector.

Oil prices plunged 8 percent in a little more than an hour following the president’s tweet that he would impose a 10 percent tariff on the remaining Chinese products not covered by earlier rounds of tariffs as of Sept. 1. Stock markets fell, too: the Dow Jones Industrial Average shed 280 points, or 1 percent, to close at 26,583.

Crude, which suffered its steepest one-day drop in four years, took the worst of the beating Thursday because of concerns that the escalation of the U.S.-China trade war would further slow global economic growth and weaken energy demand when supplies are plentiful and U.S. production is booming. Oil is again closer to $50 a barrel than $60, after losing $4.63 a barrel Thursday to settle at $53.95.

For Houston, the rout in oil markets — and the prospect of lower prices — comes just as oil and gas jobs have begun to creep back to the region. The oil and gas extraction sector only began posting year-over-year gains in February, turning positive for the first time since the oil bust began in 2014. Now, the question is whether Houston’s energy sector will be able to keep adding jobs if the trade war further weighs on the global economy and energy demand.

“It will be detrimental to Houston and Texas,” said Craig Pirrong, a professor of finance at the University of Houston, of the impact of continuing tariffs. “The fact that oil is bearing the brunt of this announcement suggests that Houston is going to fair relatively worse compared to other areas of the U.S.”

New roadblock to recovery

Oil was hit particularly hard by the tariff news because the underlying fundamentals of energy markets were already weak, said Michelle Foss, a fellow in energy and minerals at the Baker Institute for Public Policy at Rice University. While geopolitical developments, such as Iran’s seizure of ships in the Strait of Hormuz, may drive prices higher temporarily, there’s simply too much supply in the global market to maintain high oil prices, she said.

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Erin Schaff / New York Times

President Donald Trump, frustrated by increasingly fruitless negotiations with Chinese President Xi Jinping, says the U.S. will impose tariffs on an additional $300 billion worth of imports.

“As long as oil is under pressure because of the abundance of supply, we’re going to see this situation over and over,” Foss said. “It’ll go up on geopolitics and it’ll fall on something about the underlying economy and trade.”

U.S. oil and gas producers have continued to pump record amounts of crude oil, producing 12.2 million barrels of oil per day last week, according to the Energy Department’s report. Continued record production in the U.S. has resulted in investor fears that the global market for crude will become too saturated.

The growth in world oil demand, meanwhile, is expected to decline. The Chinese economy, the second largest in the world, is slowing, at least in part due to U.S. tariffs, and that is reducing its appetite for energy. More tariffs are only likely to depress energy demand in China, which is a major importer of oil.

Despite the recent turmoil, Houston’s economy remains solid. Unemployment is near all-time lows and employment is growing across sectors. In June, the region added 2,000 jobs in oil and gas extraction from the same time last year.

But other indicators of Houston’s economic health — notably a decline in manufacturing orders and falling oil prices — forecast a slowdown, according to a recent analysis by the Federal Reserve Bank of Dallas. Manufacturing, which as already taken hits from tariffs on steel, is closely tied to the energy sector in Houston.

Patrick Jankowski, senior economist for the Greater Houston Partnership, a business finance economic development organization, said the additional tariffs on China may further increase uncertainty among oil and gas companies, leading them to curtail spending, hiring and wage increases in Houston.

“We’re still seeing some layoffs in the oil and gas industry,” Jankowski said, noting that the industry is not fully recovered for the last oil bust. “They’re worried their sales are going to suffer.”

Profits plunge

The hit to oil prices from tariffs is likely to put the brakes on energy company investments, experts said. Second quarter earnings for Houston-based oil and gas companies have been relatively lackluster compared to last year. Many saw profits fall sharply from a year ago.

Halliburton’s profits, for example, plunged to $75 million in the second quarter, down from $511 million during the same period in 2018. The Houston oilfield services company, hit by slumping activity in the Permian Basin and other U.S. shale oil fields, said last week it would cut 8 percent of its North American workforce.

Surveys of energy executives in Texas conducted by the Federal Reserve Bank of Dallas found that capital expenditures by energy firms were down in the second quarter. Uncertainty about the global trade situation is likely causing firms to pause investment for the time being, experts said.

“People have to watch Trump’s Twitter feed to see what happens next,” said Pirrong of the University of Houston. “Uncertainty is an impediment to investment, and it’s quite difficult to plan in these circumstances.”

The president wrote that the tariff was a response to China deciding to renegotiate a trade deal and failing to buy “large quantities” of American agricultural products. Despite the president’s insistence that the trade war will help rectify a trade imbalance with China, Houston has yet to see the benefits. The region imported more Chinese goods and exported fewer Houston-made goods in 2018 than in 2017.

China is one of Houston’s largest trading partners, second only to Mexico, according to U.S. Census Bureau data. Trade between Houston and China has doubled over the last decade to $20.3 billion in 2018. erin.douglas@chron.com

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