China: The Real Reason for the Great Oil-Price Crash?
Plunging oil prices have sent shockwaves around the world, threatening to topple governments and bankrupt businesses even while U.S. consumers celebrate cheap gasoline.
Yet while rising supply has been largely blamed for the precipitous price fall, China’s lower demand growth and its long-term implications for the global economy have been largely ignored. Is Beijing a winner or loser from cheap oil?
On January 7, U.S. benchmark oil prices dipped below $48 a barrel, the lowest since April 2009 and half the level of just five months ago. The slump follows November’s decision by the Organization of Petroleum Exporting Countries (OPEC) not to curb production, despite surging U.S. shale supply and weakening Asian and European demand.
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China’s role in oil’s rise and fall reflects its re-emergence on the world stage. During the past decade, the communist giant’s industrialization spurt saw it become the world’s second-biggest economy and top consumer of resources such as iron ore and coal, as well as the world’s largest net oil importer.
According to Societe Generale, a French multinational banking and financial services company, Beijing’s opening to world trade at the start of the 21st century, signified by its joining of the World Trade Organization in 2001, was responsible for increasing the oil price from around $20 a barrel to $100. During this period, China’s demand grew by the equivalent of Japan and the United Kingdom’s total oil consumption, giving oil markets a similar shot in the arm to that of other commodities.
As a result, China became the world’s largest oil importer in 2013, surpassing the United States, and currently imports nearly 60 percent of its supply.
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However, China’s oil demand growth is falling, with Beijing now struggling to prop up a faltering economy. ANZ Research predicts China’s economy will expand by only 6.8 percent in 2015, down from an estimated 7.4 percent last year and the slowest expansion since 1990, amid continued deleveraging and overcapacity in a number of industries.
While now expanding from a much larger base, the nation’s “New Normal Economy”of slower growth is not conducive to another surge in oil demand and prices, argues MarketWatch columnist Craig Stephen.
“The oil market is unlikely to find another country, or even a continent, that can take over this degree of heavy lifting in demand growth. Meanwhile, longer-term forecasts that China can maintain anything close to its recent pace of growth increasingly look misplaced,” he argues.
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Chinese government researchers estimate that there was nearly $6.8 trillion worth of “ineffective investment” in China between 2009 and 2013, which has resulted in massive overcapacity in many Chinese industries. Even some consumer markets appear to be slowing sharply, causing inventories to skyrocket. Most notably, with regards to China’s oil demand, in November, Chinese passenger-vehicle sales posted only a 5 percent gain, a major slowdown compared to previous double-digit rises in the world’s biggest automobile market.
“In the past, demand appeared inelastic as growth continued even as crude prices reached triple-digits. But this period coincided with state-funded industry being the dominant driver, whereas demand for gasoline for cars can be expected to be dependent on the income growth of the middle class,” Stephen says.
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The IEA’s December oil market report notes a “sharp slowdown in Chinese oil demand growth” along with Europe and Japan as contributing to the weak outlook. It estimates total Chinese demand growth of just 2.5 percent in 2014 and 2015, with gains in transport fuels and petrochemical feedstocks only slightly outweighing weakening demand for gasoline, diesel and fuel oil.
Despite recent falls in oil prices, Beijing’s move in late November to hike consumption taxes for oil products has resulted in “little discernible price change to Chinese consumers,” negating an expected economic benefit that would have come from lower prices, the IEA said.
Yet lower oil prices are still seen as a net benefit for the Chinese economy. Bank of America Merrill Lynch estimates China’s GDP increases by about 0.15 percent for every 10 percent drop in the oil price, with its current account balance growing by 0.2 percent of GDP and consumer inflation declining by 0.25 percentage point.
International Monetary Fund researchers have estimated that falling oil prices could boost China’s GDP by 0.4 to 0.7 percent this year and by 0.5 to 0.9 percent in 2016.