How High an Oil Price Can China Endure


The oil price has been going all way up. In spite of a recent
small-margin reduction, it is still on the high side. Experts
say that the oil price will still be maintained at a high level
in 2006.
   How high an oil price can China accept?


Where is the ceiling?


Let's make an analysis to the impact of the oil price rise on
the profit in various sectors at a normal price transmission
level. Only when the price rise of crude oil endangers the profit
in key sectors and such price factor can no longer have further
transmission will the ability of the Chinese economy to accept
the crude oil price reach the limit.
   According to the estimation made by the Deutsche Bank, an oil
price rise of US$10 per barrel will bring about a profit growth
of 20% to the oil exploration and production sector and at the
same time reduce the profit in non-oil exploration and
production sectors by 8%.
   There is a sharp contrast in profit between the oil
exploration and production sector and non-oil exploration and
production sectors in the past year. The income growth in non-oil
exploration and production sectors has made a constant slowdown
from 50% in mid-2004 to around 10% in the past few months. By
contract, the profit growth in the oil exploration and
production sector has been accelerated and the profit in the
first 3 quarters of 2005 was 75.1% higher than the same period
of 2004. To downstream enterprises faced with fierce market
competition, the environment for their existence will be further
aggravated.
   In case the imbalance caused by the oil price factor lasts
long, the ability of the Chinese economy to accept the crude oil
price will go beyond the rational scope and the economy will be
in a danger of stagflation.
   The oil price in the international market has recently made
a distinctive drop, but the impact from the price rise has not
disappeared. Instead, factors such as the drastic growth of
consumption, the relatively lagging of production capacity and
the political manipulation in price rise have combined to push
the global oil price to a still higher level.
   It is generally recognized that the oil price of US$40-50 per
barrel has become a basic oil price. In such a macro environment,
the growth of the economy in China is still relatively high. The
accelerated industrialization and urbanization, in particular,
has become a solid foundation for the oil demand growth in the
domestic market. The oil consumption is on the increase. Close
attention should therefore be paid to the negative impact of the
oil price rise in the domestic market on the social economy.
    The price level of oil products as a result of the crude oil
price transmission should match the ability of economic
development. If the oil price can be compensated by the economic
returns in enterprises or does not greatly affect their
reproduction and the energy consumption in enterprises can have
constant reduction with advances in technology and management,
the oil price rise can be absorbed by the development of the
social economy.
    From a long-term point of view, with the oil consumption
growth in China, if only the oil price rise in the domestic market
is roughly identical to or lower than the GDP growth, the
development of the national economy will have no great
fluctuation. The recent market price of RMB5 000 - 5 500 per ton
for gasoline and diesel should be regarded as within a rational
and stable range. As the present market status stands, a price
beyond that range will produce greater impacts.


Seeing things from both angles


Is the high oil price favorable or unfavorable to the economic
development in China? The problem should be seen from both
angles.
   On the one hand, needless to say the high oil price has an
inhibiting effect on the economic development. The
International Monetary Fund has recently announced that the high
oil price has slowed down the economic development in the world
by 0.8 percentage points and impacts on developing countries are
somewhat greater. To China that is at the stage of developing
the heavy industry, the restrictive effect of the high oil price
on oil product consumption and domestic resources will no doubt
inhibit the development of the national economy.
   On the other hand, however, the high oil price also has a
positive role in the development of the national economy. In the
process of industrialization and urbanization, defects of high
energy consumption, high pollution and low economic performance
should be removed. It is requested to transform the economic
growth quality and mode and take the scientific road of
sustainable development. The high oil price can promote the
economic development and fully use science and technology to
reduce consumption, save energy and speed up the transformation
of the economic growth mode. Indexes of energy conservation and
consumption reduction have already been included in the
development strategy in China.


Coping with impacts


Measures from different aspects such as mechanism, technology
and substitution should be taken to cope with impacts produced
by the oil price rise.
   First of all, mechanisms and institutions should be improved.
One of the main reasons why the oil price rise produces
considerable impacts on some sectors in China is the inadequate
oil supply mechanism. Such inadequate oil supply mechanism has
distorted the supply/demand relationship in the oil market and
enlarged the impact of oil price fluctuation on economy. The
institutional reform to petroleum and petrochemical enterprises
should therefore be accelerated to establish oil risk purchase
shielding systems and create conditions for oil producing
enterprises and oil consuming enterprises to directly face
markets.
   Secondly, new technologies for energy conservation should be
vigorously promoted. Since reform and opening up, the GDP growth
of the economy in China has been maintained at more than 8 - 9%.
Up to now, however, China still relies on the high consumption
of resources and the high consumption of consumers to stimulate
and support such high GDP growth. The comprehensive energy
utilization rate in China is around 33%, compared with around
43% in advanced countries. The energy consumption per unit of
output value is more than twice the average level in the world.
The average unit energy consumption of major products is 40%
higher than the advanced level in foreign countries. For example,
the average unit energy consumption of major products in power,
iron and steel, nonferrous metal, petrochemical, construction
material, chemical, light industry and textile sectors is 40%
higher than the world advanced level. The oil consumption in
motor vehicles is 25% higher than Europe and 20% higher than
Japan. Karl Marks once said that “conservation has no difference
from production growth.” In a macro environment of the oil price
rise and a background of creating a conservation-geared society,
the dissemination of new technologies for energy conservation
is no doubt the most practical method.
   Thirdly, substitute energies should be developed and
overseas oil sources should be expanded. As the most important
energy in the 21st century, natural g