The Impact of China on World Oil Markets - Example

The Impact of China on World Oil Markets The Impact of China on World Oil Markets The demand for crude oil as well as refined petroleum products by China has been rising over the past years, and it is between 2003 and 2004 that the country’s demand for the oil products was considered highest by many energy analysts (Urban China 2014). However, it is evident that the need for the products has been rising since that time because of the activeness of China in production industry. This paper will expound on the reasons for such growth and its implications for world oil markets (Refalo 2009). Global oil prices have been increasing since 2004 because of the increase in demand for the crude oil as well as refined petroleum products from countries such as China. Those increases were correlated with an increase in demand for light petroleum products such as gasoline and diesel that are significantly used for transportation. Currently, the rate at which China requires oil for transportation significantly impacts the prices of crude oil as well as refined petroleum products. The increase in prices of the products as a result of the influence of China will significantly change the investment of many countries including the United States (U.S.). The demand for petroleum has also been increasing in other parts of the world including the U.S, Middle East regions as well as other Asian regions (Refalo 2009). However, there demand the products is slightly lower compared to that of China. Thus, it is evident that such markets have no direct impact on the prices of oil products in China; China registers continuous increases in demand for the oil and petroleum products today. Reasons for the increase in demand for oil in China China’s variation in demand for oil demand correlates with its rapid growth in economic output as well as personal incomes. The growth in earnings, on the other hand, is influenced by the rapid movement of people from rural areas to urban areas (China key to oil market pricing 2013). The rise in urban population has led to increasing in demand for new vehicles, broad roads, and an increase in demand for energy in the sector of transportation. “The annual rate of growth in China’s vehicle stock has been over 10% and this trend will continue” (Refalo 2009, p.13). In connection with this, Refalo claims that “as the vehicle population in China increases, oil consumption increases dramatically.” According to them, China is one of the nations in the globe that have the highest number of highway vehicles. He at al. also claims that by 2035, China will be the leading nation in the world in terms of highway vehicles. In their estimation, “China has approximately 662 million highway vehicles, 44 million motorcycles, and 28 million vehicles” (Oil & Gas Industry Profile: China 2013, p.11). These numbers of vehicles are probably the primary cause for China’s importation of a high amount of oil. In justifying this, Oil & Gas Industry Profile: China associated on-road vehicles in China with the consumption of approximately 1,016 million metric tons of fuel per year. On the other hand, the growth in China’s industrial output drives the demand for petrochemical feedstocks such as naphtha-based petrochemicals. Just like Oil & Gas Industry Profile: China (2013), Cornelius and Story (2007) also claim that oil demand growth in China is also as a result of a long distance vehicles cover in China. The above factors imply that China is ever in demand for petroleum. As a result of this, the key concern currently is how fast China’s demand for the oil will grow in the next few years (Levchenko & Zhang 2013). Demand for oil in China Retrieved from http://www.wolfatthedoor.org.uk/chartpages/c/c09oilconschina.html The above graph shows that the demand for petroleum product has been increasing in China for the last five decades. From the graph, one can deduce that the consumption of oil rose from 0.08 Gb in 1965 to approximately 2.72 Gb in 2006. From these findings, it is evident that the use of oil in China increases each year exponentially. For instance, it is obvious that the percentage change in oil consumption in China for the last 40 years is approximately 3328%. Oil consumption change since 1965 to 2006 Retrieved from http://www.wolfatthedoor.org.uk/chartpages/c/c10oilconschange.html The above graph summarizes the rate of oil consumption from 1965 to 2006. From the graph, it is evident that one can determine the key consumer of the oil in the world. The variation at which the demand for oil in the countries provided in the graph is very significant. The consumption of oil in China cannot be compared with any country in the world. As portrayed in the graph, the rate of demand for petroleum in China is very high. This high demand for oil in China signifies the industrialization status of China. Surprisingly, the graph only expounds on what took place between 1965 and 2006. The current oil usage in China cannot be compared with its consumption in 2006. Currently, China is working very hard in order to become the next superpower nation. As a result of that, it is evident that the country influences the oil market in the world. Current Oil Supply Trends The global oil supply slightly increased by 2.2% in 2010. This gain in production was shared between OPEC producers and other non-OPEC producers (Zaouali 2007). It is evident that non-OPEC countries constituted of 58.2% of oil production in the world in 