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Why oil markets stabilized far faster than anticipated · THE DAILY BRIEF

0:00
Speaker 1: The disruption to oil supplies through the Strait of hor
0:03
Speaker 1: Moves was a major shock to the global economy. Prices surged,
0:07
Speaker 1: government scrambled for emergency supplies, and many feared the crisis
0:11
Speaker 1: was only getting started. But then something unexpected happened. After
0:17
Speaker 1: the us RAN Memorandum of Understanding in June. Remember that
0:22
Speaker 1: was the starting point for negotiations. Oil markets stabilized far
0:28
Speaker 1: faster than anticipated, and that the center of the story
0:31
Speaker 1: was a dramatic drop in Chinese oil imports. But why,
0:36
Speaker 1: I put that question too, oil analyst Rory.
0:39
Speaker 2: Johnston, China did save the global oil market, and the
0:44
Speaker 2: most concerning thing about it, aside from the fact that
0:46
Speaker 2: we still don't fully appreciate how they managed to do it,
0:49
Speaker 2: we have even less visibility on the why. So.
0:52
Speaker 1: Johnston says, China slashed its crude oil imports during the
0:57
Speaker 1: crisis so dramatically that it helped offset the supply shock
1:01
Speaker 1: coming out of the Middle East. The result of that
1:04
Speaker 1: was a feared global energy crisis never fully materialized. So
1:09
Speaker 1: what exactly did China do and did Beijing quietly save
1:14
Speaker 1: the global economy?
1:15
Speaker 2: The one thing I and other analysts did not expect
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Speaker 2: was the scale of import retrenchment in China, So Chinese
1:24
Speaker 2: crude oil imports fell by roughly forty forty five percent,
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Speaker 2: roughly five million barrels a day from pre war levels
1:32
Speaker 2: to the levels we saw average through June, that is Gargantua.
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Speaker 2: That is larger a shift than the entirety of the
1:39
Speaker 2: world's SPR releases combined.
1:41
Speaker 1: But SPR stands for strategic petroleum reserve. These are emergency
1:46
Speaker 1: stockpiles of oil that governments keep on hand for major
1:50
Speaker 1: supply disruptions. So what Johnston is saying is China's drop
1:54
Speaker 1: in oil imports was larger than the oil released from
1:58
Speaker 1: the entire world's emergency reserves. Five million barrels per day
2:03
Speaker 1: is a huge number, So how did China manage to
2:07
Speaker 1: pull it off?
2:08
Speaker 2: And that's just from China, And the striking thing about
2:11
Speaker 2: it is that we still don't fully understand how they
2:14
Speaker 2: managed to pull it off. This is still the number
2:16
Speaker 2: one mystery amongst oil analysts in this oil market because
2:21
Speaker 2: the pace of apparent demand destruction because China hasn't published
2:25
Speaker 2: official numbers on demand, so we infer demand based on
2:29
Speaker 2: flows into an out of the country. On that apparent
2:32
Speaker 2: demand basis, China looks like it is in the midst
2:34
Speaker 2: of a massive depression or a COVID zero lockdown like
2:38
Speaker 2: we saw in twenty twenty two.
2:39
Speaker 1: But wait a minute, China isn't in a depression and
2:44
Speaker 1: it hasn't imposed a COVID style lockdown. That's what has
2:48
Speaker 1: analysts scratching their heads. Collapse in oil imports on this
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Speaker 1: scale should have been accompanied by a major economic shock. Instead,
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Speaker 1: it appears China somehow absorbed these disruption without the economic
3:02
Speaker 1: pain many expected. So what are the possible explanations?
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Speaker 2: There are those that argue, I think that the Chinese
3:09
Speaker 2: system has become so flexible between you know, electrication in
3:13
Speaker 2: you know, we know that they have you know, globe
3:16
Speaker 2: you know, world setting, world leading ev penetration rates in sales.
3:21
Speaker 2: It's still not enough in my in my opinion, to
3:23
Speaker 2: account for the swing, but it's there, right. We know
3:26
Speaker 2: that they've been driving to reduce oil dependence in the
3:29
Speaker 2: first place. Also in petrochemicals, we know that they have
3:31
Speaker 2: all these swings. So the one argument is that this
3:34
Speaker 2: was a natural response to the market. But again I think, well,
3:37
Speaker 2: maybe you could account for some of that under a
3:39
Speaker 2: natural response. The response has been too large and has
3:44
Speaker 2: lasted too long. I mean, again, if it was natural,
3:47
Speaker 2: you would have expected as the oil as crude market
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Speaker 2: softened that we would have seen a resumption of buying,
3:52
Speaker 2: and again we haven't. It feels like someone has said
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Speaker 2: don't buy oil right now. That the best explanations seem
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Speaker 2: to be at the time that they were store a
4:00
Speaker 2: lot of you know, diesel, gasoling, et cetera. You know,
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Speaker 2: under the under the potential risk scenario that they were
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Speaker 2: cut off from global supplies.
