Rising Oil Prices Effect on China's Economy

In the past month, the price of oil has continued to rise, breaking the US$35 per barrel mark and setting a 10-year high. Oil prices in China have also gone up, reaching US$32 per barrel. But just how big is the effect of the rise in oil prices on China's economy?

Experts in the industry feel that international oil prices are already starting to threaten the stability of China's national economy. But because China's level of dependence on international oil is still within the 20% warning mark, currently, the national economy will not feel much of an effect.

The Chinese petroleum industry has been the primary beneficiary of the large fluctuation in oil prices. In the first seven months of this year, China Petroleum and Natural Gas Group has already earned a profit of 29.1 billion yuan, a 4.4-fold increase compared to the same period last year.

Official statistics show that in 1999, China output of crude oil reached 160 billion tons and it imported 40 million tons of petroleum. This year's net import is expected to exceed this figure.

China Petroleum Group Economic and Technical Institute Assistant Head Engineer Zhou Ruohong said, the rise in oil prices has put a lot of pressure on the petrochemical industry. "We hope that the price of oil can keep at a suitable level," he said.

Zhou also said, the petrochemical industry is working very hard to decrease consumption of materials and management fees to cuts costs. At the same time, because China's crude oil prices and refined oil prices became linked with international prices in 1998 and May of this year respectively, the current domestic crude oil prices and refined oil prices have gone up with international prices. Thus, the pressure on the petrochemical industry has been alleviated to a certain extent.

China's aviation industry, one of the largest customers of oil, is also facing challenges. In the first half of this year, the entire aviation industry's cost expenditures increased by 1.27 billion yuan due to soaring oil prices. Oil costs took up a greater share of the airline companies' business costs, increasing from 22% to 31%.

"But the airlines do not plan to raise the prices of all air fare, we will strengthen management, eliminate new costs and raise efficiency," said Civil Air Administration of China finance department head Hai Liancheng.

The effect of the oil price increase on the agricultural, timber and fishing industry isn't very visible mainly because these industries labor costs are higher and machinery costs are lower. Moreover, China's peasant farmers' concept of costs isn't very strong.

China Petroleum and Natural Gas Group Economic and Information Research Center engineer Gong Jinshuang felt that the rise in oil prices does not help the overall development of the national economy. On one hand, it causes many industries' costs to go up and cuts into profits, driving away investments. On the other hand, it causes prices to rise, which restricts consumer demand, causing a recession.

"But these kinds of negatives effects aren't as serious as those in developed countries," Gong said. Petroleum only accounts for around 20% of China's energy consumption structure. Petroleum and other primary goods play a greater role in the national economy compared with developed countries.

China Energy Conference Secretary General Bao Yunqiao pointed out that it is normal to have "some companies rejoicing, some companies frowning" due to the soaring oil prices. But because the Chinese government has the ability to make adjustments in the national economy on a macroeconomic level, it can adapt to the fluctuations on the international markets to a certain extent.

From a long-term perspective, as the volume of China's net petroleum imports increases every year, some experts estimate that by 2010, China's net petroleum imports will reach 100 million tons, making China the country with the fastest growing demand for oil in the world. On the international market, petroleum is a highly speculative and monopolistic commodity, whose prices fluctuate wildly. Thus, China needs to research ways to deal with this problem.



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