President Joe Biden’s historic move to release oil from strategic reserves in coordination with big nations including China represents a unique bet that finding common ground with the United States’ biggest economic rival can help dampen fuel prices for middle class Americans.
The move, announced by the US on Tuesday, underscores the complicated relationship Biden is trying to craft with China as he seeks agreement on key issues like climate change and trade, while linked in an economic arms race. The rare moment of cooperation comes as inflation, and especially high gasoline prices, eat at Biden’s popularity at home.
“This is a new era of oil diplomacy for the US to coordinate with India and China” said Daniel Yergin, an oil historian and the vice chairman of IHS Markit. Cooperation with China is likely to stick to energy and environment.
“Climate and energy are in a separate category from all the tough issues that need to be dealt with between the two countries,” Yergin said.
The Biden administration’s diplomatic inroads with China first surfaced in Glasgow, Scotland this month where the two countries hammered out a surprise deal on boosting action on climate change including reducing emissions of methane, a powerful greenhouse gas.
“Glasgow showed that there is some level of common interest and diplomacy that can be successful between the United States and China,” said Amy Myers Jaffee, a research professor at Tufts University and expert on global energy markets and climate.
Jaffee said both countries recognized the importance of a global climate agreement. “I would say ‘Ditto’ on the oil market,” Jaffee said.
Washington has stark differences with Beijing on trade issues and human rights concerns related to Xinjiang, Hong Kong, Tibet and Taiwan. But the world’s top two economies would benefit from energy cooperation given their adversarial relations with Saudi Arabia and Russia in terms of keeping oil prices low for consumers.
Combined, the United States and China consume nearly 35 million barrels of oil a day, more than a third of global demand. Even though the United States has become one of the world’s largest oil producers, it is still the second-largest importer of crude, trailing only China.
China now imports more than 10 million barrels of oil a day, The United States imports about 6 million barrels per day, though in recent years it has sharply reduced its dependency on OPEC producers, with most of its imports now from Canada.
While China did not announce an oil tap on Tuesday, Biden spoke earlier with China’s President Xi Jinping about opening their reserves and Chinese officials said on Nov. 18 they are working on a release. China held the first ever release of oil from its reserve in September, which aimed to stabilize prices.
The broader group of countries that have elected to work with the United States and release oil from their reserves include other large importers, including India, Japan and South Korea, which rank third, fourth and fifth, respectively.
US oil prices hit a seven-year high in late October driving inflation and hitting Biden’s approval rating ahead of midterm elections next year. With razor thin majorities in both chambers of Congress, Biden’s fellow Democrats can ill afford to lose seats in 2022.
REPEAT DEAL TRICKY
Biden could take additional action in coordinating with other countries to maintain supply as the COVID-19 pandemic eases, the White House in a statement Tuesday.
Actually doing so may not be easy.
“Not only could US-China tensions complicate further cooperation, but the US stands apart from other strategic reserve holders in that its legislature has ordered the
selling off of strategic stockpiles” to finance government programs, ClearView Energy Partners, a nonpartisan research group, said in a note to clients.
Some 18 million barrels of the US release was simply a front-loading of required sales that were mandated by Congress in recent years.
There’s a risk that consumer countries and producing countries could keep upping the ante with opposing announcements on global oil supplies, a prospect that would likely make oil prices even more volatile, or what Yergin calls a “bloc versus bloc,” scenario.
But in the short term, the action by consuming countries is likely to put pressure on oil prices, Yergin said.
“This also comes at a time when the supply/demand balance is on a course to improve over the next few months, and this oil deal will add to that. What it means at least for now is you’ll hear a lot fewer predictions about $100 oil.”