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Oil Industry Needs Reform for WTO Entry
When China finally enters the World Trade Organization (WTO), its oil industry will be exposed to the whim of the world market. To rise to this challenge, China should adjust its development strategy for this industry.
A sustainable strategy is needed to deal with oil price fluctuations on the international market.
In March 1999, the international oil price stopped dropping and began to rebound after almost one and half years of downward movement.
The oil price increased from below US$10 a barrel to US$37 a barrel this year, reaching a record high since the Gulf War.
Nervous about high energy costs that might force the world's biggest economy into a sudden sharp downturn, the United States on September 22 loaned energy firms 30 million barrels of oil from its stockpile.
However, the international oil price is still high. On October 12, London Brent oil was US$35.30 a barrel while the New York oil price surpassed US$37 a barrel.
Some oil analysts predict that because of the dim prospects for the Middle East peace negotiations, the oil price is likely to increase even further to US$40 a barrel.
But some analysts have a different view. They think the international oil price will drop to a new low in the near future and fluctuate between US$12 and US$20 a barrel. They reason that, with the application of new technology, the supply of oil will outpace consumption. The international oil market will soon be awash. Another reason they singled out is that the sustainable development of the global economy calls for environmentally-friendly energy, which they think will soon replace oil.
The different predictions have reinforced uncertainty in the international oil market and made it difficult for each country to map out its energy development strategies.
As an important player in the world, China is also feeling the pinch.
As China's entry into the WTO nears, it has become imperative for China to craft its own oil strategy to meet the challenges of future price changes, whatever they might be.
In 1998, China regrouped its oil and chemical enterprises and clearly defined their ownership. In the same year, the State hammered out its own oil pricing system and tried to firm up the rules concerning oil prices according to international practice and requirements.
Such a move aims to force domestic oil enterprises to improve their management and technological know-how to narrow the gap between themselves and their foreign counterparts.
China has deep-rooted problems it needs to address in the fields of energy and oil consumption.
The proportion of enterprises that consume a great deal of energy is still high. Most of these enterprises rely on the State's energy subsidy.
Moreover, there is no strategic oil reserve available to ward off the market risks that might lurk ahead.
Although the high oil price in recent years has given a boost to China's oil producers, the negative impact on China's economic growth and security cannot be underestimated.
On the one hand, the oil price rises have driven up costs for many oil-related industries and brought down their profits. On the other hand, the rises have fed inflation and dampened the growth of consumer demand.
Such effects will intensify with China's entry into the WTO and increasing globalization.
Swelling oil prices have added a direct burden to the State's finances.
By the end of 1999, the amount of crude and processed oil being imported per annum had surpassed 40 million tons. In the first half of this year, 32.41 million tons of crude were imported, double that of the same period last year. If the international oil price stays at US$30 a barrel, China will have to earmark US$7 billion more this year than last year for oil imports. This would account for 1 per cent of China's gross domestic product.
In relation to China's oil industry, however, a fall in the price of oil would be bad news.
Past falls in the prices of oil have seen the sale of oil on the domestic market largely constrained by the smuggling of cheap oil from neighbouring countries.
A low oil price would also stifle the amount of investment going into China's oil industry.
While enhancing China's energy utilization efficiency, the State should establish its own energy reserves.
To sharpen the oil industry's competitiveness, the State should open the sector to competition and gradually relax its grip on the oil market.
Protection will only mean that the industry will lose in the near future.
The author is a researcher with China's Academy of Social Sciences.
Source: China Daily
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