The age-old mystery of China deepens as the nation with 1.5 billion people relaxes its COVID-19 restrictions, re-enters the global economy and cranks up its imports of oil and natural gas.
Economist Ray Perryman, Texas Independent Producers & Royalty Owners President Ed Longanecker, Independent Petroleum Association of America President Jeff Eshelman and analyst Aaron Krejci say that whatever China may be up to, it’s a heavy hitter.
“As COVID restrictions are eased and the Chinese economy returns to more normality, the country will play a significant role in global oil demand,” Perryman said from Waco. “China will be the biggest contributor in what looks to be a record-breaking year of demand and thus production.
“The country’s recovery will also lead to upward pressure on oil prices. Although this pattern will be balanced against other factors and a significant jump is not expected, the pace of economic growth will likely be the biggest factor.”
Perryman said another complexity is the China-Russia relationship and how that plays out.
“As one of the largest economies, China’s return to growth has the potential to enhance global expansion patterns,” he said. “One reason for an increase in global economic growth is that China’s rise in demand for commodities will provide a boost to many countries.
“A rapid rebound could create a boom in exports, but inflation is a concern if growth is accelerated. China has experienced a notable decline in its birth rate, which could eventually lead to workforce challenges as it tries to keep up with worldwide demand among industries and maintain the role it has established in both consumers’ goods and inputs to technology products.”
Asked how to fathom China’s inscrutability, Perryman said, “I don’t think any outsider institution can ever fully understand the inner workings of the Chinese government or the factors driving their decisions.
“Unlike Western nations where some level of transparency is the rule of law, China functions very differently. Information is not shared as fully or readily and what is shared is carefully controlled.
“I do think a strong push to restore economic growth can be observed in the current outcomes.”
Longanecker said from Austin that Chinese demand may well prompt a price hike and the disappearance of excess oil.
“Though China’s economy is projected for a slower economic bounceback at the start of this year, the end of the year may promise a full recovery and put further pressures on an already tight energy market,” Longanecker said. “The U.S. Energy Information Administration has projected that increases in global liquid fuels consumption in 2023 and ‘24 will be driven primarily by growth in China and other non-Organization for Economic Cooperation and Development countries.
“Record Texas energy production could ease the global strain from China’s economic rebound. In 2022 Texas was the nation’s top oil producer, supplying 1.83 billion barrels to energy markets. We also led the United States in natural gas production with 11.2 trillion cubic feet and this number will grow this year.”
Longanecker said China’s natural gas shortage “illustrates the tremendous shakeup of global energy market flows over the last two years.
“Prior to Russia’s invasion of Ukraine, the U.S. exported significant amounts of liquefied natural gas to the Chinese, who had outlined it as a critical part of their energy mix as they stepped away from coal,” he said. “The EIA reported in March 2021 that Asia had become the main export destination for U.S. LNG, accounting for almost half, or 3.1 billion cubic feet per day, of all U.S. LNG exports.
“In contradiction, in the first of half of 2022 74 percent of all U.S. LNG exports went to Europe.”
Eshelman said from Washington, D.C., that producers “would like to remind President Biden that supporting American energy solutions strengthens our national security.
“The choices our nation makes regarding its energy mix have a huge impact on its economy and its international position,” Eshelman said. “If America does not pursue a thoughtful energy policy, the nation will suffer economically and in national security.
“That is why U.S. oil exports are important. We must be on the global stage to prevent China or any other country from controlling worldwide prices.”
Krejci, director of public affairs for Texas Railroad Commissioner Jim Wright, said the impact to prices “may end up being more muted or have a somewhat stabilizing effect if there is a recession or slowdown.”
Speaking as an individual and not for Wright or the Railroad Commission, Krejci said from Austin that increased Chinese demand would balance lower global demand in the event of a recession.
“If we avoid a recession, that could raise prices further and add to inflationary pressures,” he said. “But a lot of forces are at play. Will sanctions significantly impact Russian production? How does the European economy fare with near-zero Russian pipeline imports? What ability or willingness does OPEC have to increase production? How committed is China to their stated environmental goals?”
Krejci said the question is not whether China will need more energy but rather what kind of energy it’ll use and who will supply it.
“Can they increase pipeline infrastructure to take advantage of the excess Russian gas now being shunned by Europe?” he asked. “In 2022 we saw them redirect their U.S. LNG deliveries to Europe and pocket the difference in price. Maybe that continues in 2023 and they supplement increased domestic electrical needs with coal power and Russian pipeline gas.
“I haven’t a clue to what extent China will influence the market except that they’ll do what is in their best interest. My best guess is that their actions will be felt by Europe more than other regions.
“As to the gas market, I can’t see China having too much impact on us as U.S. LNG export capacity is essentially maxed out for the time being. There is a multi-year backlog for new LNG vessels and pipeline infrastructure from our gas-producing regions is seeing signs of capacity restraints till planned expansions are completed in the latter part of 2023 and ‘24.”
