By Sonny Atumah

The escalating trade war between the two biggest economies, the United States and China is a cause for worry in global business. The effect of the trade war is indeed, trickling down into the Chinese real economy and sapping downstream demand especially for gasoline. If not checked it may not take a longer time for the situation to exacerbate with global economies going into recession. The threat of an all-out trade war would dampen the outlook for the global economy. There has been intense concern about a slowdown in China, believed to be the motor for growth in the global economy in recent times. Bloomberg’s Economists say: In an extreme case, where the U.S. imposes 25 percent tariffs on all Chinese imports, and keeps them in place for an extended period,China’s growth could fall to 6 percent in 2019, and 5.4 percent in 2020, even assuming that the government steps up stimulus. The impact on global growth analyst believe is non-linear; the risks are firmly skewed to the downside and the window for resolution is narrowing.

The Goldman’s team estimates those tit for tat tariffs would have a material hit to inflation and lift the core personal consumption expenditure, PCE price measure in the United States by 0.6 percentage point, on top of the 0.2 percentage point already felt from tariff hikes. It would also, combine with limited Chinese retaliation, hit United States GDP by 0.5 percent and Chinese GDP by 0.8 percent over a three-year period. Is the Chinese government feeling the heat and using alibis to rationalize teapot refiners in the industry? Shandong’s Governor, Gong Zheng said that the province will cut 25 million tons of teapot capacity, in what he recently described as a “press the small and grow the large” strategy.

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Teapot refineries are China’s independent refineries that are not wholly owned by the big three national oil companies, NOCs; Sinopec, China National Petroleum Corporation, CNPC, and the China National Offshore Oil Corporation, CNOOC. They have relatively small capacities ranging from 20,000 barrels per day, bpd to 100,000 bpd and are perceived as relatively inefficient compared with their larger state-owned refineries. The earliest independent refineries were not full range refineries; originating as asphalt, lube, and fuel oil refineries. They have become more complex across the board. They tend to be less efficient than those of the NOCs because they were built in a piecemeal fashion whereas the NOCs developed their refineries as integrated projects. It is still not clear what role the Chinese government wants teapots to play in crude oil and products pricing in China. With the new tax rules implemented in 2018, including a US$38 per barrel gasoline consumption tax and a US$29 per barrel tax on diesel, the fortunes of the country’s 40 teapot refineries dwindled after some years of bumper profits since they were first allowed to process imported crude oil in 2015.

What is certain is that gasoline glut is increasing in China as oil tanks along China’s eastern seaboard are filling up. Bloomberg report is that the problems facing the teapots are also being felt by processors across Asia as they struggle with rising oil prices but lower demand for fuel, a situation that the rapidly escalating trade war is threatening to make worse. Chinese refiners, however, are particularly hard hit as rising tariffs mean it will be too expensive for them to buy American crude. While it’s dropped around 5 percent a fortnight ago, global benchmark Brent crude is still up 27 percent this year.

Will the teapots go? It is not likely because they seem to be fulfilling their own side of the bargain. According to Erica Downs, a non-resident Fellow at the Center on Global Energy Policy, Columbia University in the City of New York, China’s teapot refiner’s account for about one third of China’s total refining capacity. Between 2005 and 2015, their refining capacity had quintupled from 832,000 barrels per day, bpd (13 percent) to 4,175,000 bpd (29 percent). The independent refineries historically had low utilization rates due to their limited access to crude, averaging 40 percent or less. They have seen substantial improvement since Beijing began awarding them crude oil import quotas in mid-2015. Their utilization rates increased from 30 to 40 percent before 2015 to nearly 60 percent in 2016, and 62 percent in the first half of 2017. The NOCs buy a sizeable portion of their refined products from the independents at a discount.

The Chinese government has devised means of making sure the teapots conform to standards in product quality for gasoline and diesel, environmental standards and also paying adequate taxes. China’s customs authorities record every barrel of crude oil that is imported into China. The Xi Jinping administration is unlikely to reverse its decision to allow the independent refineries to participate in global oil trading because of its reform agenda. Crude oil import quotas are likely to be an effective tool for facilitating the consolidation of the independent refining sector in the hands of the strongest firms that Beijing has long sought.