China Slowdown and Expected Decline in Crude Oil Demand 28 Aug 2012
by Walid Khadduri

Fluctuation in demand leads to volatility in the price of crude oil. In recent decades, the unpredictability of economic growth in Western countries (mainly the United States and Europe) and Japan has played a key role in influencing oil prices. Meanwhile, the role of emerging economies (China, India, Brazil and South Korea) has also started playing a major part in determining the price of oil in recent years.

The main reason for the growing importance of emerging economies on the global scene is the gradual rise of their share in global economic growth. Since the turn of the century, developing countries accounted for 42 percent of global economic growth, which shot up to about 76 percent in 2012. As is well known, the share of both China and India is the largest in this rise. Information from OPEC indicates that the exponential rise in the economies of developing countries in Asia, Latin America and the Middle East has also been a significant factor in the growing demand over the last decade.

Global demand for oil has risen by about 15 million barrels per day since 2000, which is quite substantial, constituting around 50 percent of the OPEC’s overall production. This production currently stands at 30 million barrels per day. Among the most noteworthy factors behind this phenomenon is that China has doubled its consumption of crude oil over the last 12 years, while demand for oil in industrial countries has fallen by 4 million barrels per day since 2005 as a result of domestic taxes imposed on petroleum products. This shows China’s growing share in global oil consumption and the fact that any fundamental change in China’s economic growth would have major implications for global oil markets.

The demand for crude in China rose by 1.5 million barrels a day from 2009 to 2011, constituting about 40 percent of the overall increase in global demand for oil during this period. There is fear in oil markets that unless China takes adequate and immediate measures to address some of the structural issues in its economy, the continued increase in global demand for crude could falter. Some of the problems China is facing stem from the rapid increase of its urban population and the continued weakness of its agricultural sector vis-à-vis its industrial sector.

The International Energy Agency (IEA), in its publication on global oil markets for July 2012, lowered its forecast for oil consumption at the global level for several years. It also lowered its forecast for demand in 2013 by 400,000 barrel per day in light of the ‘worrying slowdown’ in global economic activity. The sovereign debt crisis in the eurozone and the weakness of the US economy are well known factors in this respect. For a long time these two crises have festered in the absence of meaningful and successful solutions. However, the slowdown in Chinese trade and its impact on the rate of global oil consumption in the future has been a new and important factor which has prompted the IEA, the US Department of Energy and OPEC to follow up on energy consumption projections.

In addition to its enormous domestic market because of its huge population and a steady rise in the standard of living of hundreds of millions of citizens as a result of the booming industry and trade, China depends first and foremost on the health of its export sector to maintain sustainable levels of economic growth to meet its high demand for oil. Therefore, the latest data coming from China disappointed experts when it was revealed that the country’s exports rose by only one percent in July compared to exports in the same month last year. The reason for this meager growth is the decline in imports in Europe and the US, which are considered one of China’s two largest markets. This data comes on the heels of other weak monthly data that has led experts to believe that Chinese economy will undergo a period of sluggishness.

This is expected to cause a decline in demand for oil in the second biggest oil-consuming nation in the world after the United States. One of the most important recent data shows that economic growth for 2012 will stand at about 8 percent, which is much higher than that of its counterparts in the Western industrialized world (which hovers in the range of 2 to 3 percent). However, this figure is less than the high growth rate China has achieved in recent years, which was in the range of nine percent. The same thing applies to the economic growth rate for 2013, estimated at 8.1 percent. China is expected to consume 9.5 million barrels of oil daily in 2012.

When this data was published in July, it caused the price of Brent crude (North Sea Oil, September contracts) to fall by 45 cents to $112.77 per barrel, while the US light oil dropped 34 cents to about $93.02 per barrel. However, these prices can by no means be called low, particularly the price of Brent crude. In fact, several other factors have helped keep up price levels, despite expectations of a fall in global demand in general and Chinese demand in particular. Factors that affect oil prices, particularly, geostrategic factors, have played a key role in keeping these prices higher than expected. These factors include the policy of sanctions on oil-producing counties, particularly the imposition of sanctions on Iran and the wariness of the market over implications of the Syrian revolution at the regional level. There is also fear in global markets over the possibility of oil supply disruptions from the Middle East. If these factors continue to hold sway over markets, it is expected that prices will remain high despite indicators showing a slowdown in global economic growth.

China’s growing need to secure large oil supplies to support its industrial growth has forced its companies to take the initiative of exploring oil in different areas of the world. These days, Chinese companies are operating in all Arab and African oil-rich countries, in addition to acquiring ownership of oil companies in Canada and the US to invest in oil producing and newly explored fields. Chinese oil company Cnook recently bought the Canadian Company Nexen for $15 billion in order to consolidate Chinese investments in North America, particularly in exploration and drilling for oil and shale gas. The Chinese government also has a dispute with neighboring countries in the South China Sea over hydrocarbon rights, which experts argue, shows its attempt to gain direct control over large sources of oil to reduce its dependence on global companies.

This ‘independent oil’ policy is similar to the one pursued by major powers. China is also seeking to gain energy self-sufficiency through access to modern technology by buying foreign companies for developing its domestic energy resources. This is evident from its acquisition of oil and shale gas drilling companies or through its import of oil from abroad through Chinese national companies.

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