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Sunday, January 21, 2001, updated at 16:24(GMT+8)

Protection Urged over Oil Prices

China should engage more strongly in the world oil futures markets to reduce its exposure to volatile oil prices, according to a senior analyst.

Chen Huai, deputy director of the Market Economy Institute of the State Council-affiliated Development Research Centre, said the country's mounting oil imports had made greater participation in the futures markets more urgent to stabilize the economy.

He estimated the annual oil imports at 180 million tons by 2015 against about 70 million tons last year.

Chen also called for the State to reopen an oil exchange and allow domestic and foreign oil companies to carry out spot and futures transactions in preparation for the stronger engagement in the world markets.

The oil exchange in Shanghai was closed by the government in 1995 to make the oil and fuel market more orderly.

Chen also suggested in an interview with Business Weekly that China strengthen co-operation with other countries in exploring and developing foreign oil resources.

He said it was vital for the country to launch a State strategic oil reserve like the US Strategic Petroleum Reserve (SPR) to protect against any shortage.

His remarks reinforce a recent call by Li Shensheng, deputy director of the Economic Research and Consulting Centre under the State Economic and Trade Commission, for the central government to create a strategic oil stockpile of 15 million tons by 2010.

But the creation of an oil stockpile would only be a passive move to ensure the country's energy security, Chen said.

The government recognized there was an urgent need for stronger action to stabilize the economy.

"We should go out and use foreign oil resources through multichannels,'' Chen said.

World oil prices had been so capricious not because of an imbalance between supply and demand, but due to international speculators, he said.

The oil price is now hovering around US$25 a barrel, compared with a decade-peak of US$38 a barrel last October. But it was less than US$10 a barrel in March, 1999.

"We must lose no time in training professionals and getting familiar with the rules of the game to play a bigger role in the world oil futures markets,'' Chen said.

Some Chinese oil companies, such as China National Petroleum Corporation (CNPC) and China Petrochemical Corporation, the country's two largest, seek hedging on the world market, but the volume is small.

At the moment CNPC had no plans to expand its futures business on the markets, said a company spokesman.

Chen Huai said China would be in a strong position to cushion itself against oil market volatility within 10 years if it could get 30 million tons of oil annually by exploring and developing abroad.

The State has established some oil production bases in foreign countries, such as Sudan, Iran and Peru, and can produce about 5.5 million tons every year.

Oil price volatility has greatly affected China's economy and curbed its reform plans as the central government has allowed domestic oil and fuel prices to move in line with world markets.

The long-awaited fuel tax, for example, is still on hold because of high oil prices.

Analysts said the tax could be implemented when oil prices fell to around US$20 a barrel. They predicted the price would stay at US$20 to US$25 a barrel during the next decade.

Chen Huai said the country would rely more heavily on oil imports with a widening gap between its oil demand and production.

He said the country's oil demand would shoot up to 360 million tons by 2015 from 189 million tons in 1999, to fuel its rapid economic growth, which is expected to run at an average 7 per cent or more a year.

But according to Li Shensheng, domestic oil output has little potential to increase and will linger at around 180 million tons during the period.

Yang Jingmin, former president of the Shanghai oil exchange, has said re-establishment of an exchange would attract foreign oil and investment and help domestic producers and buyers assess market conditions, fine-tune prices and minimize risks.

The exchange should be re-established in Shanghai as it is China's financial centre, believes Yang, who is now director of the Development Research Centre of the CNPC.

Source: China Daily

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China should engage more strongly in the world oil futures markets to reduce its exposure to volatile oil prices, according to a senior analyst.

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