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Speaker 1: So maybe China has been stockpiling. But it's also important
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Speaker 1: to stress that Beijing has spent years trying to reduce
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Speaker 1: its dependence on far and oil through electric vehicles and
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Speaker 1: alternative energy sources. Johnston says that alone doesn't explain what
4:26
Speaker 1: happened here, though the drop in imports was simply too large.
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Speaker 1: In fact, even as oil prices began to fall, China
4:33
Speaker 1: didn't rush back into the market the way many observers expected.
4:37
Speaker 1: So what else could explain this?
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Speaker 2: There could be the ultruistic interpretation, which is that Beijing
4:44
Speaker 2: wants to kind of silently help the rest of the world.
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Speaker 2: You know, the US put particularly Asia in this horrific bind.
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Speaker 2: This you know, you know, energy insecure crisis that they
4:54
Speaker 2: could have you know, only in their wildest nightmares, and
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Speaker 2: that you know, the implosion of the Asian economy broadly
5:01
Speaker 2: would be bad for China, particularly given the fact that
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Speaker 2: China is attempting to diversify away from dependence on the
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Speaker 2: US market, given the trade wars towards Asia and Europe,
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Speaker 2: the two areas that were going to most hurt by
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Speaker 2: this formuleous crisis. So there's one argument that that could
5:15
Speaker 2: have been, you know, something that they were doing try
5:18
Speaker 2: and you know, both support potential allies, but also, i think,
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Speaker 2: even from a self interested perspective, support alternative markets outside
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Speaker 2: the United States, which was going to remain relatively insulated
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Speaker 2: from this crisis given North American energy you know, oil,
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Speaker 2: oil and gas production.
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Speaker 1: Right. So in other words, if China deliberately reduced its
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Speaker 1: oil purchases, it may have been acting in its own
5:39
Speaker 1: economic interests. A major energy crisis would have hit Asia
5:44
Speaker 1: especially hard, and Beijing had plenty of reasons to avoid
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Speaker 1: that outcome. But Rory Johnston says there's another possibility, one
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Speaker 1: that's far more speculative and far more geopolitical.
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Speaker 2: Then there's the kind of more potentially nefarious kind of
6:00
Speaker 2: I'll be fair and kind of tinfoil hat kind of
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Speaker 2: interpretation here, which is, and I think we have to
6:05
Speaker 2: consider it, which is that there was some kind of
6:07
Speaker 2: secret deal struck between various governments. We know that Trump
6:11
Speaker 2: administration was in Beijing through this crisis for a very
6:14
Speaker 2: high profile talks. We didn't think much of it at
6:17
Speaker 2: the time. They did not seem particularly successful. You had
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Speaker 2: no major announcements coming out of it. But it was
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Speaker 2: around that time that you did see China pulling back
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Speaker 2: most aggressively on its crude imports. Is was there some
6:29
Speaker 2: kind of deal struck. We don't know what was in exchange,
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Speaker 2: but there's something that you know, Trump could have asked
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Speaker 2: chijingping to say, support us in terms of what China
6:38
Speaker 2: could have received in exchange. This is where we go to,
6:43
Speaker 2: you know, maybe theorizing along the lines of the so
6:45
Speaker 2: called Dunrow doctrine, which is, you know, this idea that
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Speaker 2: Trump has been trying to carve the world into these
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Speaker 2: spheres of influence, that the United States was going to
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Speaker 2: get the Americas, the Western hemisphere, he was going to
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Speaker 2: largely seed kind of geopolitical interest of of you know,
7:00
Speaker 2: Europe and Eurasia towards Moscow, and then Asia was going
7:04
Speaker 2: to kind of be left over for Beijing. And what
7:08
Speaker 2: do we see through this crisis. We saw, given the
7:11
Speaker 2: scale of damage to US military assets in the Middle
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Speaker 2: East from Iran, we've seen the United States military transfer
7:19
Speaker 2: a bunch of military equipment from Asia, from let's say
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Speaker 2: Taiwan back to the Middle East in order to kind
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Speaker 2: of buttress defenses there, which would support this idea that
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Speaker 2: you know, you know, long gone or the days of
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Speaker 2: the Obama era, you know, Pacific pivot, and this is
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Speaker 2: kind of a US retrenched and I think that could
7:38
Speaker 2: also serve Beijing's long term interest. But very frankly, we
7:41
Speaker 2: have no firm evidence of any of this, which is
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Speaker 2: why it remains this massive mystery in the market. All
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Speaker 2: we can do is speculate until we get more data.
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Speaker 1: Now I'm going to stress this, there is no evidence
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Speaker 1: of any secret agreement, but the timing raises obvious questions.
