As the Ukraine War drags on, the countries on each side appear politically entrenched. Vladimir Putin lectures the world that Ukraine is rightfully Russian, while at least for now, much of the world seems smitten with Ukraine’s President Volodymyr Zelensky. Joe Biden, meawhile, may now view standing up to Putin and uniting Europe against him as his presidential destiny.
These entrenched positions mean that any easy, face-saving offramps may have disappeared, and we face the greater likelihood of a long and ugly conflict along the lines of Bosnia, Kosovo, Afghanistan, and Iraq.
The Ukraine War has brought sanctions and threats that will restrict oil and natural gas availability, so the focus has been on the hardship that will come in Europe, which gets a large share of these resources from Russia. But even in countries where oil is not at as much risk of restriction, the damage from high prices alone is almost as important as scarcity—and most of the world’s largest countries are net importers of oil, and therefore exposed to this price risk.
Among these countries, China has as much to lose as any country not directly involved in the war, if not more, and thus perhaps has more motive to see a de-escalation or negotiated resolution to the war.
Some of the China experts I know disagree with this opinion. In their view, China will largely shield itself from the war’s economic consequences, stay above the fray, and perhaps even improve its standing as a world leader, while quietly acquiescing to some of Russia’s appeals for economic support.
But the facts are plain. At 10.2 million barrels of imported oil a day in 2019, China is now the largest net importer of oil in the world, importing almost as much as all of Europe combined. Oil, which was $62 a barrel in March 2021, is now trading near $100 a barrel, and if the past is a guide, $200 is not out of the question.
A sustained $50 increase in the price of oil will cost China almost $200 billion annually, or an ugly 1.25 percent of its GDP. A $100 increase would be crushing.
Some quickly surmise that China will solve its dilemma simply by importing oil from Russia—perhaps even at a discounted price. But the infrastructure to get any substantial amount of Russian oil to China doesn’t exist, and tankers won’t do much better. They can’t get insurance for transporting Russian oil, to say nothing of dockworkers to load or unload it.
Xi Jinping’s priority is to foster a stable and healthy economic environment. With China’s 20th National Party Congress looming in the fall, during which Xi is expected to be awarded a third term as party chair—unprecedented in recent history—he is not looking to have a ravaged GDP or a world in turmoil as the backdrop. Yet this turmoil will loom just as long as this war persists. The United States now believes that China is planning to support Russia militarily, and warnings of sanctions and countersanctions between the two have ensued.
The issue for China is not just oil. It is a major importer of natural gas, iron ore, soybeans, wheat, and any number of other commodities. Even if the impact of these commodities on its GDP will be less than that of oil, this price inflation will still savage China’s households.
Pre-COVID, China produced about 4 million barrels of oil a day and consumed about 14 million, while Europe produced about 3.5 million barrels a day and consumed about 14.5 million. Japan, Germany, and France’s net imports are 3.5 million, 2.3 million and 1.5 million barrels a day, respectively. Even Britain, with its North Sea fields, is no longer a significant exporter. The United States is not oil self-sufficient, despite what the pundits say, but it’s close. Pre-COVID, the United States produced 17 million barrels of oil a day and consumed 19.5.
For context, I should note that Russia produced 11.7 million barrels a day and consumed only 3.4 million, although that production number is now highly at risk. The Middle East produced 30 million and consumed 9 million.
Watch for China to feel the pain, perhaps sooner rather than later. If high prices persist, look to China to be a much bigger factor in the geopolitical equation and to pressure Russia for a negotiated solution behind the scenes. Given the financial damage Russia is facing at this critical moment and its increasing need for China’s support, Putin will be hard pressed to ignore any signals from Xi.