China Will Be The Big Winner In OPEC’s Production Decision

When OPEC decided on Nov. 27 not to reduce production below a nearly 3-year-old cap of 30 million barrels a day, the losers were producers such as the United States, whose boom in shale oil requires expensive extraction methods, and Russia, whose economy relies perhaps too heavily on energy. Even OPEC members will see losses of revenue, especially those outside the oil-rich Persian Gulf.

The effect on China, though, is mostly beneficial. China doesn’t make money on oil, it buys it, relying on imports for almost 60 percent of its domestic oil supply, and is the world’s largest net importer of oil. And the lower the price of oil, the more affordable it becomes for China to develop its economy, which is now in a period of slow growth.

It can also buy more than it needs now and warehouse it for times when the price of oil rises again.

China’s press agency Xinhua quotes Bank of America Merrill Lynch, the US investment bank, as saying growth in China’s GDP would rise about 0.15 percent for every 10 percent drop in the global price of oil. At the same time, the bank says, the country’s current account balance would grow by 0.2 percent of GDP and consumer inflation would decline by 0.25 percentage points.

Related: OPEC Fires First Shot In Global Oil Price War

Before the Nov. 27 OPEC meeting, the price of oil had plummeted by more than 30 percent from an average of $115 per barrel to around $70 per barrel because of a market glut caused in part by the recent US oil boom. It fell further after the cartel announced it wasn’t lowering production.
That translates into enormous savings for China in foreign exchange. China’s National Bureau of Statistics says the country imported 281.92 million metric tons of crude in 2013 at a cost of $219.6 billion.

With lower prices, which began dropping in mid-June 2014, China will have saved as much as $30 billion by the end of the year if prices keep falling, Lin Boquiang, the director of China Center for Energy Economics Research at Xiamen University, told Xinhua.

The US surge in production isn’t the only cause of lower oil prices, though. Another reason is the slight slowing of economic growth not only in China but also in Europe, which means lower energy demand. In fact, China’s economy is so sluggish that it could keep oil prices depressed for years, according to Andy Xie, formerly Morgan Stanley’s chief economist for the Asia-Pacific region.

Related: OPEC Refuses To Cut Production, Sending Oil Price Down Again

Xie said Chinese industry is experiencing enormous “investment overhang,” in which huge amounts of stocks are owned by a single investor or group of investors who may be interested in selling the securities in a single flood, threatening the securities’ value and stifling investment.

The overhang in China totals more than $6 trillion, Xie said, thereby lowering the demand for energy and keeping oil prices depressed for months, maybe years.

“China’s energy demand, the only source of growth for a decade, has fallen sharply,” Xie told The Globe and Mail of Toronto. “[T]he whole damn thing is driven by China. When the investment cycle turns down, everything goes down.”

By Andy Tully of Oilprice.com

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