Cheap oil: China’s opportunities and risks
Low energy prices provides Chinese companies with golden opportunities
There are various reasons for the decline in oil prices: market sentiment, supply and demand, and geopolitical factors. China’s influence is at the heart of most of them. Its booming economic growth over the last three decades has been accompanied by a sharp increase in oil demand. China’s share in global oil consumption has risen from less than 4 percent in 1993 (since it became a net oil importer) to over 11 percent by the end of 2014.
However, the International Monetary Fund anticipates lower growth over the next five years, forecasting China’s real GDP growth to average 6.6 percent from 2015 to 2019, compared with 8.4 percent for the period 2010 - 2014. This projected decline coincides with the collapse in oil prices to their lowest level in almost six years.
Beijing is in an unprecedented position, and is trying to take advantage of this price slump, and of competition between oil producers desperate to maintain their shares in Asia’s markets, especially China.
At the micro level, the World Bank in its latest Global Economic Prospect, Jan. 2015, says China is set to gain on multiple fronts: economic growth, current-account surplus, manufacturing and agricultural costs, and inflation management. The IMF says China remains substantially more energy intensive than advanced economies, and so benefits more from lower energy prices.
Indeed, the dramatic drop in global oil prices has been dragging down prices for many imported commodities including liquefied natural gas, while pushing down coal prices to another low. The Bloomberg Commodity Index of 22 energy, agriculture and metal products slid recently to the lowest level since Aug. 2002.
To put this in perspective, in 2013 China spent over $315 billion importing mineral fuels, oils and distillation products, and almost $250 billion on crude oil and petroleum products. According to the latest U.N. data, China’s energy bill reached more than $244 billion in the first nine months of last year. Subsequently, oil prices should provide an important boost to its economy in 2015.
Citibank calculates that a $50-per-barrel drop represents a $112 billion stimulus, or around 1.1 percent of GDP. The World Bank predicts that sustained low oil prices in 2015 are expected to widen the current-account surplus by 0.4 - 0.7 percentage points of GDP.
Lower energy prices will open the window for further reforms in the energy sector, which is stymied by inefficiency and widespread corruption. Ian Bremmer, president of the Eurasia Group, says lower oil prices are a big political boon for Chinese President Xi Jinping.
They will “help reduce the need for more aggressive stimulus to prop up the economy, and most importantly, it buys Xi Jinping more time to implement his reform agenda,” Bremmer said.
Sustained low prices may force foreign companies to sell equities in order to raise more funds for their activities. This may favor Chinese companies that still have a lot of money to spend. At the same time, low oil prices enable Beijing to fill its strategic reserves, and Chinese companies to buy cheap crude for their commercial stockpiles. China has become a hotspot for fierce competition between oil producers, with some offering steep discounts to defend their market share in the world’s second-largest oil consumer.
Many risks may accompany the decline in energy prices. China is the fourth-largest oil producer in the world, behind Saudi Arabia, Russia and the United States. This makes Beijing as vulnerable to falling prices as any other oil producer.
In addition, International Energy Agency research indicates that by the end of 2013, combined overseas oil and gas production by Chinese companies totalled 2.5 million barrels of oil equivalent per day. Of this, crude oil production was 2.1 million barrels per day (mb/d). Consequently, Chinese companies will suffer the same negative impacts of declining crude prices as their overseas counterparts.
With no growth in domestic oil production this year (4.2 mb/d in 2014), and demand projected at 2 - 3.4 percent, Beijing will rely heavily on oil imports to fill the gap. Citibank notes that China’s dependency on crude oil imports is increasing, with net imports accounting for 57.4 percent of crude consumption in 2013, projected to increase to over 59 percent in 2014, 60 percent in 2015 and almost 61 percent in 2016.
China’s Sinopec Corp. says it is on track to reach capacity of 5 billion cubic meters (bcm) of natural gas by 2015, and 10 bcm in 2017. However, if oil prices remain at $50-60 for the next two years, achieving 10bcm will be challenging.
If the Chinese leadership can deal with these developments wisely, the benefits of declining commodity prices will far outweigh the risks of a persistent fall in energy prices.
Dr Naser al-Tamimi is a UK-based Middle East analyst, and author of the forthcoming book “China-Saudi Arabia Relations, 1990-2012: Marriage of Convenience or Strategic Alliance?” He is an Al Arabiya regular contributor, with a particular interest in energy politics, the political economy of the Gulf, and Middle East-Asia relations. The writer can be reached at: Twitter: @nasertamimi and email: firstname.lastname@example.org
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