Thank China for plunging gasoline prices

President Biden wants Americans to know that gas prices are falling fast—and he deserves the credit. The average price at the pump has dropped from $5 per gallon in June to $3.25 today. Biden said that because he released oil from the national reserve, he convinced the petrostates to produce more, and convinced oil and gas companies to lower prices.

No. The biggest reason for the drop in oil and gas prices is China’s confusing COVID lockdowns. China is the world’s largest energy consumer and second largest oil consumer, and widespread COVID lockdowns have cut China’s energy demand. China’s economy grew at a weak 3.9% annualized rate, compared to 6% before the COVID pandemic hit in 2020. During the second quarter, China’s GDP growth almost turned negative.

The economy is growing because China is struggling against COVID more than any other advanced country. Vaccines produced at home are not as effective as those used in the West, and China has a low vaccination rate to begin with. There is a national shortage of hospital beds, which means that people with severe cases of COVID may die from lack of treatment. President Xi Jinping has preferred a sluggish economy caused by strict stay-at-home orders to the risk of a massive COVID-19 death toll.

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China’s oil imports are on track to fall about 2% this year, with other energy purchases falling more, according to S&P Global Commodities. “China’s COVID policy is the most important fundamental factor in energy markets,” S&P said in a recent report. “Weaker Chinese energy imports are a key safety valve for the oil, gas and coal markets in 2022. If not for the weakness in demand, the prices of all commodities in doubtless higher.”

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China’s energy demand is below average throughout the year. However, oil prices rose in the first half of 2022 due to a “fear premium” due to Russia’s invasion of Ukraine and concerns that Russian sanctions could cause shortages. That hasn’t happened yet, 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.

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A key question affecting American drivers is when China will emerge from the fallout from COVID, and begin importing more energy. Surprisingly strong anti-lockdown protests in China led the communist government to ease some COVID-related restrictions in early December. But that may be mostly for show. Capital Economics thinks China’s zero-Covid policy could last until 2024. “China is not in a place now to move from zero-Covid to living with COVID,” said Mark Williams, chief Asia economist at Capital Economics, said in a recent brief. “It’s going to be a long time before they get their vaccination rate up to where they can rest.”

China can also emerge in phases, with business activity rebounding before consumers are free to move around the country. S&P thinks China’s energy imports will grow again in 2023, with commodity prices “well supported.” I mean, higher.

The tightening of oil production worldwide means that prices will never reach bargain-basement levels in 2020. How high they reach in 2023 depends not only on Chinese demand, but also on whether the slowdown in Europe and the United States will be in recessions with rising unemployment and declining demand. If that happens, oil prices may stay where they are, around $72, or go lower.

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Prices could be higher if the US and Europe narrowly avoid recessions and China slips away from the ravages of COVID. There is also a chance that Russian oil exports could decline due to new sanctions that will be tougher for three months. Citibank thinks US crude oil prices will average around $75 per barrel in 2023. Bank of America thinks crude oil could rise to $110. If there is a lesson for the drivers, maybe they enjoy the dips but don’t get used to it.

Rick Newman is a senior columnist for the Yahoo Finance. Follow him on Twitter at @rickjnewman

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