Historic changes in Russian energy flows support China

Coordinated sanctions imposed on Russian oil and gas exports by the United States, Europe and their Pacific allies have resulted in a historic shift in the direction of Russian energy flows. Putin’s main ally, Xi Jinping’s China, already a major importer of Russian energy supplies, has increased its imports from the Eurasian giant since the start of the war against Ukraine. Putin has always viewed Xi as a “tough bargain”, but the price discounts Xi got from a desperate Russia in 2022 add to China’s competitive advantage with virtually unlimited access to Russian energy. New research at the Hudson Institute provides insight into the price differential Xi has obtained from global oil prices. These discounts offer the Chinese manufacturing juggernaut an opportunity to increase its dominance in important energy-related industries.

Chinese economic data is not the most reliable as Chinese Communist Party (CCP) bureaucrats often bolster production and other statistics to demonstrate Xi’s historical argument that ‘East rises and West declines’ . We must therefore rely on the primary data that can be found and extrapolate to get as close as possible to an accurate assessment. The Hudson researchers took the last few years of Chinese customs data to plot the volume of Russian oil imports, then took the total reported value of those imports to calculate a price per barrel for its oil imports. The chart below shows results going back to 2019.

While import volumes remained relatively stable between 2019 and 2021, prices – likely resulting from a combination of longer-term contracts and spot purchases – were broadly in line with the global Brent benchmark price. In 2022, Chinese imports started to increase, reaching a record level in volume in May. But prices began to track the price of Brent significantly as Russia became increasingly concerned about replacing closing markets in the West. The table below details this trend.

The terms of Chinese purchases have also been eased by removing letters of credit and extending the repayment terms needed to complete a transaction.

In the natural gas market, China has also accelerated its plans to increase imports from Russia, although due to the need for additional transport infrastructure the impact will not be as immediate as for oil. and refined products.

Russia is already China’s third-largest gas supplier, behind Australia and Turkmenistan, but its proportion will increase significantly as volumes from an existing pipeline increase and a new pipeline announced by Putin during his visit to Xi for the Beijing Olympics will be posted online. . China is also diverting LNG imports from US and Australian suppliers to Russian exporters. In 2022 alone, imports from the United States have decreased by 95%. Much of this LNG has been redirected to Europe, which pays high prices.

News reports frequently claim that long-term Chinese contracts for Russian gas are below market prices, but available data is unable to definitively support this claim. Hudson’s research using Chinese customs data suggests that China paid Russia around 17% less than its average import price in 2020 and 22% less in 2021 for the pipeline. Putin’s observation of Xi’s bargaining prowess when they signed the 2022 gas deal (as well as a larger project deal in 2014) supports the widely held theory of below-market prices, especially compared to the doubled or tripled prices on the spot markets of 2022, which the Europeans are forced to pay to compensate for the losses of Russian exports and their own sanctions.

Russia is also a major supplier of coal to China, which still accounts for more than half of its energy consumption. In total, 73% of Chinese imports from Russia are fossil fuels. It should be noted that the Chinese economy produces more CO2 than all of the industrialized countries that are members of the Organization for Economic Co-operation and Development. The GDP of the latter group is more than double that of China.

As well as helping to keep Putin’s war machine afloat, China’s imports of Russian energy are helping to give its industrial sector an even greater competitive advantage in global markets than that already produced by its heavily mercantilist economic model. subsidized. As European energy prices have tripled or more and face looming basic supply shortages, and US industry is weakened by rising fuel prices and rising inflation, China is benefiting now have the great advantage of a constant supply and favorable prices.

One concrete example among many others concerns the chemical industry, which uses oil and natural gas both as raw material and as process heat. New reports suggest that major European chemical companies such as BASF are at increasing risk of crisis due to both lack of supply and soaring prices. Europe’s power generation and machinery industries are also in grave danger for the same reasons. The US chemical industry has been a global leader as the hydraulic fracturing revolution has produced abundant domestic supplies at favorable prices, but it is now under threat from the growing Chinese industry.

Another looming problem is that the United States and Europe have not built significant new oil refining capacity in the past 20 to 30 years. Shortages in this important part of the industry are a major contributor to politically damaging retail prices for gasoline and other refined products in the Western world. China now has around 30% excess refining capacity and could eventually close the gap and become a major exporter to the West as it benefits from large new supplies at lower relative prices from Russia. (as well as its mutual ally, Iran).

The United States could help its European and Pacific allies, neutralize growing Chinese opportunities in energy and energy-intensive industries, and contribute to Ukraine’s beleaguered efforts to defeat Russian aggression if it treated its industry as oil and gas production as part of their modern “arsenal of democracy” rather than as a pariah that should be phased out. Promoting more domestic production amid these related crises could help reduce domestic inflation and maintain industrial competitiveness in the wake of rising Chinese industrial might fueled by US adversaries in Russia and Iran. This is an acute crisis and the Biden administration and Congress must address it before Ukraine is overwhelmed and Russian ally China gains further dominance in the industrial sector.

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