Oil and China 0 comments

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The economic boom in China in recent years has led to a surge in prices of most basic industrial commodities such as metals, coal and oil. How sustainable is this, many might ask?

China has had a history of booms and busts, its GDP growth characterised by a trend line zig-zagging crazily up and down since Deng Xiaoping initiated economic reform for China in 1978. This is a symptom of a developing capitalist economy and suggests that it will be difficult to manage "soft landings" for booms such as the one currently.

However, over the long-term, oil demand in China is likely to sustain on a secular growth path. There are clear development trends anchoring this. To ensure that the China interior do not lag too far behind the coastal areas (resulting in social unrest), the Chinese government is committed to constructing linkages such as roads and telecomunications; that fuel needs for commercial(truck) and passenger transport will rise is almost a given. Energy shortages at factories during the summer season are common, a sign that there is upward pressure for industrial fuel and associated power generation facilities.

It is clear that coal, the primary source of energy in China now, is likely to be supplanted increasingly by oil as a cleaner and more efficient fuel in the future. Heating fuel is also likely to trend towards oil instead of biomass/coal as electricity is increasingly adopted as a primary delivery channel of energy.

On the supply side, unlike other commodities like metals which are less in demand by other developed countries (due to their already developed infrastructure) and whose supply elasticity is higher, oil is needed for run all industrial economies and is considered a strategic resource by governments, due to its scarcity. The supply problems are of course exacerbated by the OPEC cartel control.

China has identified the securing of its future oil supplies as a key target, and recent developments suggest their committment in this area. China vied with Japan to finance Russia's construction of the trans-Siberian oil pipeline, in order to ensure that the pipeline would fork to China (ultimately Japan won the bid; another reason why China's government implicitly supported nationalist rallies against Japan lately?). It has increasingly sought to strengthen relations with Indonesia lately, the latter being the biggest country in South-east Asia and controlling access to the Straits of Malacca where most of China's imported oil passes along (from the Middle East), and also a key exporter of oil. State-linked oil companies has also sought to buy stakes in foreign counterparts; they were planning to take a stake in Singapore Petroleum through China Aviation Oil before the latter ran into a quagmire of financial problems. Exploration for domestic oil is also accelerating; our own KS Energy Services is a key beneficiary of China oil companies going offshore to drill for oil.

As oil prices continue rising, it is likely to be in focus more and more by all countries because the need for this commodity cannot be substituted easily in the short-term. It is a long-term trend which is not likely to go away even as the economy slows, with the resulting tussles over and heavy investments in energy-related assets, such as oil resources, refineries and distribution channels (pipelines/tankers/trading routes).

References:
(1) Oil in Asia (by Paul Horsnell)