Although China was a net oil exporter as recently as 1992, by 2002 it was importing 33 percent of the oil it was consuming. In 2007, China imported about 40 percent of its total oil needs, which was more than a gross 7 million barrels per day (bpd); this level of consumption is second only to that of the United States, which consumed 20.7 million bpd. Earlier in the year there was speculation that Chinese oil demand was the reason for the ever increasing petroleum prices. As this was a topic on everyone’s mind, it would be easy to blame the cause on China. The truth however, remains to be proven; without looking at the data there is no way to determine whether or not China is solely responsible for oil prices volatility. A cause and effect exercise is needed to see if oil price movement induced by demand from other parts of the world affects China negatively or whether Chinese demand affects the price of oil for other countries. In other words is China already a more influential player in world commodity markets than the U.S.?

The chart shows that China being approximately 20% of the world’s population only uses 6% of the world’s petroleum demand, conversely, the United States, which contains approximately 4.56% of the world’s population uses approximately 31% of the world’s demand. 

China has been increasing the amount of imported crude oil steadily every year; however, this statistic is dwarfed by the amount of crude oil imports sought by the United States. Between the average amount of crude oil imported into the United States, and that of China, this amount has been increasing at an average rate of approximately 21% on average per year. Compared to the United States of America, increasing at a rate of 17% on average per year,  this is only a slight amount more, but China (111,045,669,604 barrels p.a.) only imports approximately 17% of the total crude oil imports of  the total imported by the United States (664,963,058,012 barrels p.a.). 

Although Chinese oil demand is lower than US demand, it is the activity at the margin which has the greatest effect on the price of a commodity. For this reason China contributed vastly to the increase in the price of all commodities but in the fall of the price of oil it has been a minor contributor since demand has fallen faster in China than everywhere, particularly in the US. There have been some attempts to calculate the relative elasticity of oil in the world, the US and China but the results are too disparate for meaningful conclusions. Since 2003, China has contributed one third of the global growth in oil demand. Therefore it may be fair to say that China is an active contributor to the increase in the price of oil in times of world growth because it grows at faster rates than the rest of the world but does not influence the drop in the price of oil to any extent.

Furthermore there is evidence that there have not been many benefits from oil at $40. China was suffering from many of the problems of accelerated growth earlier this year, including inflation, but has found that the drop in the price of oil has brought down inflation giving room to cut interest rates to prop up growth and it has done this five times so far this year. Another decision the Chinese government has had to take involves the price of gasoline. Like fellow BRIC´s Brazil and India, China regulates retail fuel prices. Last month, China announced that it was cutting gasoline prices 13.8 percent and diesel by 18 percent, while India lowered gasoline prices 10 percent. Brazil has not yet announced any plans to cut the price of gasoline or diesel arguing that it did not increase prices when oil was at $140 thereby preferring a policy of price stability despite a major case today for a cut in the price of diesel. So why isn’t everyone letting off Chinese fireworks and buying GM made gas guzzling SUV´s on a wave of cheap oil optimism, not to mention other commodities? Better still, China's once ravenous hunger for energy is weakening at a record rate, compounding the pressure on OPEC to slash global oil production this week by as much as two million barrels a day to prevent a glut. Hopes held by oil exporters that continued growth in Asian demand might serve to bolster prices were short-lived, amid growing fears that China too is slipping into recession. Goldman Sachs has predicted that Chinese energy demand was in a sharp deceleration as manufacturers cut production and lay off staff to cope with the downturn and forecast that oil demand would fall by 200,000 barrels per day during 2009. Merrill Lynch predicted that the price of oil could fall to $25 a barrel if China entered recession. Almost every non OPEC country has a symbiotic relationship with oil. Note that the Brazilian ethanol lobby has now admitted that ethanol will not be a commodity any time soon with oil so low. It was less than a year ago that George Bush was in São Paulo to mend some fences on the ethanol question between Brazil and the US.

While coal still supplies about 70 per cent of China's total energy needs, oil is the second-largest source, accounting for about 21 per cent. China has made an effort to diversify its energy supplies but hydroelectric power (6 per cent), natural gas (3 per cent), and nuclear power (1 per cent) still account for small proportions of its total energy consumption. With China's economy slowing sharply, the country's electricity output during November fell 9.6 per cent from a year ago to just over 254 billion kilowatt-hours, according to recent official figures. It was the second consecutive monthly decline and the largest fall on record. Other data pointed to a 3.5 per cent fall in demand for crude oil during the month. Presently, the Chinese are facing a serious electric power shortage stemming from a mismatch between the new coal fired generating plants they have built in recent years and their ability to mine and transport coal to these facilities. Some are talking of a renewed surge of Chinese oil, coal and liquefied natural gas (LNG) imports if Beijing is to keep its factories humming on and continue to grow at the planned 10 percent a year.

China has talked about increasing its oil reserves in the past. China’s rapidly rising dependence on foreign oil supplies has created anxiety among its leaders about the security of those imports, more than half of which come from the Middle East or West Africa (China is well embedded in Angola and not just for oil). China’s apparently very modest commercial storage capacity probably has contributed to this concern. In view of these facts, China has followed other nations in establishing strategic oil reserves. China’s long-run goal is to store 90 days of net imports, about 400 million barrels at projected future import rates. This would bring them into compliance with the International Energy Agency’s (IEA) recommendation for strategic reserves. China’s decision to build a strategic reserve has some concerned that these purchases will affect the price of oil. At least two factors will influence the rate at which China purchases oil for storage. The first is the Chinese government’s sensitivity to the price impact of such purchases. The second factor is the price of oil. Other things equal, higher oil prices meant a slower accumulation of reserves whereas the present low price will justify a faster accumulation. Once again, China could affect the future price of oil by its stockpiling tactics. It is difficult to envisage much more downside for the price of oil so they may start their stockpile soon. If not now, when? (To partially quote John Kennedy who was quoting Hillel the Elder).

Conclusions

China was much better off with 10% p.a. growth and a $140 oil price than the current 7% (and dropping) growth rate and oil at $40. As time passes it becomes apparent that the world recession will cost China dearly. On the other hand, once world growth resumes, China will have to pay more for its oil. Creating growth is like pushing on string whereas managing the price of oil involves pulling levers thereby giving more options. Such is the Catch 22 nature of markets which are completely out of equilibrium. However, since it still has almost two trillion dollars in reserves and little debt China does have options and may use the opportunity to find some respite from oil prices once the upturn finally materializes by stockpiling at $40. As they say, the best thing to do with lemons is to make lemonade.