China Taxing US Oil Exports Makes No Difference – Oil Is Fungible

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There are worrying things about the trade spats between Donald Trump and China. But the threat of Chinese tariffs upon US oil exports (or imports of US oil into China at least) aren’t such. Sure, the general idea of a trade war is an exercise in seeing who can impoverish their own populations first and fastest but we all know that anyway. Imposing tariffs upon crude oil though, that’s going to mean pretty much no difference to anything at all. For imposing preferential tariffs upon fungible goods makes pretty much no difference anyway. Perhaps a tiny addition to transport costs but other than that, not much.

Beijing’s retaliatory measures against US tariffs can include penalties on oil coming to China from America. A cut in Chinese purchases of US oil may benefit Iran’s sales.

No, not really.

China’s threat to impose duties on US oil imports will hit a business that has soared in the last two years, and which is now worth almost $1 billion per month.

In an escalating spat over the United States’ trade deficit with most of its major trading partners, including China, US President Donald Trump said last week he was pushing ahead with hefty tariffs on $50bn of Chinese imports, starting on July 6.

China said Friday it would retaliate by slapping duties on several American commodities, including oil.

No, not really.

The two things to understand are that oil is fungible and that very little goes unsold. Fungible just means that one barrel is pretty much like another. Some extracted from Saudi Arabia isn’t that different from that under the North Sea. The people in Singapore don’t care greatly which is which either. That not much goes unsold means that if that which was to be used in Singapore won’t be then it can be sent to Rotterdam instead. And because it is fungible no one cares all that much.

Sure, it’s not perfectly fungible but it is pretty much. And it’s not entirely lossless, given different transport costs.

But this does mean that China applying different import duties to US oil doesn’t make much difference to anyone at all. Obviously, US oil will no longer be imported into China. But that means that China will need to get some from elsewhere – why not Iran? But that Iranian oil would have gone somewhere before, now it won’t. And the US oil will go where the Iranian now isn’t.

Hey, maybe there will be more than just the one iteration of changes. But at the end of the game of pass the parcel about the same amount of oil will be produced in the same places they are now, sold to and used in the same places they are now. It’s just that the matched pairs won’t be the same, even as the overall effect is.

Differential tariffs upon fungible commodities mean very little indeed.