China is the main beneficiary of the biggest change in energy trade flows in recent memory as Russia pivots to Asia to sell the oil and coal banned in the West and looks to build another major natural gas pipeline to China. Beijing is not only a willing energy trade partner for Russia, soaking up hundreds of thousands of barrels of crude oil per day unwanted in the West.
China is also paying for Russian energy at growing discounts to international benchmarks, which makes its government-managed industry even more competitive than that of the U.S. and its allies, Thomas J. Duesterberg, Senior Fellow at U.S.-based think tank Hudson Institute, writes in Forbes.
“The United States could help its European and Pacific Rim allies, neutralize the growing Chinese opportunity in energy and energy-intensive industries, and contribute to the beleaguered effort of Ukraine to defeat Russian aggression if it treated its oil and gas production industry as part of its modern-day “Arsenal of Democracy” rather than as a pariah that should be slowly phased out,” Duesterberg says.
But the Biden Administration is intent on keeping its climate goals and is blaming the oil industry for all the sins—from not enough gasoline to bring fuel prices down, to price gouging and profiteering from triple-digit crude oil prices.
In the wake of the Russian invasion of Ukraine, industries in the West are grappling with soaring energy, input, raw material, and equipment costs. The EU may be on the brink of a recession later this year with its gas supply from Russia slashed and the possibility of rationing for some industries in a few months’ time. Recession in the U.S. is also a distinct possibility after the Fed aggressively hikes key interest rates to tame the highest inflation in four decades.
Meanwhile, China is enjoying growing flows of crude and coal at cheaper than benchmark prices. Although China still has ups and downs in its economic growth due to the ‘zero COVID’ policy with sudden lockdowns, it is boosting its global position further because of the cheap commodities from Russia it has been importing in recent months.
China’s industrial power is being fueled by U.S. adversaries in Russia and Iran, Hudson Institute’s Duesterberg notes.
China, which has never followed U.S. sanctions and keeps importing oil from Iran, has now increased imports of crude from Russia to records. China likely imported another 2 million barrels per day (bpd) of discounted Russian crude oil in June after bringing in around the same record amount in May. This kept Russia as the top Chinese oil supplier ahead of Saudi Arabia for a second consecutive month, according to tanker tracking firms Refinitiv, Vortexa, and Kpler cited by Reuters.
A Hudson Institute analysis of Chinese customs data and the reported value of its imports showed that China paid for Russian oil 9% below Brent prices in January. The discount widened to 18.2% below Brent prices in May, when China imported a record 2 million bpd of Russia crude. Beijing also imports the typical high volumes of coal from Russia, as higher purchases from China, India, and Turkey have offset in recent months dwindling Russian coal sales to Europe ahead of the EU ban on coal imports starting in August.
In natural gas, however, it will take years for China to materially boost pipeline imports from Russia because of a current lack of infrastructure. Russia is already sending natural gas via pipeline to China through the Power of Siberia pipeline, with plans for another major gas pipeline, but this will take years to complete and commission. Analysts warn that Russia—having no other choice—could become too dependent on China for energy trade, especially for its gas sales.
By Tsvetana Paraskova for Oilprice.com
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