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Zhang Kang:China should take the initiative in gaining oil pricing power

 

One of the greatest marvels of the first decade of the new millennium was China’s phenomenal growth. In 2010, China’s GDP was 4.04 times greater than its figure in 2000, with an annual growth rate reaching 14.50%. While China’s energy demand accounted for 11.07% of the world’s total energy consumption in 2000, by 2010 the figure had risen to 20.26%. Consequently, China became the world’s largest energy consumer. Annual growth for oil consumption during this period was 6.63%, with an average of 13.99% annual growth in net crude oil imports. Concurrently, oil import dependence rose from 28.2% to 54.8%.
 
Coinciding with the significant increase in international oil prices, China’s import volumes rose substantially. The value of imports consequently rose even more dramatically. In 2010, the total value of imports was nine times greater than the figure in 2000, and the average annual growth rate was as high as 24.6%. As impressive as these figures were, many came to question whether such developments were sustainable and rational, and whether importing in such large quantities could have had negative impacts on the economy.
 
With an excessively high GDP growth rate, energy and petroleum consumption rose inequally massive proportions, but as the extensive development models were adopted to expand the economy and energy sectors, various energy conservation and emission reduction targets could not be met. Those drawbacks in sustainable development could imply negative impacts on the economy and society.
 
Meanwhile it is worth noting that, in the early stages of industrialization, economic growth is dependent on energy (especially oil), and consumption levels must rise to meet demands. In China, the growth rate of domestic oil production is evidently lower than the growth rate of oil consumption, so it goes without saying that the volume of imports would continue to rise. A ‘clever wife’ is frugal, but she ‘cannot cook without rice’.
 
Oil imports help sustain economic development
 
Most imported oil is treated as energy source to uphold citizen’s standard of living, and to ensure the continuity of industries, so as to advance economic and social developments. Also, oil can become the raw material for petrochemical and fine chemical industries. Given this nature, over time, the true value of a barrel of oil may multiply several times, or even tenfold, from its original price. Just by looking from the vantage point of foreign trade, the rapid growth of oil imports has no significant impact on imports overall.
 
In 2000, the volume of oil imports accounted for 6.60% of the country’s total imports. By 2010, it was 9.59%, only a 3 percent rise.
 
Looking at it further, between the years 2000 to 2007, there was a general increase in oil prices, and the ratio of oil imports to total national imports only rose 1.74%. When oil prices rose dramatically in 2008, the ratio increased by 3.04%. This suggests that unless oil prices skyrocket, the economy, as big a system as it is, can ‘absorb’ the effects brought about by increases in oil imports.
 
Oil imports safeguard the development of the refining industry, help sustain rapid economic growth, and expand the volume of oil product exports. The amount of oil product exports in 2010 was 3.25 times greater than 2000’s, with an annual growth rate of 12.52%. As many exported oil goods are high-valued products, the total value of oil product exports in 2010 was 8.46 times the figure in 2000, with an annual growth rate of 23.81%. Certainly, the revenue generated from exporting oil products cover the cost of oil imports to a degree. Simultaneously, such patterns were reflected in China’s foreign trade and international economic exchanges. As the pier and precondition to China’s robust economy, oil imports have contributed to China’s economic strength and development, and generated sustainable trade surplus and considerable amounts of foreign currency.
 
According to the “BP Statistical Review of World Energy”, the national import volumes of crude oil for the United States, China and Japan in 2011 were 445 million tons, 254 million tons and 177 million tons respectively, accounting for 23.5%, 13.3% and 9.4% of total global imports. China has already become the second largest oil importer in the world.
 
The former directoroftheChinaEnergy Board said recently that total energy consumption will reach 5 billion tonne coal equivalent (tce) by 2020, with 20% of it coming from oil. (This is a slight increase from the 18.1% figure in 2010). This forecasts that 700 million tons of oil will be consumed in 2020.
 
If domestic oil production remains stable at 200 million tons per annum, then China will need to import 500 million tons of oil. Import dependence would be as high as 71%. Even if there is steady growth in domestic production with an annual growth rate of 2.31% (annual growth rate between 2000 and 2010 was 2.13%), domestic production would be 250 million tons, such that 450 million tons of oil would need to be imported. In this case, there would be an import dependence of 64.3%. Even if the latter scenario comes true, the figures would still be greater than the import volumes reported by the United States in 2011.
 
Considering the rise in unconventional oil production and advancements in alternative energy and energy conservation, American experts forecast that oil imports for the United States will continue to decline. In the early years of extensive shale oil exploration between 2008 and 2011, annual crude oil import growth rate was -2.97%. Knowing that this trend will continue to grow, if one should take -3% as the forecast growth rate, the import volume in 2020 will be 338 million tons. Then, between 2015 and 2020, China will have become the world’s largest crude importer. In time, this will create greater pressure for China over crude oil supply.
 
China likely to become world’s largest natural gas importer
 
In 2011, natural gas import volumes for Japan, the United States, Germany and China were 107 billion m3, 98.1 billion m3, 84 billion m3, and 30.9 billion m3 respectively. The first three nations were the top importers, whereas China had not been listed as a major natural gas importer. In light of the rapid developments in unconventional gas (especially shale gas), natural gas imports sharply declined in the United States, and predictably, the United States will have become a net exporter of natural gas by 2017. In contrast, if China is to rely on natural gas to meet 8.3% of the country’s primary energy consumptionby 2015, import volumes could reach from 90 billion to 100 billion m3.
 