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Speaker 1: As diplomatic talks were taking place, China was made making
8:00
Speaker 1: its most dramatic cuts to oil imports, and whether that
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Speaker 1: was a coincidence or not, Johnston believes it revealed something
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Speaker 1: important about China's influence over global energy markets.
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Speaker 2: Well, the interesting thing is that we often talk, you know,
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Speaker 2: when we talk about China in energy markets recently, we
8:21
Speaker 2: typically talk about how Beijing has had a concerted effort
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Speaker 2: and kind of a clear policy priority to dominate renewable
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Speaker 2: energy technology, the systems of the energy transition, you know, photovoltaics,
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Speaker 2: lithium ion batteries, everything else. And typically, you know, one
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Speaker 2: of things, you know, the dovetail to that has been
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Speaker 2: that the West has actually been relatively stronger on the
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Speaker 2: fossil fuel side, that China is well known to be
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Speaker 2: fossil fuel poor, the largest importer of these fuels. But
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Speaker 2: what we've seen here could be a demonstration that the
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Speaker 2: same concerted policy effort they've put into dominating energy transition
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Speaker 2: supply chains has been equally applied to the false fuel
9:00
Speaker 2: supply chains, and that this kind of Western belief that
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Speaker 2: particularly North America I'm I'm in Canada, that that you know,
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Speaker 2: North American and Western fossil fuel dominance has become this
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Speaker 2: geopolitical playing card, and it has, but it looks like
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Speaker 2: China has also worked to kind of erode that potential
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Speaker 2: advantage as well, that they are covered. They are They
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Speaker 2: are ambidextrous across the kind of energy space, and they're
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Speaker 2: showing it in real form right now.
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Speaker 1: If Johnson is right, then this crisis may have revealed
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Speaker 1: something much bigger than a temporary shift in oil markets.
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Speaker 1: It may have been a demonstration of China's ability to
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Speaker 1: influence global energy supplies without needing a single extra viral
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Speaker 1: of oil.
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Speaker 2: So I think overall, China is a clear win winner here.
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Speaker 2: It has clearly demonstrated that it can cut back, that
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Speaker 2: the world's largest crude oil importer can cut imports by
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Speaker 2: nearly half and have very little effect immediately on its economy.
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Speaker 2: That's a kind of a superpower in the in the
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Speaker 2: global oil and global energy market.
10:00
Speaker 1: Johnson believes China emerged from this crisis stronger than many expected,
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Speaker 1: but Beijing isn't the only winner.
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Speaker 2: I do think it's pretty clear that Iran is a
10:09
Speaker 2: major winner out of this crisis. You did not have
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Speaker 2: Iranian any kind of Iranian control of the Strait of
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Speaker 2: horm moves coming into this war, and they are leaving
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Speaker 2: it in a dominant position.
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Speaker 1: And what about the losers from all of this?
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Speaker 2: I would say the biggest losers in my mind, and
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Speaker 2: in many ways are the Gulf States. It's been shown,
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Speaker 2: you know, while you know, the UAE is actually also
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Speaker 2: i think, actually seen impressive performance through this, given their
10:35
Speaker 2: ability to not just reroute through the pipeline Fujera, but
10:38
Speaker 2: also dominate this kind of dark transit in trade that emerged,
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Speaker 2: the shadow transit trade that emerged this crisis. But Saudi
10:45
Speaker 2: Arabia is looking more chastened but obviously opek loss to
10:48
Speaker 2: the UAE through this crisis arguably the single greatest political
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Speaker 2: wound to the producer group in its history. So I
10:54
Speaker 2: would say that Saudi Arabia seems like a pretty big
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Speaker 2: loser through this.
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Speaker 1: So not everyone emerged stronger, and we can't forget that.
11:01
Speaker 1: Beyond the geopolitical winners and losers, we need to remember
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Speaker 1: the human cost of this crisis, particularly in the global South.
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Speaker 1: Rising energy prices contributed to higher food and transportation costs
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Speaker 1: around the world, worsening food insecurity in many countries, which
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Speaker 1: has put millions of vulnerable people under considerable economic strain.
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Speaker 1: Now that's a consequence we can't afford to overlook. We
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Speaker 1: still don't know exactly how China managed to navigate its
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Speaker 1: way through this crisis with what appears to be no
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Speaker 1: significant damage to its economy. But if Rory Johnston is right,
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Speaker 1: maybe they also quietly save the rest of us from
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Speaker 1: a far worse crisis. Him Pablo Folilias, thanks so much
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Speaker 1: to my guest Rory Johnston, and to my producers in Berlin, Annahommel,
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Speaker 1: Joel Dulroy, Aaron Tilton, Leon Yute, Melanie Marker and Stephen Habig.
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Speaker 1: I'll see you very soon.