Oil Prices, Policy, and Dependency in China

Current oil issues in China

The price of oil seems to be a constant feature in world news today. With instability in the Middle East, debt crises in many western countries and the constant growth and industrialization of China there are many strains upon our natural resources. China, the most populous country, is the world’s largest energy consumer and second largest oil consumer after the US. Its GDP has been growing at rates between 7-10% consistently in recent years and its oil consumption is growing at 7.5% annually, seven times more than the US. Reasons for this are plentiful; China has become more industrialised, oil has become more affordable since China’s entry into the WTO and people’s wages on average have been increasing, thus there has been a greater demand for private transportation over mass-transport systems. The explosive growth of China exports and continued activity of China manufacturing have also contributed to the country’s energy concerns.

Oil Companies and China

Many factors have been affecting global oil prices in the last year making prices very volatile and more susceptible to shocks. The general unrest in the Middle East, in particular the war in Libya, led to an increase in oil prices after the supply of oil from Libya was halted. China imports 11% of Libyan oil and due to this decrease in supply, oil prices rose from $84 a barrel at the start of the conflict to $110 a barrel this April. However, some state-owned Chinese petroleum firms have been performing very well in the first half of this year. Sinopec, Asia’s largest oil refiner saw a 12% rise in net profits for the first half of the year which exceeded expectations, due to robust domestic demand. There were also better-than-expected results for the oil firm Cnooc who posted a first half net profit of 51.4%. Cnooc, which also owns Conoco-Phillips, has recently apologised for the Bohai Bay incident, in which there have been three leaks since June of this year in the country’s largest private oilfield, and have recently had to scale down production forecasts due to the spillage. However, despite these impressive profit gains, PetroChina only saw a 1% net profit gain. This, it has been argued, is attributed to the state regulation of oil prices in China where gas and diesel has been capped even through periods where barrels were $120 each.

Effects on “The Bottom Line”

When oil prices rise however, it can be a ‘double edged sword’ for oil firms. Earnings are boosted in the upstream sector which deals with exploration but downstream there are reduced margins in refining due to the increase cost of importing crude oil. However, despite this, oil prices have been seen to take a downturn in the last month due to the ongoing credit crisis in Europe and lacklustre recovery in the US. This should aid the refining sector boost margins once again. The high oil prices have been hurting other sectors in the Chinese economy as well, Air China, China’s largest airline, had a net profit decrease of 13% as a result of this combined with the poor performance of its subsidiary, Cathay Airways.

The regulation of oil prices has long been a contentious issue for oil companies in China as they feel they need to set higher process to be able to grow and meet demand. The cap on retail oil prices has definitely hurt China’s oil companies; however, the government has to consider a range of factors before it settles on a retail price such as the increasing inflation rate squeezing Chinese suppliers, which has become a big economic issue in government policy recently in China. Chinese petroleum firms will continue to lag in competitiveness with other Asian firms if the government continues to keep a low retail price for gasoline and diesel. The other Asian firms, although hurt by higher raw material costs, do not have as much strain on their bottom line and so can boost profits. The regulation of oil prices in China has caused it to rank amongst the lowest prices for oil-importing countries, a third of prices in Europe and Japan. This may also be in an attempt to remove some of the strain from Chinese manufacturers and exporters at a time when continued problems in Europe and the U.S. in addition to an appreciating RMB have made margins narrower than ever before.

The Future

So what is the future for oil, especially in relation with China? China’s need for energy will continue to increase and is projected to grow by 150% by 2020. As wages increase further, more people will buy cars, especially if the government keeps oil prices low, and though foreign demand from abroad may be dampened for now, China manufacturing growth will continue into the foreseeable future. A real concern, especially for China, will be energy security, and one can see how China is taking steps to improve its energy security interests in the future. As there is not much profit to be made or potential to grow for Chinese oil firms due to the price regulation, many firms are looking to overseas acquisitions to increase their production base. These acquisitions have been more common in Canada and the US where prices tend to be cheaper than in Europe. China’s main energy security interest lies in the Middle-East however, as they produce 66% of the worlds output of oil. This figure is expected to rise to 80% within the next ten years. However, if China actively pursues its security goals in the Middle-East it is likely to cause tension in relations with the US which has been known to intervene heavily in the pas and similarly has security interests in the Gulf region. China is especially close with Iran as they are the number one importer of Iranian gas and oil. Support for such nations as Iran as well as Sudan may cause diplomatic tensions with the US. It is no secret that access to the Middle Eastern oil nations will become increasingly important to China. One must hope that China realises that cooperation and not necessarily competition is the key to securing its energy security and gaining economic benefits especially from such a finite resource as oil.

• Neil Rylander- CPG Marketing Intern