Slowing Growth of Oil Consumption in 2007

By Gong Jinshuang

Constant rise of oil prices in 2006

1. The output growth of crude oil presents a declining trend

The output of crude oil in China increased again in 2006. It
reached an all-time high monthly output of 15.736 million tons
in July 2006. Due to the restriction of resources, however, the
growth of crude oil production slowed down in 2006. Impacted by
factors such as the large volume of imports and the low activity
in refining, in August and September 2006 in particular, crude
oil had a relatively high inventory and the growth of production
dropped considerably. The output of crude oil in China was
137.929 million tons from January to September 2006, an increase
of 1.7% over the same period of 2005.
   Pulled by the two upward price adjustments of oil products
in the middle of 2006, the profit in crude oil processing
companies improved. The crude oil processing amount increased
to an all-time high of 25.554 million tons in July. Nevertheless,
as the price of oil in the international market continued to
climb and China experienced no further upward adjustments of
domestic prices of oil products after the second quarter, the
profit in the production of oil products was low and the
processing of crude oil started to drop once again late in the
third quarter. China processed 224.145 million tons of crude oil
in the first 3 quarters of 2006, an increase of 5.2% over the
same period of 2005.
   With the impact of policies related to the price of oil
products, the growth in output of many oil products was slower
from January to September 2006 than in the same period of 2005.
The output of some oil products was even reduced.

2. The import of crude oil continues rapid growth

The import of crude oil in China continued to grow rapidly from
January to September 2006. Due to capacity expansion in
refineries, the need for inventory replenishment in new oil
pipelines and oil depots, the low inventory of crude oil at the
end of 2005 and the brisk oil demand in the domestic market, the
import amount of crude oil has increased drastically. As China
restricts oil exports, the export of crude oil has dropped by
a considerable margin in 2006. China imported 109.258 million
tons of crude oil from January to September 2006, an increase
of 15.9% over the same period 2005. Only 4.275 million tons were
exported, a drop of 21.8%.
   Oil consumption growth is relatively stable with only a
slight increase in 2006. The economy and the heavy
industrialization in China experienced rapid growth in the first
half of 2006, especially in the second quarter, and the oil
consumption growth was quite high. With the impact from factors
such as the macro control by the state, oil consumption growth
was reduced in the third quarter. It was expected that the annual
demand for oil in 2006 would be around 5% higher than 2005.
   The growth in the apparent consumption of gasoline is higher
than the growth in the apparent consumption of diesel in 2006.
Besides the rapid growth of automobile production, especially
sedans, the restriction of oil exports and the elimination of
the gasoline export rebate in 2006 also play an important role
in the difference between the apparent growth of consumption of
gasoline and diesel. What should be noted is that the apparent
consumption of asphalt grew dramatically - 21.6% from January
to September 2006 - because of sustained rapid growth in capital
construction. The production capacity of asphalt expanded
constantly at that time.

3. The oil price is maintained at a high level

With the impact from the international oil price, the price of
crude oil in the domestic market hit new historical highs again
and again in 2006. The base price of light crude oil and middle
crude oil increased to a new all-time high in September. The base
price of heavy crude oil reached its highest point ever in June
and then started to fall.
   In the first three quarters of 2006, China made only two
upward adjustments to the price of oil products. There was a
considerable gap between the price increase of oil products in
China and the increase in the international market. Distributors
expected a further price rise and were not willing to sell their
products. The low profit of crude oil processing in refineries
and in the sale of imported oil products by the importers
affected the supply of oil products in the domestic market,
leading to a deficit of major oil products such as gasoline and
diesel fuel in China. With the oil price drop in the
international market late in the third quarter of 2006, the
market price of oil products in China declined.

Further rapid increase of the oil output in 2007

1. Growth of actual oil consumption will slow down

The growth of actual consumption of oil in China will be slow
in 2007. Actual oil consumption in 2007 is estimated to be 4.5%
higher than the same period of 2006.
   (1) The economy in China will continue its rapid development,
but the growth rate will be slower. Economic data recently
published show that the China's economy maintained rapid
development in the third quarter of 2006, but growth was lower
than before. The economy saw rapid growth of 10.4% in the third
quarter of 2006, but it was 0.9 percentage points lower than the
second quarter of 2006. The economy in China will still maintain
stable growth in future.
   (2) The growth of some high energy-consuming sectors slows
down. With the impact of factors such as the macro control by
the state, both the growth of fixed-asset investment and the
growth of industrial added value declined in the third quarter
of 2006. Of 39 industrial sectors, the growth of 28 sectors was
lower than the second quarter of 2006. The output growth of many
high energy-consuming products dropped compared with the second
quarter. China will continue to strengthen macro control of the
growth of these sectors.
   (3) The supply of other energies will improve. The dual
deficit of electric power and coal in 2003 and 2004 was the most
important factor for the drastic oil demand growth. The supply
of electricity and coal in China can basically meet the domestic
demand today.
   In addition, the rapid development of alternative energies
will also help slow the growth of oil consumption.

2. The oil supply will increase rapidly

Due to the restriction of resources, the output growth of crude
oil in China was still not high in 2006 and the growth was 1.7%
compared with 2005. The crude oil output was 183.7 million tons
in 2006 and will reach around 188 million tons in 2007. In terms
of oil products, some refining units will start production in
China. Owing to the oil price drop in the international market,
profits in the production of oil products will also go up. The
crude oil processing amount in China was 306.5 million tons in
2006, an increase of 6.3% over 2005, and then will reach around
314 million tons in 2007.
   The output growth of crude oil is presently less than 2% and
the demand growth around 4.5%. To meet the demand, the import
of crude oil has to increase. Both the oil price drop and the
appreciation of Renminbi are favorable to the oil import in China.
The import of crude oil will surely experience further rapid
growth. Due to the impact of factors such as the restriction of
export qu