Oil companies like mine are paying for Trump's trade war with China. It's about to get worse

Editor's Note: (Dan K. Eberhart is CEO of Canary, an independent oilfield services company in the United States. He has served as a consultant to the energy industry in North America, Asia and Africa. The opinions expressed in this commentary are his own. )

While the full effects of the trade war between the United States and China have yet to hit the pocketbooks of most Americans, many parts of the US economy are feeling the pinch. Even with the preliminary trade deal reached last week, the oil and gas industry has been especially vulnerable.

While Americans are working in US-based oil and gas fields to produce the energy that powers our homes, cars and factories, much of the equipment they use — the valves, compressors, well-heads and other parts — comes from China where it has always been cheaper. The escalating tariffs have increased the cost of importing equipment from China that oil service companies like mine depend on by as much as 25% — a significant amount in a low-margin business.

This has disrupted the global supply chain and forced US companies to find more affordable suppliers, mostly in Vietnam and other Southeast Asian countries.

While there has been no impact to date on US oil production, and thus no effect on prices at the pump, liquid natural gas export projects that have yet to secure long-term contracts are at risk because of the added cost of tariffs on the Chinese side. If US producers can't find export markets for their gas, they won't invest in new drilling, which will eventually lead to a reduction in US production.

The US price of oil is currently trading at around $54 a barrel — a precarious level for shale producers, who barely break-even at that price. Crude oil traded as high as $76 last October, before the trade war took off and energy commodities became a target.

Economists now fear a global recession. At best, they see an indefinite trade war that eats increasingly into global economic growth — and thus oil demand — in a big way.

Both OPEC and the International Energy Agency, the Paris-based watchdog for the world's major economies, have slashed their 2019 and 2020 oil demand growth projections in recent months. I would not be surprised to see oil demand growth projections drop below 800,000 barrels a day in 2020 — a far cry from the robust 1.3 million barrels a day of recent months.

As global oil demand growth shrinks, America's oil producers find themselves locked out of the world's largest market for oil imports. That's because China imposed a 5% retaliatory tariff on US crude oil on September 1.

So far, this has not been a big deal for American producers thanks to the availability of other markets in Europe, South Korea, India and Japan. But the shale sector is about to unleash a massive surge of oil thanks to the startup of roughly 1.5 million barrels per day of new pipeline capacity from Texas oilfields to Gulf Coast export terminals. And Europe, South Korea and other big importers do not have much more appetite for the light, sweet shale oil American producers have on offer.

But China does. Without access to that market, US exporters may struggle to sell these barrels and be forced to offer sharp discounts to get global importers to take them off their hands. With industry profit margins already on a knife's edge, lower export prices could push them deep into the red. That, in turn, could prompt producers to rein in capital investments, which would cut production growth targets next year. Energy market watchers, including the Energy Information Administration, already predict a slowdown in shale output growth in 2020 due to the sector maturing.

While current surging output from shale means America is now producing more energy than it needs to meet domestic demand, it also means that every new incremental barrel has to find a market abroad. That challenge becomes increasingly difficult when China, the world's largest oil import market, is suddenly off limits.

On the other side, even a partial deal or truce between the Trump administration and Chinese leader Xi Jinping's team would likely unleash up to 500,000 barrels a day of US crude exports to China. That's roughly the level China was importing from the United States around the time when the trade war began. But there's room for China to buy even more American oil.

That's because there's a strategic upside for China here, too. Beijing has offset the loss of US imports mainly by buying more Saudi oil. It's a good bet that after the September 14th attacks on Saudi oil facilities, which temporarily knocked offline roughly half of the OPEC member's output, that Beijing would like to diversify its suppliers. The threat of war in the Middle East, along with US sanctions on Iran and Venezuela, must have China reexamining its options.

The US shale sector remains on solid ground, but it could use some help from the White House if it is to deliver fully on the promise of energy dominance. The resources are there for American oil exports to increase by nearly 5 million barrels a day over the next three years. But whether or not this happens depends on China once again becoming a willing trade partner.