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Oil-Price Hikes: Will China Feel the Pinch?2004/06/15
Global oil prices have been on a roller coaster recently. Geopolitical tensions, unexpected increases in demand and speculative factors have helped push the price of oil above US$40 per barrel. This price surge has alarmed consuming nations, which worry whether economic growth could suffer. But observers report the fears appear to be unfounded. In China, the world's second-largest crude-oil consumer after the United States, "the impact of rising global oil prices has yet to be felt," said Zhang Guobao, deputy minister in charge of the State Development and Reform Commission. Experts and officials share a view that rising global oil prices are likely to have a mildly negative effect on the country. They believe the Chinese economy will not be affected by price hikes in the near term, nor will its oil market fluctuate, but warn that sustained high oil prices will exert some inflationary pressure on the economy. "Sustained oil prices of about US$40 a barrel could add US$7 billion in import costs to China this year. A chain reaction could result in high crude prices eventually being passed on to the cost of production materials, and industries such as transport would feel the effects to a certain degree," Zhang predicted. "But at present, the impact on the Chinese economy has not been felt," Zhang said, because the country s economy is strong and has experience in coping with oil crises. Deng Yusong, an expert with the Development and Research Center under the State Council, said the government guides oil pricing in China. There is usually a one-month gap between the country's price adjustment and international oil market changes. If global oil prices drop in the near future, China's domestic market should not fluctuate much. But, if global prices remain high for a long time, which is probable, the costs will be reflected in the Chinese oil market, and businesses such as airlines will immediately feel the pinch, experts warn. Although oil refiners and developers may benefit from high crude-oil prices, experts warn that sustained price hikes will result in downstream industries such as petrochemical producers facing sharply increased costs. Liu Yiming, a researcher with the Chinese Academy of Social Sciences, believes that except for a small portion of industries and enterprises, Chinas domestic consumer market is not likely to be affected by the high oil prices in the short term, a view echoed by Song Guoqing, a professor with the China Economy Research Center of the Peking University, who said negative effects may be felt on the country's transport sector, even if they are negligible to the overall economy. Citigroup economist Huang Yiping, said oil prices at their current levels would be equivalent to a 0.2 per cent decrease in China's gross domestic product, a fractional amount given the economy grew 9.8 per cent last quarter. Despite fears of more terrorism, tension in the Middle East and a protracted US war in Iraq, global oil prices of US$40 a barrel would increase consumer prices by 0.1 per cent, while the mainland's current account balance would fall by 0.4 per cent. "The impact would not be very huge, Huang was quoted by AFP as saying. But anyway, China doesn t want to see oil prices rising, as it will exert a negative influence on the steady growth of world economy," said Zhang. "China Factor" in Soaring Prices Some analysts have blamed China's growing oil demand for the rising prices, an idea to which Zhang objects. According to Zhang, China is not only a net importer of oil, it is also the worlds fifth-largest crude oil producer, with an output of over four million barrels per day. He said China mainly relies on its own resources to meet energy demands, and the country still has much potential for energy development. In 2003, China's net crude oil imports totaled 86 million tons, or 1.72 million barrels a day, "representing only 7.3 per cent of OPEC's existing export quotas of 23.5 million barrels per day. This is a small part of the worlds overall oil trade volume, said Zhang. Chinas demand for crude oil is on the rise, but it is not so big that it can influence global oil prices," he said. Expert: Measures Needed to Enhance China's Oil Supply Security Guo Tong, a senior economist with the National Bureau of Statistics, suggests the country should build strategic oil stockpiles, create a domestic oil-futures market, and find more energy substitutes for oil. This strategy would allow China to fend off oil supply security risks. Guo said China is one of the only major oil importers without a strategic oil stockpile. He said the government and oil companies should work together to create oil stockpiles to strengthen the country's ability to cope with unexpected changes and emergencies and ensure economic stability. The economist urged the government to invest in improving oil-exploiting and refining technologies and to encourage technological innovations in oil exploration and refining techniques and management. He said the government should encourage energy conservation and public awareness about saving energy, further upgrade the energy structure and develop more oil substitutes, such as natural gas. "China has 2.2 trillion cubic meters of geological storage of natural gas but only 5 per cent of the storage has been discovered. Given this huge exploitation potential, natural gas can be an ideal substitute for oil. Other energy resources, such as wind, solar power and terrestrial heat could also be energy substitutes for oil," Guo said.
Geopolitical Tensions and Terrorism in the Middle East. Violence in Iraq is adding to uncertainty about the supply of crude from the region, and investors are increasingly wary about terrorist attacks in Saudi Arabia, the biggest oil producer in the world. Growing Oil Demand from Consuming Nations. Global economic recovery is fuelling a surge in demand for oil, the strongest in 16 years. Oil demand is expected to reach 80.6 million barrels per day compared with 78.7 million in 2003. China, which has increased imports, became the second-biggest crude consumer after the United States in 2003. Chinas oil consumption surged 18 per cent in the first quarter alone. Producers are struggling to pump enough crude to meet demand. However, consumers stocks are extremely low and would suffer if supplies fell. Concerns About Gasoline Shortages in the United States. The biggest oil consumer in the world is suffering from severe problems with its oil-processing infrastructure. No major US oil refinery has been built since 1976. Existing refineries are operating at about 95 per cent of capacity compared to about 51 per cent in 1980 and are struggling to satisfy gasoline demand, which has unexpectedly risen by 5 per cent in one year. Market Speculation. Big investment funds have been piling into the oil futures market, betting prices could rise in the near term, especially if underlying factors such as demand and geopolitical tensions get worse. Current uncertainties, stirred by terrorist attacks in Saudi Arabia and low global oil stocks, have not encouraged such funds to sell. Algerian Energy Minister Chakib Khelil recently estimated that if big investment funds closed out their market positions, prices would tumble no less than US$7. OPEC Policy. The cartel, which produces about a third of global oil, has played a role in recent years in moderating oil prices. OPEC, which is under pressure to increase its production, has regularly charged that high oil prices are not its fault, although some analysts say it has underestimated demand.
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