From Zero-Covid To Energy Demand Explosion: The Impact Of China’s Reopening

China has reopened its doors following its long zero-Covid policy. But now governments and energy firms around the world are waiting to see what this means both for the energy industry and global supply chains. Experts are uncertain if the reopening of China’s borders means that business will resume as usual or whether ongoing disruptions will be seen due to years of closures and industry challenges. 

The executive director of the International Energy Agency (IEA), Fatih Birol, stated earlier this month that China’s reopening poses the biggest uncertainty for global energy markets. He suggested that, at present, oil markets are “balanced”, but producers are currently unsure how great the change in demand will be as the world’s largest crude oil importer opens up. 

Birol explained, “For me, the biggest answer to the energy markets in the next months to come is [from] China.” He added, “China’s economy is rebounding now,” Birol noted. “How strong this advantage will be will decide the oil and gas market dynamics,” and “If it’s a very strong rebound, there may be a need that oil producers will increase their production.”

The global oil demand fell significantly as China imposed strict pandemic restrictions, that limited industrial activity and movement. But now that many activities will resume, experts are worried that the current global oil output will not meet the needs of the Asian superpower. The IEA estimates oil deliveries to increase by 1.1 million bpd to reach 7.2 million bpd during 2023. Producers in major oil-producing regions, such as the U.S., Brazil, and Guyana, are expected to increase their crude output throughout the year to meet the rise in demand. But uncertainties around the world’s oil needs make it difficult to ensure the necessary oil supply. 

And this uncertainty has already affected oil prices, as the Brent benchmark soared in January upon the announcement that China would be ending its zero-Covid policy, with investors anticipating a steep spike in demand for crude in 2023. However, experts believe that China likely accelerated the pace of crude oil stockpiling last year, meaning that its initial demand for oil may not be as high as many predict. But China doesn’t report crude oil inventories, which means there are simply too many variables adding to the uncertainty of what China’s opening up means for the world’s energy. 

The IEA suggested that “two wild cards dominate the 2023 oil market outlook: Russia and China.” While China’s oil demand is set to rise, the future of Russia’s actions is unknown. The world’s energy could centre largely around whether Russia calls an end to its war on Ukraine and if more countries around the globe, including China, decide to continue importing Russian crude. 

However, when it comes to natural gas, Europe may not have to worry too much about increased demand from China. Beijing’s energy policy, which seeks to increase pipeline imports, use more coal, and boost domestic gas production, is expected to suppress China’s demand for natural gas in 2023. This could help Europe maintain its limited gas supply, to battle against the cold next winter, when the region expects to face shortages once again. Having imposed sanctions on Russian gas, Europe has raced to ensure its energy supply in recent months, after imposing strict gas use limits to reduce demand and provide enough for basic consumer needs. 

After being the world’s biggest LNG buyer in 2021, China’s LNG imports fell by 20 percent to 88 billion cubic metres (bcm) in 2022. Meanwhile, EU imports of LNG rose to 131 bcm of LNG last year, around 60 percent more than in 2021. This year, Chinese LNG imports are expected to increase by just 7 percent, to 94 bcm, temporarily alleviating pressure on the EU to battle even harder to find more suppliers. 

And while China’s energy demand may be of concern, the recommencing of its industrial activities will likely support global economic growth this year. China’s GDP is expected to increase by 6.5 percent in 2023, which could help raise global GDP by 1 percent by the end of the year. GS Research’s Joseph Briggs and Devesh Kodnani explained, “The global growth backdrop has brightened.” Briggs and Kodnani added, “While we already expected most major economies to avoid recession and China to see a growth rebound from an end to zero-Covid, the more rapid pace of China’s reopening since then—along with a waning drag from global financial conditions and lower European gas prices—has prompted us to upgrade our expectations further.”

While uncertainty over the future of China’s energy demand is concerning for the global energy market, and may well lead to energy shortages and higher oil and gas prices, the reopening of Chinese industry will support global economic growth, which will likely help countries to better confront this challenge.