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Thursday, May 7, 2015

The Impact of Low Oil Prices on China

The Impact of Low Oil Prices on China

By Kang Wu

May 7, 2015 | http://nbr.org/research/activity.aspx?id=555
Like many other Asian countries, China has been affected by recent dramatic changes in global oil prices. In the view of FACTS Global Energy (FGE), the shift occurring in the global oil market is structural, and we have entered an era of lower oil price ranges that is likely to last for years. [1] As such, the impact of low oil prices on China will not end anytime soon. This policy brief assesses the impact of low oil prices on China in several areas, ranging from the economy and the environment to energy security and regional cooperation on market instability.

Economic Impact

The implications of sustained low oil prices may be wide-ranging for the Chinese economy. On the positive side, low oil prices have resulted in the following changes:
  • Lower imports of oil in dollar amounts will increase China’s current account surpluses. Using crude oil as an example, in 2014 China imported a total of 6.2 million barrels per day of crude oil at a cost of $228 billion (at an average oil price of around $101 per barrel). Crude oil accounted for 12% of China’s total merchandise imports. For 2015, FGE projects that China is likely to import 6.5 million barrels per day of crude oil. If average Brent crude prices are in the range of $55–$60 per barrel for the year as a whole, total imports will be valued at $130–$142 billion. [2] The share of oil in China’s total merchandise imports is thus forecast to decline to 7%.
  • Low oil prices are expected to stimulate growth of China’s GDP. Estimates vary, but the impact appears to be positive. [3]
  • This trend should facilitate efforts by the Chinese government to reform the country’s tax and fiscal systems.
A negative implication, however, is that low oil prices have enhanced the fear of deflation. If deflation indeed occurs, the consequences could be grave, considering that China has surplus capacities in many energy-related industrial sectors. [4] Meanwhile, investment in domestic energy supplies, particularly oil and gas production, is likely to be negatively affected by low prices, leading to lower contributions from these sectors to China’s GDP growth. http://nbr.org/research/activity.aspx?id=555

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