“Protecting America's Strategic Petroleum Reserve from China Act”: Assessing the US Congress’ new idea for depleting Chinese oil markets

On January 12, 2023, the United States House of Representatives passed Bill H.R. 8488, titled the "Protecting America's Strategic Petroleum Reserve from China Act." If enacted, the legislation would prevent the Secretary of Energy from exporting the US strategic petroleum reserve (SPR) “to any entity under the ownership, control, or influence of the Chinese Communist Party”.

The bill received approval with 331 favourable votes and is currently awaiting deliberation by the Senate ever since. The Upper House can either reject or approve the bill and if approved, it would proceed to the President for consideration. This spotlight attempts to clarify the potential impacts on China (if any) in case the Act ever becomes law and restricts its access to imported SPR reserves.

The road ahead on Capitol Hill

The Bill had significant bipartisan support in the Lower House to secure a comfortable majority, with all the 218 present Republicans and about half (113) of present Democrats voting “yes”. Analyst Benjamin Salisbury from Height Capital Markets argues that approval in the Senate might not be so smooth as the Upper House is controlled by Democrats, but it’s still feasible under “tough compromises” - and under greater pressure from voters for a stronger stance against China. The greatest obstacle, however, might arise from the President's Office

President Joe Biden has been depleting the SPRs at an unprecedentedly faster pace to manage oil prices driven up by the war in Ukraine. However, some argue that the move is more about political concerns involved in alleviating inflationary pressures on fuel ahead of an election year.  Since the SPRs are only meant to be used in times of great uncertainty and with due restraint - only enough to secure minimal levels of energetic security - critics point out that the President might be compromising the country’s long-term energetic security for short-term political gains. From this point of view, the Executive would hardly sanction a bill that would constrain its influence on oil markets.

But even in a scenario where the Act is approved by both the Legislative and Executive branches, current data suggests that its effects on China’s energy markets are likely to be minimal.

How will China be impacted?
China is the world’s second-largest consumer of crude oil in total volume, and the commodity accounts for roughly 20% of the country’s total energy generation. This figure is roughly comparable to other large emerging economies like India (23%) and Russia (19%). Nevertheless, China represented only one-fifth of the total foreign purchases of SPR released in 2022, while the US itself accounts for only 2% of China’s total crude imports.

Source: S&P Global Commodity Insight

As evident from the chart above, China depends more on oil producers in the Middle East and Eurasia and has concentrated its diplomatic efforts accordingly. It has expanded economic and financial ties with Saudi Arabia, mediated an agreement with Iran, and continues to purchase Russian oil in large quantities. These efforts are likely to provide China with greater resilience against disturbances that may affect energy supplies and limit the US' ability to manipulate oil markets to harm the Chinese economy. Rather than a practical purpose, the act’s eventual approval would likely serve a rhetorical one: Washington is taking a tougher stance against Beijing.

EU ban on Russian oil products – what will the fallout be?

On February 5th, 2023, the EU imposed a further price cap on Russian petroleum products. This comes after the decision, in December 2023, to set a threshold price for Russian crude oil shipped by sea at $60 per barrel. In particular, the new price cap will apply to “premium-to-crude” petroleum products, such as diesel, kerosene and gasoline, and “discount-to-crude” petroleum products, like fuel oil and naphtha. The maximum price agreed on by EU leaders for the former is $100 per barrel and the latter, $45 per barrel. The move is being undertaken by the EU and other G7 countries. This spotlight will focus on the fallout of the price caps on oil products. 

Firstly, Russia, which is the second largest oil exporter in the world, will see a decrease in its fiscal revenues in the coming months. Earnings from oil and gas-related taxes and export tariffs accounted for 45 percent of Russia’s federal budget in January 2022. Contrary to embargoes, the price caps implemented by the EU ensure Russian oil products keep flowing into the market, whilst starving Moscow of revenue. In January, Russia’s government revenues decreased by 46 percent compared to last year and government spending surged due to higher military spending. A study by the Centre for Research on Energy and Clean Air reported that Russia is already losing $175 million a day from fossil fuel exports. The new price caps enforced in February will likely reinforce this trend and contribute to the widening Russian deficit, which was $25 billion in January. In response, the Kremlin might increase the shift of its oil product exports to China, India, and Turkey, which collectively now make up 70% of all Russian crude flows by sea and have so far contributed to partly offset the impact of Western sanctions on the Russian economy. At the same time, Moscow might scale up its efforts to bypass price caps imposed by G7 nations through its growing “ghost fleet”, which in January moved more than 9 million barrels of oil. However, these new importers have acquired considerable leverage vis-à-vis Russia. As Adam Smith, former sanctions official with the US Treasury Department, put it “Am I going to buy oil at anything above [the price cap], knowing that’s the only option Russia has?”. This might mean that, even if the Kremlin succeeds in re-orienting its exports of oil products to these new destinations, it will do so at lower prices.

On the other hand, the EU may face a diesel deficit in the coming months. In 2022, Russia accounted for almost half of the EU’s diesel imports, corresponding to around 500,000 barrels per day of the fuel. This will push European countries to try to step up imports of diesel from the US and the Middle East in order to avoid a spike in diesel prices. High fuel prices are politically sensitive and have contributed to high inflation rates across the EU. New trade flows in oil products from these regions could lead to a spike in clean tanker rates, which would increase delivered fuel costs in Europe. Tanker rates from the Middle East to the EU were already close to a three-year high at $60/tonne in January. They are expected to double this year. Moscow has responded to the EU price caps by cutting its oil output by 5 percent, or 500,000 barrels a day. Headline inflation in the eurozone has decreased for the third consecutive month in January but the threat of a rebound in inflation in the near future still looms large.

In such a case, the prospects for an increase in social tensions would become more concrete. Already in September of last year, due to the rising cost of living, protesters in Rome, Milan, and Naples set fire to their energy bills in a coordinated demonstration against escalating prices. In October, thousands of people marched through the streets of France to express their dissatisfaction with the government's inaction regarding the cost of living. In November, Spanish employees rallied together chanting "salary or conflict" in demand of higher wages. However, an increase in salaries would risk pushing up prices even more, thus jeopardising the European Central Bank’s efforts to bring inflation under control.