The Influence of Rocketing Oil Prices on China

After a fall of 16 straight months in the international oil market, oil prices have comfortably cruised at US$33-34 per barrel, with the peak at US$35-36 per barrel. To gauge the impact of this on the global petroleum industry and oil market, the China Internet Information Center (CIIC, WWW.CHINA.ORG.CN) invited Song Wucheng, a senior research fellow with the Macro-Economic Research Institute under the State Development Planning Commission, to provide his opinions.

CIIC: What is the in-depth reason for this straight surge of oil price? What new changes have emerged in the supply-demand chain in the international oil market?

Song: The rise was a result of multiple factors interacting. It was fundamentally a reflection of the supply-demand chain between oil importing and exporting countries, and a white-hot battle to maximize their respective interests.

At a meeting held to find ways to cut production in March 1999, the Organization of Petroleum Exporting Countries (OPEC) agreed to limit daily production to balance the cartel's basket of crude prices at US$18-20 per barrel. Non-OPEC oil producing nations like Russia, Norway, Oman and Mexico also inked the bill, which triggered the straight markup till now. In March 2000, OPEC decided to raise the basket price to US$22-28 per barrel. Under the new price mechanism, if the price stays above US$28 for 20 working days or below US$22 for 10 working days, crude production would be adjusted by 500,000 barrels a day either way, in a bid to stabilize prices. Venezuela's president, Hugo Chavez, also executive chairman of OPEC, called for even greater compliance by all OPEC and non-OPEC producers concerned to retain the current profit level and to resist pressure from certain powers, in his politically highlighted visit to the other ten OPEC member nations.

That naturally aroused a strong reaction from consuming nations. An anti-trust organization of the US Senate passed a bill stating that the president could start a sanction bill against OPEC members if the price surpassed US$28 per barrel by 27th July, 2000. When Brent oil went beyond US$34 per barrel on the London market on the 8th of September, the ministerial conference of the European Union's 15 member nations issued a joint communiqué urging OPEC to raise daily production. On the 10th of September, the finance ministers' conference of the Asia-Pacific Economic Organization's 21 member nations passed a decision requiring OPEC to boost production and stabilize prices. Under great pressure from consuming nations, on the 10th of September, OPEC compromised by raising output to 500 thousand barrels per day from the 1st of October 2000 at the Vienna conference.

Now that oil prices have become a political matter, producing and consuming nations struggle for their respective interests. In the meantime, the continuous rise in prices has kindled the tension between consumers and the state, like street demonstrations, and sieges of refineries and gas stations to protest high oil prices in England and France. Besides tightening the supply-demand chain, media propaganda, overheated marketing promotion and distorted reports caused consumers to hoard heating oil for winter, which in turn contributed to the high oil prices.

CIIC: What will be the trend of international oil prices? How long is this situation likely to continue?

Song: I think the crude oil price may cruise at a high level, above US$25 per barrel, from the forth quarter to the next first quarter because of the interaction of OPEC and the international community. OPEC will reduce production when it's excessively low. And the international community will jointly intervene if it's over US$28 per barrel.

The IMF (International Monetary Fund) predicted that the average price would be US$24.5 in 2000. The OPEC prefered US$25 as the basket price. According to President Clinton, a range of US$22-25 is acceptable. He also expects a drop from next year's second quarter and a stable US$18-25 per barrel.

CIIC: China is an oil producing but also a consuming nation. How will the high oil price affect China's economy?

Song: China has experienced a great impact from the two big fluctuations in the international oil market since 1998. I think that this is because of the incomplete separation of our petroleum industry from the planned economy mechanism.

We recorded a great loss in 1998. CNPC (China National Petroleum Corporation) and Sinopec Corp (China Petroleum and Chemical Corporation) reported losses of over 10 billion yuan, and CNOOC (China National Offshore Oil Corporation) reported over 4 billion yuan in losses. The upriver industries have stepped into a worse-than-ever plight. The outdated adjustment mechanism prevented us from importing or exporting more oil according to the spot price. In the first half of 2000, China imported 32.41 million tons of oil more than in the same period of 1999, while exports shrank to only around 3 million tons. We paid an additional US$3 billion because the oil price had jumped to US$192 per ton from US$101 per ton in 1999. Sources said China might pay more than 40 billion RMB for oil imports in 2000 because the operational mechanism caused by structural problems in the reform can't well adapt to the market. The US saved US$5 billion by importing more than 100 million tons oil when the price was low in 1998.I think we should radically speed up the marketing mechanism process. Especially after China's entry into the WTO, a change in the price adjustment mechanism will be even more urgently needed to give full play to the market mechanism and make enterprises the main stream of the market.

CIIC: What measures should China adopt to cope with the high prices?

Song: My recipe for China is:

1. Revitalize our petroleum exchanges.

The state set up several exchanges in 1995, but had to abolish them for some reason. After WTO entry, enterprises will be the real main stream of the market without government intervention. It is necessary to rebuild an oil exchange to attract international oil resources and international fund; ensure open and fair trade to restrain smuggling and speculation, and stop leaks; and integrate with the international market.

2. Speed up the establishment of a strategic oil reserve

The strategic oil reserve project is already listed in the Tenth Five-Year plan, with an expected reserve capability of five million tons. I think we need to speed up the process still more. The funds can be raised by issuing treasury bonds or by the state and enterprises supplying them. Funds are raised by the state in the U.S., and by enterprises in France. The Japanese government and enterprises share the burden of supplying such funds. It is feasible to encourage enterprises to conduct the setting up of an oil reserve if the state forms the relevant economic policies.

3. Attach importance to an oil importing strategy in accordance with domestic, international and future situations.

4. Stick to a low-cost strategy. Low cost should be accented by petroleum companies even when oil prices are high. International competition is actually competition of price, cost and quality.

5. Science and technology should be given priority to boost the petroleum industry. We should develop more high-value-added and hi-tech petroleum products.

6. The government should spare no efforts to help stabilize the oil price level and the international oil market.

(CIIC 11/01/2000)

In This Series

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