Since the late 1990s, China has been the big beast in global oil markets, driving demand for oil and other commodities, from which it achieved double-digit economic growth every year for many years and high single-digit growth for years thereafter. As recently as 2017, China’s rapid economic growth overtook the United States as the world’s largest annual gross importer of crude oil, after becoming the world’s largest net importer of petroleum and other liquid fuels in 2013. From 1992 to 1998, China’s annual economic growth rate was generally between 10 and 15 percent; from 1998 to 2004 between 8 and 10 percent; from 2004 to 2010 again between 10 and 15 percent; from 2010 to 2016 between 6 and 10 percent and from 2016 to 2022 between 5 and 7 percent. As of this point, no one knows exactly where it will go, other than that it will likely go down, and the main reason it will go down is the country’s handling of Covid – specifically its ‘zero Covid’ policy. However, any decision by China on how to proceed with these policies – whether to stick to them or loosen them further – poses enormous risks for the country and for its leader Xi Jinping, with whom the policy is personally linked. Whatever choice Xi makes, it is almost certain that it will result in a prolonged period of lower oil prices. While unwelcome to oil majors and pure oil-producing countries, it will be extremely welcome to several major developed economies and their citizens, who have seen high oil prices play a key role in destroying their savings, their pensions and their quality of life in recent months. Related: US oil and gas drilling activity is going nowhere
To recap, China’s zero-Covid policy relies on ultra-tight lockdowns being rolled out across entire areas, including major cities, immediately after a relatively low number of Covid-19 cases have been identified. In December 2021, the zero-Covid strategy was refined into one that included the idea of ”dynamic clearing,” giving local governments more flexibility in imposing restrictions and allowing the daily increase in symptomatic cases on a national basis to about 200 limit. On Nov. 11, the Chinese government unveiled 20 minor changes to the zero-Covid policy, including overseas travelers only requiring one negative PCR test within 48 hours of boarding a flight to China instead of two. Another was that foreign travelers would only need to quarantine for eight days instead of 10, and another that people in China who are considered “close contacts of close contacts” of Covid-19 carriers would no longer be quarantined would have to be. The new guidelines also banned mass testing unless “it is unclear how infections are spreading in an area”.
Despite this slight relaxation of rules, China’s President Xi is now facing a wave of public protests against the still-tight Covid-19-related restrictions across the country, not seen since the mid-1980s, which peaked in 1989 Tiananmen Square massacre. The latest round of these protests began after at least 10 people were burned to death in an apartment fire in the city of Urumqi, capital of eastern Xinjiang Province, with many blaming Covid lockdown rules for delaying any response from emergency services. According to multiple live TV reports at the time, the protests spread to several major cities, including Shanghai and Beijing, with protesters shouting, “Resign, Xi Jinping! Resign, Communist Party!”. It seems that the protests of the 1980s were fueled in large part by the rupture in understanding between the people and their government – that the former are content to align themselves with the latter’s controlled regime provided they are bestowed prosperity So are the current protests. However, prosperity requires economic growth, and the more there is, the better for the government, and this is where their problem lies at the moment.
President Xi is caught between the metaphorical rock and a hard place. On the one hand, if it adheres to anything close to zero Covid restrictions — basically any sensible restrictions at this point — then China’s economic growth will continue to deteriorate. In addition, the scale and scope of the protests against him and his regime are likely to increase. On the other hand, if he sensibly relaxes China’s Covid-19 control measures, then it is very likely that large numbers of people will die in China, leading to exactly the same dire scenario that China would face if it adhered to a strict control policy would for Covid-19.
The reason why a significant lifting of controls related to Covid-19 would lead to a large number of deaths is because China still has no effective vaccine for the disease, or any variant of it, despite offers from all major vaccine-producing countries Deliveries available. China also does not have an effective post-infection antiviral and still refuses to purchase such supplies from foreign suppliers, again despite offers from several Western countries to provide it with such post-infection antivirals and treatments. Due to China’s initial response to the Covid-19 outbreak in 2019 – draconian lockdowns across the board – the country still has large numbers of its population unvaccinated against any variant of the disease, even China’s own vaccine (CoronaVac), and that there has been a critical shortage of intensive care units (ICUs).
“There are 263 million people in China aged over 60 and 35 million people over 80, and the vulnerability of the elderly to severe cases of Covid-19 is well known,” said Rory Green, chief China economist at TS Lombard. in London, OilPrice.com said exclusively last week. “Of those over 80, only 66 percent are vaccinated and only 40 percent have had three shots, and we know from a detailed medical analysis of the Hong Kong outbreak that the CoronaVac vaccine only has the same efficacy as mRNA vaccines after three doses This leaves about 37 million people over 60 vulnerable to a widespread Covid outbreak,” he says. Post-vaccination, dealing with Covid-19 outbreaks has prioritized treating those severely affected by the disease, and that means the capacity of intensive care units in hospitals, but China has a big problem here too. “Various studies put the number of intensive care units per 100,000 people in China at between 3 and 6 – compared to 2.3 in India and 34.7 in the US,” Green tells OilPrice.com. “What is missed in the national-level analysis are the regional disparities in ICU care: the majority of ICUs in China are located in the more affluent eastern provinces, which tend to have higher vaccination rates and better demographics, and local estimates account for those City-level demographics and medical capacity estimate that the most vulnerable city — Lijiang in Yunnan province — would need a 6,000 percent increase in ICU capacity to adequately handle an omicron outbreak,” he said.
So how bad could it get for China? Data from the Hong Kong outbreak in February 2022 probably offers the most relevant comparison, Green says. “Back to China CDC [Center for Disease Control] City-level health care micro-estimates: If we use the February 2022 Hong Kong outbreak as a baseline for community spread and case severity, it’s estimated that only 7.3 percent of China’s population live in cities with sufficient intensive care capacity The other 92.7 percent live in areas where the resources of the intensive care unit would be completely overwhelmed by the epidemic,” he says. “The shock to a relatively unvaccinated population could be significant: based on the death rate in Hong Kong, China could see 50,000 deaths a day at the height of an uncontrolled outbreak,” he points out. So in economic terms, “In short, China is stuck and we believe real GDP as measured by TS Lombard will be 1.6 percent yoy this year,” concludes Green.
Losing much of the economic power behind China’s ample supply in global oil markets would mean a much weaker true demand background for future oil prices, especially with a simultaneous reduction in the premium to the Russia-Ukraine war. That bounty began last September when savvy market participants began buying oil based on observations by US intelligence officers of highly unusual Russian military movements on the Ukrainian border following the conclusion of joint Russia-Belarus military exercises. Previously, oil was trading consistently around $65 a barrel Brent. This level reflected the equilibrium price, which took into account the already apparent weakening of demand from China. As this premium for the Russia-Ukraine war falls as Europe continues to replace energy from Russia with energy from other sources, this $65 a barrel level will likely be the base point for oil prices from then on.
By Simon Watkins for Oilprice.com
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