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Thursday, November 18, 2021
Global Energy Supply Crisis and Inflationary Pressures
ANBOUND

As international crude oil prices remain high, the market is growing increasingly concerned about its future supply and demand imbalance, particularly in light of rising inflation levels around the world, while changes in crude oil prices pose a major threat to monetary policies in all countries. On the other hand, crude oil supply patterns are also facing greater uncertainty in the context of a global consensus on climate policy. These factors make the impact of crude oil prices on economic activity increasingly significant. For the process of global economic recovery, changes in the energy supply pattern will not only affect oil-producing and consuming countries but will also have a long-term impact on the changes in the global geopolitical landscape and the process of economic recovery in each country.

With crude oil prices remaining high, on November 18, there are news that the U.S. is considering international cooperation among government departments to calm oil prices. According to sources, the Biden administration has asked some of the world's largest oil consumers, including China, India and Japan, to consider releasing crude oil stocks in a coordinated effort to lower global energy prices. The unusual request comes only after U.S. President Joe Biden fought off political pressure to raise oil prices and other consumer costs as economic activity rebounded from the lows touched in the early days of the coronavirus pandemic. It reflects, on the one hand, U.S. frustration with the lack of cooperation with its economic policy by members of the Organization of Petroleum Exporting Countries and its allies, who have rejected repeated requests from Washington to accelerate production increases, and indicates a further decline in U.S. influence and voice in the energy sector.

The Biden administration has discussed the possibility of a coordinated release of oil from its stockpile with close allies such as Japan, South Korea and India, as well as China, over the past few weeks. According to a U.S. source involved in the discussions, the U.S. share of any possible reserve release would need to exceed 20 to 30 million barrels to influence the market. The news sent U.S. crude futures trading down to USD 78.18, while Brent crude futures fell to USD 80.21 after closing at USD 80.28 per barrel. The news comes after both U.S. crude and global benchmark Brent crude settled at their lowest prices since early October, with Brent crude down 1.7 percent and U.S. crude down 3 percent on the day.

It is uncertain whether this impact will lead to lower oil prices in the long term. The effect of the release of crude oil reserves in the US faces a long-term challenge as OPEC+ has stuck to its self-interest-based capacity supply plan. OPEC, led by Saudi Arabia, and OPEC+, formed by Russia, still insist on adding about 400,000 barrels per month to the market and are more concerned about the current level of global economic recovery, arguing that the rebound in demand may be fragile. But on the part of the Biden administration in the U.S., rising inflation from oil prices has exposed it to political repercussions. U.S. gasoline prices now average USD 3.41 per gallon, more than 60 percent higher than a year ago, according to the American Automobile Association, as the economy has rebounded from the outbreak. The consumer price index has risen 6.2 percent in the past 12 months, with the energy component up 30 percent.

In the view of researchers at ANBOUND, the current climb in inflation levels has put the U.S. under enormous pressure. As a crude oil exporter, the United States is facing domestic challenges, both in terms of constraints on the release of shale oil capacity due to climate change policies and in terms of increasing competition with OPEC+ in its transformation into an oil exporter. Thus its control and influence over international crude oil prices are weakening and it has to work with oil-consuming countries to curb rising crude oil prices. This pressure is primarily due to political factors rather than the continued rise in inflation at the economic level. Therefore, the Biden administration's request for cooperation from consumer countries is equivalent to the Biden administration asking its allies to contribute to its domestic politics. Although the consumer countries will also be under pressure in response to rising oil prices, the matter will obviously have a greater impact on the Biden administration, as this situation will affect the U.S. midterm elections and pose political pressure on the Biden administration.

On this basis, major U.S. allies such as Japan have a reason to cooperate, but wanting China to cooperate may involve an exchange of interests. This matter was probably mentioned in the previous summit meeting. Judging from China's statements, it appears that China accepted the U.S. request and must have gotten something back in exchange, but in terms of concrete implementation, China still shows a willingness to stick to its own pace. China's National Reserve Board said it is working to release crude oil reserves. China, the world's largest oil importer, launched its first public auction of national crude reserves to selected domestic refineries in September intending to stabilize energy prices, and it is keeping the level of its strategic oil reserves secret. The National Energy Administration had disclosed in 2019 that China's oil stocks, including national reserves, oil companies and commercial depots, could last 80 days. Some market institutions estimate that China's national oil reserves hold about 220 million barrels of crude oil, equivalent to 15 days of demand.

With regards to long-term impact, under the influence of the COVID-19 pandemic and climate change policies, the contradiction between oil supply and demand may not be resolved in the short term. Some oil-producing countries are facing capacity constraints due to underinvestment and supply chain distortions; on the other hand, under the changing international energy landscape, new energy sources as an alternative are still facing difficulties in capacity enhancement. At the same time, the international geopolitical game around oil and energy is still further deepening, which not only threatens the current international trade settlement system dominated by the U.S. dollar but also makes the traditional oil-producing countries face the instability caused by increased geopolitical conflicts. These changes, which may bring global inflation levels to remain high, may further increase the risk of stagflation.

Final analysis conclusion:

The U.S. demand for cooperation from oil-consuming countries to take measures to curb oil prices is both an economic consideration and a result of domestic political pressure. The changes in demand and supply of oil and energy brought about by the pandemic and climate change are more long-term in nature and are not only an economic issue but are increasingly manifesting themselves as geopolitical factors in the changing international energy landscape. These factors will affect oil prices in the long term, which in turn will bring about continued inflationary pressures.

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