Mon, Feb 10, 2003 page8

• China suffering from high oil prices

  • By Hooman Peimani
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  China is expected to increase its oil imports this year, according to a Jan. 21 announcement by an official of China's largest crude oil importer, Sinopec. While the increase might not be very significant, with the official describing this year's imports as "slightly higher than last year," the high cost of imported fuel could slow China's economic growth.

  China has a domestic oil industry and even exports a limited amount of oil (7.21 million tonnes last year), but it still depends heavily on imported oil for two major reasons. First, it has limited oil reserves that are diminishing quickly. For example, the production of China's largest oil field, the Daqing oil field, will decrease by 1.7 million tonnes this year to 48.3 million tonnes. On the other, there has been a steady increase in domestic oil consumption since the 1980s as a result of China's economic growth and improving living standards, as reflected in an increasing number of car owners.

  Rising imports of crude oil

  According to statistics released by Chinese Customs on Jan. 21, China imported 69.41 million tonnes of crude oil last year, a 15 percent increase on the previous year.

  The expected increase this year is despite a 29 percent decrease in imports in the final month of last year from the same month the year before. The sharp decline was the result of soaring oil prices, which forced the government to temporarily cut back on imports. For the same reason, it is expected to import less oil in the first quarter of this year, during which oil prices will likely remain very high. However, China's need for oil will force it to increase imports later in the year to meet its requirements of about 70 million tonnes.

  The value of China's oil imports has gone up significantly since early last year as oil prices have risen from US$25 a barrel to about US$34.

  Threat of war in Persian Gulf

  The main reason for the rise in prices has been the threat of a US-led war against Iraq and growing uncertainty about its impact on the Persian Gulf region, where more than 60 percent of the world's proven oil deposits are located. It also houses the largest members of OPEC, the cartel of oil-producing nations. Another main factor has been political instability in a major OPEC member, Venezuela.

  Oil prices will likely remain high, and may go higher, in the first two quarters of this year. This is despite adequate supplies of oil in the international markets and the efforts of OPEC members to prevent oil prices from skyrocketing. OPEC members do not want high prices because they fear losing customers to non-OPEC exporters and damaging relations with major oil-importing economies. Thus, the psychological effect of uncertainty about war in the Persian Gulf and Venezuela on the availability of oil will likely keep prices high for the next few months and possibly longer.

  China is vulnerable to rising oil prices because of its growing reliance on imported oil, particularly from the Middle East. China's imports from that region reached 34.39 million tonnes last year, 1.6 percent more than in the year before. The largest Persian Gulf oil exporter, Saudi Arabia, was China's largest oil supplier last year, shipping 11.39 million tonnes.

  Diversifying reliance on OPEC

  To minimize the adverse financial effects of the increasing cost of oil imports, the Chinese government has sought to bring down its reliance on Persian Gulf oil exporters through the diversification of its oil suppliers. Hence it has resorted to non-OPEC exporters, mainly Russia, whose exports constitute the bulk of China's oil imports not from the Middle East. To a lesser extent, it has also resorted to a West African oil exporter, Angola.

  The Chinese plan to increase, by an unspecified amount, their imports from these two countries this year. "We will see more crude purchase from West African countries and Russia in the future," the Sinopec official said. Unlike Russia, Angola is a very small oil supplier to China, shipping 5.71 million tonnes last year, a 50-percent increase from the year before.

  China will probably fail to reduce significantly the cost of importing oil this year. Russia, China's main non-OPEC oil supplier, and Angola will probably not supply China with oil at a significantly lower price than that of the OPEC suppliers. Although the OPEC and non-OPEC oil suppliers will offer different prices, the uncertainty about the impact of a war in Iraq will guarantee higher OPEC and non-OPEC oil prices compared to last year.

  Russia sticks to OPEC line

  Despite its refusal to join OPEC over the past few years, Russia has closely followed the cartels measures to prevent sharp changes in oil prices. Such behavior indicates Russia's heavy dependency on oil and gas exports as its main source of revenue.

  The looming threat of a US-led war against Iraq will ensure that oil prices will continue to rise until the end of the Iraqi crisis, which could drag into the second half of this year. Given this situation, the cost of China's imported oil will increase significantly despite its diversification policy.

  Combined with the expected fall in China's exports to its largest trading partner, the US, as a result of a shrinking American economy, the higher cost of oil imports will likely slow economic growth in China.

  Hooman Peimani works as an independent consultant with international organizations in Geneva and does research in international relations.
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