2010, this value has not changed very much since 2000 (Zaouali 2007). This process was influenced by China that documented its highest increase in production ever, and then followed by the U.S. and Russia. The non-OPEC production rose by 1.8%, the highest value that has ever been recorded since 2002 (Zaouali 2007). On the other hand, the production of oil has been declining significantly in Norway and the UK. Just like some of the non-OPEC countries, OPEC countries have seen their production increase by 2.5% in 2010. The highest increase however came from Nigeria and Qatar (Zaouali 2007). The additional volume in 2010 came from non-OECD countries, which contributed approximately 90% of the world production (Zaouali 2007). More recently, China has shown her desire in the shale oil. This is evidenced by the cooperation the China National Petroleum Corp (CNPC) has towards foreign companies like Shell and Hess Corp. The CNPC is interested in exploring shale oil in Santanghu Basin (Lee 2012). The implementation of this project is likely to expound technological advancement in the production of shale oil, and from this, one can deduce that China plays a very crucial role in the energy market. Trends in oil demand As it was introduced above, the demand for oil energy is growing exponentially. This has been as a result of the increase in consumption in OECD countries as well as non-OECD countries in the world. The rise in oil consumption in 2010 was not matched by the production of oil, resulting to a decrease in inventories. This is evidenced by the fact that the global oil consumption rose by 3.1% whereas the production only increased by 2.2% (Zaouali 2007). This could be associated with the rise in demand for oil in China as well as OPEC production interruptions that were implemented in 2008. According to Zaouali (2007), population and income contribute significantly in determining the rate of consumption of a given product. For instance, if the population rises to 1.4 billion by 2030 with a global GDP growth of approximately 3.7% per annum, the overall consumption of primary energy will increase by approximately 1.6% (Zaouali 2007). It is also evident that non-OECD countries are likely to improve their oil consumption by 705 in 2030 (Zaouali 2007), which is higher than the forecasted production of oil. Most of the oil demand will be influenced by China that is expected to increase its net oil imports. According to Lee (2012), China will become the largest economy as well as energy consumer 2030, accounting for the increase in consumption of liquid fuels. The rise in global liquids demand by China will account for approximately 21% of the world’s population, and it is likely to represent 67% of the growth in net oil demand (Lee 2012). China’s energy consumption increased by 11.2% in 2010 making China stand out as the largest consumer of energy; its global energy consumption was 20.3% (Ahmadian, Hassan & Regassa 2013).From this assertion, one can deduce that more than a half of the oil liquids demand in the world is in China. As a result of this, it is evident that China’s refinery expansion plans will influence the product balances in the world. Scenario showing future demand growth in China CBO considers the impact of the rise in China’s consumption of oil, and according to it the value is likely to increase by 8.5% per a year (Ahmadian, Hassan & Regassa 2013). From the assertion, it is evident that the rate of consumption will correlate with the increase in population, incomes, urban employments as well as the sale of vehicles. It is also apparent that the construction of highways will impact the demand for oil significantly. In connection with this scenario, it is clear that China’s oil demand will mainly constitute of light petroleum products such as motor fuels and petrochemicals. Population of China: 1950-2030 Retrieved from http://www.wolfatthedoor.org.uk/chartpages/c/c11popchina.html The above graph shows the trend of China’s population since 1950. It also provides a prediction of how that population is likely to be in the years to come, and from the information provided; it is evident that China’s population increases at a very high rate. In connection with the introduction above, it is clear that the population also determines the rate of consumption of fuel. As a result of this, one can deduce that the high rate of increase in population in China influences the oil market. It is approximated that the people of China are likely to reach 1.5 billion by 2030, and as a result of this, it is evident that China’s demand for oil will increase by a great percentage. Retrieved from http://www.businessspectator.com.au/article/2014/9/12/energy-markets/world-oils-pivot-asia The above graph summarizes the current consumption of the oil in critical areas in the world. From the graph, one can deduce that the demand for oil in China increases exponentially from time to time. From the graph, one can also deduce that the consumption of oil correlates with the economy of the states. For instance, it is evident that China is one of the countries in the world with an emerging economy. From this assertion, one can, therefore, learn that the continuous demand for oil by China impacts the oil market in the world significantly. It is also evident that the rise in demand of oil China is likely as a result of advancement in industrialization as well as transportation. Retrieved from http://econbrowser.com/archives/2014/07/the-changing-face-of-world-oil-markets The graph above summarizes the contribution of emerging economies to the oil market. From the graph, one can deduce that China that is an emerging economy contributes significantly to the current price of oil. Additionally, one can also conclude from the graph that the prices of oil have been increasing significantly since 1984, and the main reason for that is an increase in demand of oil in the current industrial world. In connection with this assertion, it is evident that China is one of the nations in the world that is advancing significantly in terms of industrialization in the world. In other words, increase in demand for the oil in the world is driven by the emerging countries in which China is the principal contributor. Retrieved from http://econbrowser.com/wp-content/uploads/2014/07/iaee3.png The graph above summarizes on the reasons as to why oil prices have remained high for very long. From the graph, one can deduce that the continuous demand for fuel by developed, as well as developing countries in the world, contributes significantly to the rise in fuel prices. From the graph, it is also evident that the oil is the most used form of fuel. The high demand for oil by developing countries is as a result of the rise in industrialization. In connection with this, it is evident that industrialization in China will significantly influence the price of oil in the world market. From the above graphs, it is clear that oil consumption in China is going to increase significantly in the next few years and this will probably be more than the one consumed in Europe as well as the U.S. The rise in population will also impact the consumption of oil as portrayed in one of the graphs above. Thus, it is evident that China has very significant implications on the determination of the oil market in the world. How the China’s Government Programs Affect oil market in the world The extensive industrialization in China has contributed significantly to the pollution of the environment. This is as a result of the industrial emissions as well as vehicle emissions. According to Schubert and Turnovsky (2011), China is one of the nations in the world that contributes to the pollution of the environment. It is as a result of this that the Chinese government is advocating the production of vehicles that are economical in terms of consumption of fuel. According to Schubert and Turnovsky (2011), the production of vehicles that are economical in terms of usage of fuel will significantly lower the market of oil, and, as a result, lead to its drop in price. This is evidenced by the fact that China is one of the critical consumers of fuel in the world. Environmental regulation The management of the fuel consumed by vehicles through setting standards for the production of the automobile contributes immensely to the reduction of the amount of fuel imported to China. This regulation will significantly contribute to the reduction of oil prices. In connection to this, Huang, Fletcher and Sun (2008) claims that the cost of products increase with increase in demand; thus, the reduction in demand for oil in China will contribute to the reduction of its price in the world market. In connection with the above claim, Levchenko and Zhang (2013) assert that the Chinese government has formulated programs that directly affect the demand for oil. The regulation of the production of vehicles so as to lower the rate of pollution will contribute to the reduction of the use of oil in running most of the industrial activities in China. For instance, it is evident that the environmental regulation in China led to the closure of some businesses that were contributing to the pollution of the environment. Unfortunately, closure of such businesses contributes to the reduction of oil importation into China. The reduction in oil import to China also leads to the reduction of oil consumption in the world market and, as a result, leads to the reduction of its price. Impact of China’s price controls on the oil market The price of oil in China is significantly lower than in any other country in the majority of the states. The low price of oil in China has been for long the principal contributor to failure of use of other sources of energy. This is evidenced by the fact that there is no particular alternative source of energy in China. Additionally, it is evident that China has been advancing its concern for advancement of the oil industry so that it can compete in the oil market. It is as a result of this that the majority of the experts claim that China influences the world oil markets. Additionally, the energy taxes in China are very low compared to that imposed in most industrialized countries. However, the additional taxes on the new vehicles will significantly affect the cost of traveling and, as a result; influence the decision about the cost of fuel for maintains new vehicles. The VAT as well as enterprise income tax are the same to all businesses, with many exemptions depending on the product, the age of a given operation, the technology employed in the production as well as the location of the activity. For instance, it is evident that China has a 13 percent reduction VAT on the sale of fuels such as propane and residential energy services. There are also many free-trade zones as well as foreign firms producing products for export that are involved in paying very little taxes. Additionally, it is evident that only the VAT as well as the consumption tax that directly affects the prices of fuel. It is as a result of the low imposition of the tax on fuel that the consumption of fuel is very high in China. Thus, a low tax on fuel leads to an increase in the amount of oil imported into China, and as a result, a direct impact on the world oil market. The effect of the increase in for the oil in China in the future It is evident that the urban population of China is very high compared to the rural population (Huang, Fletcher & Sun 2008). Surprisingly, this population is likely to increase in the coming years. It is also possible for the government of China to come up with effective regulation programs that will curtail the extensive consumption of oil by the industries in China. However, the chances of the use of oil increasing more than the current consumption are more than the reduction in the consumption. This is evidenced by the fact that China will continue to advance technologically. It is also evident that China is working towards becoming the next superpower, and as a result of this, it will expound its industries in order to compete in the world market. According to Huang, Fletcher and Sun (2008, p.11), “the growth in China’s total oil consumption in the next five years is necessary for the U.S. because any addition to worldwide oil demand could put upward pressure on global oil prices.” From this assertion, it is evident that the extensive use of oil by China in the coming years will influence the world oil markets. Effects of slower growth in demand for oil in the future Although there is great possibility of the demand for oil in China to continue in future, it is good also to expound on the factors that may contribute to the decrease in demand for oil and its effect on the world oil market. Some of the factors that may lead to the reduction in the rate of oil consumption in China include increase in oil prices, reversal of some demand, and restriction of consumer credit as well as new car sales. New fuel economy, as well as easing of limits on personal car use, may also contribute to the reduction in the rate of oil consumption in China. According to Liu (2013), increase in oil prices might have contributed to the reduction in oil consumption in China in 2005. In justifying his claim, Liu (2013) asserts that if the oil prices rises or remains high as it is currently, the dampening effect of oil is likely to be felt in the world’s oil market. This is evidenced by what took place in the U.S. in 2005; consumption of oil dropped significantly in the U.S. when the price of petroleum increased sharply (Lavelle 2005). Since China is one of the main consumers of oil in the world, its pull from consumption of oil will significantly impact the global oil markets (US shale revolution will transform global economy’ 2014). One of the contributors for high use of oil in China is its lack of alternative sources of energy for delivering electricity to support its industries as well as growing cities. Thus, it is evident that the consumption of oil in China will only reduce if she gets alternative sources of energy. As introduced above, it is clear that the government of China is working towards reducing the pollution of the environment from the produced carbon dioxide (Levchenko & Zhang 2013 and Al-mulali & Che Sab 2013). Some of the methods that the government plans to use restriction of the consumer credit as well regulating the production of new car sales. Additionally, the government of China is working towards reducing the use of small cars that are among the key consumers of oil products. According to US shale revolution will transform global economy’ (2014), the government programs will contribute to the reduction of oil consumption that may lead to the reduction of the price of oil in the world’s oil markets. In conclusion, China is one of the emerging economies in the world that consumes a significant amount of oil. The rate of industrialization in China increases exponentially due to technological advancement and availability of raw materials for the production of different products. Majority of the people in China also reside in urban centers contributing to increasing the rate of oil consumption. The use of personal vehicles in China is also very high; majority of the people residing in urban areas use their own cars for moving from one point to another. The high consumption of oil in China is also as a result of the low taxation it imposes on oil products. It is as a result of these reasons that the consumption of oil is very high in China. The high use of oil in China contributes significantly to the rise in oil prices. However, there is also the possibility for the use of oil to reduce in China in the coming years. This is evidenced by the fact that the government is working towards reducing the emission of carbon dioxide to the environment. Being the principal consumer of oil in the world, the reduction of the demand for oil will contribute to the reduction of its price in the global oil market. Reference List Ahmadian, A, Hassan, A, & Regassa, H 2013, The impact of oil price fluctuations on the automobile industry, International Journal Of Business And Economics Perspectives (IJBEP), 2, p. 35, Academic OneFile, EBSCOhost, viewed 5 December 2014. Al-mulali, U, & Che Sab, C 2013, The impact of oil shocks on Chinas GDP: a time series analysis, OPEC Energy Review, 37, 1, pp. 20-29, Academic Search Complete, EBSCOhost, viewed 5 December 2014. 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