By Michael Lelyveld
A PetroChina gas station in China’s Xinjiang province. Photo courtesy of Wikipedia.
Plunging world oil prices have cheered consuming nations and troubled producers, but the effect on China is likely to be mixed.
As both a major importer and an oil producing country, China will see both upsides and downsides of lower prices after a 43-percent drop since the start of 2014.
At first glance, China should welcome the extra lift for its economy that lower energy costs can be expected to bring.
“The slide in oil prices to five-year lows offers China a double-benefit as its leadership confronts the weakest expansion in a generation,” Bloomberg News said.
Analysts at Bank of America Merrill Lynch have estimated that each 10-percent decline in oil prices will raise China’s gross domestic product (GDP) by 0.15 percentage points.
In 2013, crude oil accounted for 11.3 percent of China’s total imports, according to customs data cited by the official Xinhua news agency.
China could save $4.5 billion per month on its oil imports if the price trend continues, Merrill Lynch said.
But even that could prove problematic because consumer price inflation is already running far below the government’s 2014 target level of 3.5 percent, hitting a five-year low of 1.4 percent in November.
Since each 10-percent dip in oil prices is also expected to reduce consumer prices by 0.25 percentage points, further cuts could raise deflation risks, throwing the economy into a stall as spenders await further drops.
Uneven Effects
The effects of declining energy revenues would also be felt unevenly in China.
“For China, the fall in crude prices has added to concerns over the prospect of regional deflation in the country’s resources-dependent hinterland, even as coastal manufacturers welcome lower input costs,” the London-based Financial Times said.
China’s import dependence for crude oil has grown steadily over the years, but the balance of its interests in a global market of cheaper supplies remains unclear.
As of November, China imported an average of just over 6 million barrels per day in 2014, according to customs data, representing 59.2 percent of its crude oil supplies.
The country’s oil production of 4.2 million barrels per day has remained virtually flat for several years.
While China is saving on imports, it may lose revenues from production.
An analysis published by the official English-language China Daily noted that net profit at PetroChina, the listed subsidiary of state-owned China National Petroleum Corp. (CNPC), fell 6.2 percent in the third quarter.
Revenue at China National Offshore Oil Corp. (CNOOC) was down 4.6 percent from a year earlier, the paper said, citing figures reported earlier by Reuters.
In a sign of concern for the pressure on profits, China’s Ministry of Finance announced on Dec. 26 that it would raise the threshold for the windfall tax on oil production to U.S. $65 (403 yuan) per barrel from U.S. $55 (341 yuan) per barrel at the start of 2015, giving oil companies a break, Bloomberg reported.
Producers are expected to reassess their oilfields and gradually shut down high-cost operations, The South China Morning Post said last week.
For much of the past year, China has been importing more crude oil than its market can use, taking advantage of falling prices to fill its strategic petroleum reserve.
In the first nine months, China put an average of 391,000 barrels per day into storage, Platts energy news service estimated.
The costs and benefits of the strategy may be open to question, since world oil prices dropped even more sharply in the fourth quarter of the year.
Apparent oil demand growth has been running far behind official GDP rates at 2.3 percent in the first 11 months of 2014, said Platts in a December report.
Demand for refined oil products has also been weak, rising by a scant 1.1 percent in 2014, a study by consulting firm ICIS China said.
Pricing Formula
The balance of advantages for consumers and oil companies may depend on how well the government’s domestic fuel pricing formula responds to crude oil price declines.
Under rules revised in 2013, fuel charges are adjusted when international crude prices vary by more than 50 yuan per ton (U.S. $1.09 per barrel) over 10 working days.
The government has cut fuel prices 10 times under the formula since July, state media said.
But the lag in the system makes it less responsive than full market pricing, delaying or distorting the effects of world market shifts.
Philip Andrews-Speed, a China energy expert at National University of Singapore, noted that falling oil prices have been dragging down prices for imported liquefied natural gas (LNG), while world coal prices are also at a five-year low.
“As a net importer of all these energy products, China is set to gain on multiple fronts: trade balance, foreign exchange reserves, economic growth, manufacturing and agricultural costs, and inflation control,” Andrews-Speed said in a posting on the website andrewsspeed.com.
But for China’s refiners, the situation is more complex because the government has been cutting retail prices for fuel.
“Also, the refiners now have to sell at a low price product refined from crude oil that was purchased some time ago when prices were higher,” said Andrews-Speed.
Additional savings for consumers are limited under the formula when world oil prices fall below U.S. $80 (500 yuan) per barrel, the Financial Times said.
It is unclear how much benefit the government will want to pass on to consumers in the form of lower fuel prices.
Andrews-Speed noted that retail prices for gasoline and diesel have not dropped substantially because the government has raised fuel taxes to keep consumption in check.
On Dec. 12, for example, the Ministry of Finance and the State Administration of Taxes announced a retail price cut and a tax increase of 1.4 yuan per liter (U.S. 87 cents per gallon) at the same time.
Fine line
The government may be walking a fine line between pro- growth policies that satisfy consumer demand for cheap fuel and public pressure to bring air pollution under control.
Environmental issues are also a concern for the government’s efforts to promote natural gas as a partial replacement for high-polluting coal.
Cheap oil and coal prices pose a challenge for switching to gas in the transport and industrial sectors, Andrews-Speed said, while lower gas prices would lower incentives to invest in costly gas extraction and development.
In an email message, Andrews-Speed said participants in a recent energy conference in Beijing seemed to agree that “the government has a problem deciding what do about domestic gas prices.”
One option would be to cut the prices but keep pressure on the national oil companies (NOC) to keep investing in exploration and production, even at a loss.
A combination of slower economic growth and price shifts in the energy sector appear to be playing havoc with forecasts of China’s natural gas demand.
In April, a statement on the central government’s website said China would “raise its natural gas supply to as much as 420 billion cubic meters (14.8 trillion cubic feet) per year by 2020” due to rising demand and urbanization, Xinhua reported at the time.
Previous government forecasts called for 350 billion cubic meters (bcm) of demand in 2020, up from 167.6 bcm of apparent consumption in 2013.
But last month, a CNPC researcher said consumption in 2020 would not live up to either target.
“Because of China’s economic slowdown, annual growth in the nation’s natural gas consumption will no longer run at double-digit levels,” said Qian Xingkun, vice president of CNPC Economics and Technology Research Institute,China Daily reported.
Qian said consumption in 2020 would reach only 300 bcm.
Five days later, China Daily cited a CNPC forecast of 360 bcm in 2020 as the company pledged to increase imports in the face of a gas shortage this winter.
Since 2009, China’s gas use has climbed at an average annual rate of 15.6 percent, a company representative said.
In Qian’s forecast for the 13th Five-Year Plan (2016- 2020), consumption would rise by only about 8 percent per year.
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