Despite the unquenchable thirst for oil to fuel China’s fast growing economy, the oil consumption growth rate is dropping
At first glance, the official figures of China’s oil consumption in 2005 seem a bit confusing. With a robust economic growth and rising annual oil imports, China made the surprise announcement that its oil consumption growth rate was dropping sharply, from 15.3 percent in 2004 to 2.1 percent in 2005. Earlier, China’s Ministry of Commerce attributed the slower growth to high oil prices, the government’s macro-control and a relatively sufficient electric power supply, but some argue that this phenomenon is a result of tightening oil supplies rather than a decline in the demand for oil.
Opting for fuel saving
From 2003 to 2005, prices of refined oil and diesel oil have jumped by 14 percent, keeping pace with soaring world oil prices since 2003. While the price increase during 2003 and 2004 was not felt by the majority of the Chinese, the impact was soon obvious in the sluggish car market, decreasing cars on streets and also the frequent use of substitute fuel in the country.
The explosive demand for cars during 2002 and 2003 finally came to a halt with car sales plummeting as a result of the high oil price. Meanwhile, climbing oil prices have also resulted in higher plastic and rubber prices, as well as the cost of car manufacturing, which has narrowed the profit margin of car manufacturers. Furthermore, owing to the price increase, more people are now turning to gas and ethanol oil while more car manufacturers begin to develop fuel-saving engines. Recent years have seen an increasing demand for cars with low emission and low oil consumption. This may have directly led to the falling demand for refined oil.
Cutting energy consumption
China’s rapid urbanization and industrialization in the 21st century depend heavily on oil. The country’s oil consumption jumped by 8.6 percent from 2000 to 2004, much higher than the 7 percent growth rate in the 1980s. During 2003 and 2004 especially, the large-scale development of iron and steel, chemical, metallurgical and building material industries inevitably resulted in serious power, coal and oil shortages.
In order to keep a basic balance between energy supply and demand, the Chinese Government promulgated a series of regulations to curb the development of programs of high energy consumption. For example, export tax refunds for such big energy-consuming sectors as steel, coal and non-ferrous metals have been reduced, and the processing trade of some of these sectors abolished. The whole society is now encouraged to save and use energy in a more efficient way, and each industry was given a set of consumption guidelines and recommended to use substitute energy wherever possible. In June 2005, the State Council put forward requirements to both central and local government departments to take energy-saving measures. Office building construction, house heating systems, air-conditioners, illumination systems and cars are all required to be adjusted for energy efficiency. While ethanol oil was widely recommended in China’s nine provinces in 2005, carbinol oil has also been put into use in most of the country’s northern provinces and municipalities.
Restored power supply
When troubled by electric power shortages in 2004, a number of companies began to use generators, which led to a soaring demand for diesel oil and other fuel oil. Diesel oil import in 2004 was two times more than that in 2003 and fuel oil imports saw a 27.7 percent growth over the previous year.
With the government’s growing investment in the power industry since 2005, a batch of new power plants (hydropower and thermal power) are now able to play a role, thereby cutting the country’s power shortage from 30 million kw in 2004 to 20 million kw in 2005. At the same time, diesel oil and fuel oil also began to see a decline in demand. According to statistics, 2005 saw an increase of 69 million kw in installed capacity or 15.7 percent over the previous year, a jump of 3.1 percentage points.
Limited supply
Some argue that the slower demand growth in 2005 is a blend of real demand decline and a limited supply in China.
The price of crude oil in China is fixed in line with the international oil price, while that of refined oil is adjusted by the State Development and Reform Commission according to the world’s oil supply. In recent years, although the world’s oil price keeps rising, given the country’s economic development, inflation and other problems, the Chinese Government is cautious in its adjustment of the refined oil price, which constitutes the major reason why the price of refined oil in China is much cheaper than that in the international market and cheaper than the crude oil price in the country.
Such an embarrassing price gap is throwing a number of refinery companies into the red. While oil refineries could still absorb a shrinking profit margin during 2003 and 2004, a large-scale loss in the refinery industry seemed inevitable in 2005, when the whole industry’s losses amounted to 30 billion yuan.
As a result of the climbing crude oil price, small companies have to close up shop, while big companies are losing the motivation to refine oil, as the more they produce, the more they lose. According to China National Petroleum Corp. (CNPC), in 2005, every ton of refined oil was 700 yuan cheaper than crude oil. As oil refineries are reluctant to produce too much, supply shortages occurred, like the oil shock in Guangdong Province in 2005. It’s true that as China’s two largest state-owned enterprises, CNPC and Sinopec (China Petroleum & Chemical Corp.) have the obligation to ensure state oil security, but at the same time, they are in business to make profits. It is within this dilemma that oil refineries began to protect their own interests by limiting oil supply to the domestic market and increasing oil exports. To a large extent, the limited supply comes after this strategy has curbed consumption growth in China.
Moderate growth
The slowdown of oil consumption growth in 2005 resulted from both objective reasons and the state’s policy intervention. Although the efforts to curb soaring oil demand have achieved initial success, there still remain many problems.
Some of the measures taken by the Chinese Government in 2005 helped to bring down the rocketing oil consumption, such as encouraging the development of energy-efficient industries and substitute energy. However, the slowdown of consumption growth due to insufficient supply, which occurs as a serious result of a policy-based oil pricing system, is not the answer. If refined oil continues to be sold at a lower price than crude oil, the whole refinery industry will suffer and the low price will not help prevent a reccurrence of oil shocks. Worse still, this may even create opportunities for rampant oil smuggling.
Energy security is a crucial issue for China’s robust economic growth in the coming decade. On the one hand, China is stepping up efforts to explore domestic oil and gas resources and seeks to purchase or explore oil and gas in other countries, while on the other hand, the state is trying to curb the excessive growth of domestic consumption. The State Development and Reform Commission proposed in 2005 to keep the oil consumption within 450 million tons by 2020. Despite the universal doubt over this ambition, the slowdown in 2005 proved that fulfilling this goal was possible.
Of course, some believe that the fundamental way to curb soaring oil consumption growth is to relax the control over the pricing of refined oil, so that the domestic oil price can be brought in line with that in the international market. High prices should be used as ways to prevent high energy consumption and oil wastage. Nevertheless, the Chinese Government is careful in employing this method.
It is widely predicted that China’s oil demand in 2006 will see a rebound, that is, a demand growth rate of 6 percent over 2005. The Chinese Government has already announced on several occasions that it would continue to maintain the moderate increase in both oil consumption and oil imports. At the same time, China will try to reduce its reliance on oil in its economic development. For example, while low emission vehicles are being promoted, generation boilers and dynamotors consuming oil are to be eliminated, supplemented by a series of policies to encourage energy saving and the use of substitute energy.
The author is an associate researcher at the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce