President Biden wants Americans to know gas prices are falling fast—and he deserves the credit. The average pump price has plunged from $5 per gallon in June to around $3.25 now. Biden says it’s because he released oil from the national reserve, persuaded petrostates to produce more, and convinced oil and gas companies to lower prices.
Nope. The single-biggest reason for falling oil and gas prices is China’s baffling COVID lockdowns. China is the world’s largest energy consumer and second-largest consumer of oil, and widespread COVID lockdowns have cut into Chinese energy demand. China’s economy is growing at a weak 3.9% annualized rate, compared with 6% before the COVID pandemic struck in 2020. During the second quarter, China’s GDP growth almost turned negative.
The economy is sputtering mainly because China is struggling against COVID more than any advanced nation. Its domestically made vaccines aren’t as effective as those used in the West, and China has a low vaccination rate to start with. There’s a nationwide shortage of hospital beds, which means people getting severe COVID cases might die for lack of treatment. President Xi Jinping sems to prefer a softening economy caused by strict stay-home orders to the risk of a massive COVID death toll.
Chinese oil imports are on track to drop by about 2% this year, with other energy purchases falling by more, according to S&P Global Commodities. “China’s COVID policy is the most important fundamental factor for energy markets,” S&P said in a recent report. “Weaker Chinese energy imports was a key safety valve for oil, gas and coal markets in 2022. Were it not for this demand weakness, prices of all commodities would have undoubtedly been higher.”
China’s energy demand has been below average all year. Yet oil prices spiked in the first half of 2022 due to a “fear premium” caused by Russia’s invasion of Ukraine and worries that sanctions on Russia would cause shortages. That hasn’t happened, easing pressure on prices in the second half of 2022. Gasoline and oil prices are roughly where they were a year ago, before Russia invaded Ukraine.
A key question affecting American drivers is when China will emerge from its COVID slump, and start to import more energy. Surprisingly robust anti-lockdown protests in China led the communist government to ease some COVID-related restrictions in early December. But that may be largely for show. Capital Economics thinks China’s zero-COVID policy may last until 2024. “China is in no place right now to move away from zero-Covid to living with COVID,” Mark Williams, chief Asia economist at Capital Economics, said during a recent briefing. “It’s going to be quite some time before they get their vaccination rate up to where they can relax.”
China could also emerge in phases, with business activity bouncing back before consumers are free to roam about the country. S&P thinks China’s energy imports will grow again in 2023, with commodities prices “well-supported.” That means, higher.
Tightening oil production around the world means prices may never again hit the bargain-basement levels of 2020. How high they will go in 2023 depends not just on Chinese demand, but on whether slowdowns in Europe and the United States become recessions with rising unemployment and declining demand. If that happens, oil prices could stay where they are, around $72, or go lower.
Prices will be higher if the U.S. and Europe narrowly avert recessions and China snaps out of its COVID malaise. There's also a chance Russian oil exports could decline due to new sanctions that will get tighter still in three months. Citibank thinks U.S. crude prices will average a modest $75 per barrel in 2023. Bank of America thinks crude could rise to as high as $110. If there's any lesson for drivers, it's probably enjoy the dips but don't get used to them.