Consistent with the International Energy Agency (IEA, May 2012)’s analysis, total natural gas consumption in 2020 for China is predicted to be 400 billion m3. One may also predict that import volumes would range from 150 billion to 160 billion m3. Taking into account Japan’s 1.97% primary energy consumption decline rate between 2006 and 2011, even if Japan stops all nuclear power production with half of the total consumption satisfied through LNG imports, the country’s 2020 import volume would only be approximately 120 billion m3.
 
Thus, between 2015 and 2020, China will likely have become one of the largest natural gas importers in the world.
 
Take the initiative in gaining oil pricing power
 
Since China will soon become the world’s largest oil and gas importer, it is vital to strengthen our negotiating power in the international market. We have to change the framework that is in place today if we want to improve our performance.In the 1990s, China already missed a golden  opportunity to establish a favorable petroleum exchange.Oil and gas operations and financial operations at the exchange are the subjects on which we must manifest our “right to speak.” 
 
Generally speaking, energy security involves two key factors: the country of origin and the import method.To acquire oil and gas, we have to rely on long-term contracts while attaching importance to short-term spot trading. In the short-run, we also need to vigorously improveour operating capacity in spot trading.
 
As far as country of origin of imports is concerned, Chinais comparable to the European Union and is not as competitive as the U.S., but it is superior to Japan, Korea, and India. The shareof the Middle East countries as our source of oildropped from 53.6% and 56.2% in 2000 and 2001 to 45.2% and 44.6% in 2006 and 2007. In 2011, however, that figure rose again to 51.5%.
 
The top three countries of origin in 2006 (Saudi Arabia, Angola, and Iran) accounted for 44.2%. If we added the figures for the fourth and fifth largest sources(Russia and Oman), the top five countries of origin may be seen to account for 64.2% of China’s total imports.
 
Because the European Union and especially the U.S.are reducing their oil imports from them, the Middle East countries will increasingly direct their exports to China. Fortunately, steady growth in oil and gas imports from Kazakhstan, Venezuela, and Brazil helps China diversify its oil and gas sources.
 
Guarantee supplies with robust reserves
 
Land and sea channels determine the routes for oil and gas pipelines. Shipping will be crucial in developing transport for oil and gas, especially for natural gas, which depends on both land-based and sea-based systems. We should take full advantage of the strong Chinese shipbuilding industry, as well as the lowered costs resulting from the global shipbuilding industry downturn. We have to vigorously develop ocean-going tankers and liquefied natural gas (LNG) carriers and pay appropriate attention to supplementary inland waterway andland transportfacilities.
 
During the later stages of the last century, almost all economically developed countries relied on large volumes of imported oil. In those days, a country with high import volumes faced great risks during oil shortages.
 
Some researchers propose that a 50% foreign oil addiction is an oil security threshold. Some evensuggest that when foreign oil addiction reaches 60%, there would be significant economic constraints.These claims, however, have not been verified. In reality, these claims are not only inapplicable to well-equipped developed countries, but also irrelevant to large nations. For small developing countries, they are virtually meaningless; otherwise all the non-oil-producing small countries would not have survived.
 
Preparedness averts perils. The bestway to handle shortages is to have robust reserves. In general, for importing countries, three to four months of oil reserves, with a system of safety and emergency measures in place, could guarantee two months of normal operations for the economy and society.
 
The “storage” component of oil inventories and the “preparedness” aspect of emergency systems constitute the modern defensive shield for oil security.
 
Could an oil exporting country with intensive internal conflicts and a weak economic base withstand two or more months of interruptions in their oil exports? “Oil weapons” are two-edged swords that could “penetrate one’s own abdomen.”Looking beyond, the International Energy Agency (IEA), as a subsidiary of the Organization for Economic Co-operation and Development (OECD), not only stipulated alower limit of reserves for member states, but also put forth a set of robust collective measures to handle energy shortages.
 
Mutual Benefits for Importing and Exporting Countries
 
Over the last twenty years, China coped with regional wars and many natural disasters, events that could have led to energy shortages. Today, China already has one month of oil tactical (commercial) reserves, along with a near-one month strategic reserve. This is enough to fulfill the two-month reserve target and to improve the corresponding regulations andsafetywarningsystems by the end of the “12th Five Year Cycle.”
 
Sufficient reserves not only provide material support for China in times of crisis, but also allow the country to participate in IEA, laying the groundwork for collective security arrangements with OECD member states. In the modern world, it is very hard to “dodge” international cooperation when safeguarding an individual country’s energy security.
 
The oil crises in the later part of the last century, as well as the opposition between the Organization of the Petroleum Exporting Countries (OPEC) and the OECD, were manifestations of the intense conflict between old sovereign statesand(semi-)colonies. Such phenomena were by-products of the Cold War. With the great advancements in economic integration in the global village, it is now possible for exporting countries and importing countries to coexist. Outright confrontation is harmful, whilecooperation yields mutual benefits.
 
China has taken the initiative to implement a “reasonable price band” policy. When supply declines, more production takes place; this is one of the characteristics of the new dynamic. China has been bullied for a long time, and because of this, the nation has strived for mutual benefit as a guiding principle in its relations with others. This principle also applies in China’s cooperation with oil-exporting countriesfor its own oil security.
 
China is in the early stages of industrialization with a huge population and a resource shortage. Nevertheless, China with her sufficient funds and position as the “factory of the world” has made significant contributions to the world economy. Her contributions became especially evident during the recent global economic crisis. Hence, China should “boldly” utilize world resources. This would yield positive change, especially for economically underdeveloped butresource-rich countries, to develop key methods and timely initiatives.
 

 
ZHANG Kang
CEFC Advisor, Deputy Director of the Consultant Committee of the Petroleum Exploration, Development and Research Institute of SINOPEC
 
CEFC Members : CEFC China Energy Co., Ltd. China Institute Of Culture Limited CEFC Shanghai Charity Fund
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