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Why China’s rebound could cause higher energy prices

Yahoo Finance's Rick Newman explains the case for higher oil prices should China fully reopen its economy.

Video transcript

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RICK NEWMAN: Welcome back to "What Just Happened?" I'm Rick Newman. And we're in a deep dive into the China effect. Let's talk about oil and energy demand and why America might be the winner here. Now, China's COVID shutdowns have meant reduced demand for energy, which has lowered prices, including the prices we pay here in the United States. And if China rebounds next year, that could mean higher prices here.

Let's start with where we are right now in energy markets. We've got gasoline prices here in the United States at about $3.30 a gallon. Obviously, way down from $5 a gallon that we saw in June, and oil prices here in the United States around 72 bucks a gallon. That's down from a high of around $120 per gallon-- per barrel over the summer.

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And that's good news for Americans, obviously. President Biden and the Biden White House, they keep sending out press releases, making sure everybody knows that gas prices are now actually lower than they were a year ago. Biden is taking credit for this. He has released oil from the Strategic Reserve. And they just put in place this complicated price cap on Russian oil.

That is not the main reason energy prices are down here in the United States. The biggest reason energy prices are down is reduced demand from China. This is a sleeper factor in the energy industry. Not too people are-- not too many people are noticing this, but if you don't take my word for it, let me tell you what S&P Global Commodities said in a briefing I participated in earlier this week.

They said China's COVID policy, meaning the lockdowns, is the most important fundamental factor for energy markets. Were it not for this demand weakness, prices of all commodities would have undoubtedly been higher in 2022. And if China's energy demand and imports are strong in 2023, commodity prices will be well supported. Now, well supported commodity prices means higher commodity prices, and we're talking about not just oil and gasoline, but also natural gas. And those are things that we are affected by.

So, S&P actually does forecast a significant increase in demand from China for those forms of energy this year. And that probably is going to mean higher gas prices here in the United States. Now, how high are we talking about? If you go back-- if you look at an oil price chart, and you go back to 2011, look at the 2011 to 2014 time frame, global oil prices hit 100 bucks, 110 bucks, and a lot of that was because the Chinese economy was booming, and they were just buying tons of energy. When the Chinese economy really gets going, it totally supercharges prices for commodities.

So we may be at a bottom here for energy prices. If people could stockpile gasoline, I'd say, go do it. You can't really do that. But if China does come back as many economists think, that is going to be mean higher gasoline prices here, higher electricity prices, and higher heating prices. So in a way, it would be good for Americans if the Chinese lockdowns continued. Back to you, Rachelle.

RACHELLE AKUFFO: Indeed. All right, well, a big thank you to Yahoo Finance's Rick Newman there, keeping an eye on those gas prices.