The slide in crude prices to a five-year low this week following Opec’s decision to keep oil output unchanged should have been welcomed in energy-hungry China.
On the surface, falling crude prices benefit the world’s largest oil importer.
Imports of crude into China are rising faster than refinery output, implying elevated commercial and strategic stocks. Beijing last week offered the first formal estimate for the level of crude stored as part of phase one of its strategic stockpiling exercise – 91m barrels in four locations – and a second phase is well under way.
“The plunging oil price benefits China,” says Li Yan, oil analyst with Oil Chem, a petrochemicals information provider. “It helps the country reduce the cost of imports and shore up oil storage that will in turn beef up energy security.”
However, the picture is more complicated because China is also the world’s fourth-largest producer.
As such it is vulnerable to falling prices just like any other oil-producing nation. China last year produced 4.45m barrels a day of crude, behind only Saudi Arabia, Russia and the US. It has also been pumping more than all the members of Opec barring Saudi Arabia. China has increased oil production by nearly 750,000 b/d over the past decade, but in the same period, oil consumption has risen by 3.7m b/d.
For China, the fall in crude prices have added to concerns over the prospect of regional deflation in the country’s resources-dependent hinterland, even as coastal manufacturers welcome lower input costs.
Falling prices can make it difficult for some of China’s regional governments to meet local budget obligations. More worryingly, they also create vulnerable links in the chain of lending rings that can often prop up local economies.
Arthur Kroeber, head of Gavekal Dragonomics in Beijing says: “Particularly [the remote northeast province of] Heilongjiang is getting hammered by falling resource prices.”
In the northeastern province of Heilongjiang, bordering Siberia and home to the nation’s largest oilfield at Daqing, strikes by teachers have been spreading, with the indebted local governments unable to increase salaries or benefits. Heilongjiang’s economy grew 5.2 per cent in the first three quarters of this year, well below the 7.4 per cent figure for the country as a whole.
That mirrors the much bigger problem in China’s coal producing heartland. It is coal, rather than oil, that has powered China’s rapid economic growth; China is by far the world’s largest producer and consumer of coal.
But international coal prices hit a five-year low last month, ravaging the hinterland that supplies China’s coastal manufacturing base. In Shanxi province, which produces a quarter of China’s coal, debt-laden private mining groups and steel mills have collapsed while an anti-corruption purge has ensnared hundreds of officials whose favour they sought in happier times.
Despite the pain, falling commodities prices have at least provided the opportunity to restructure the way resources are taxed, which has eluded the authorities for years. Restructuring taxes when prices are low delays the immediate impact on large energy producers.
For example, for years the resource tax on coal – collected by provinces – was a low flat levy based on production volume. As of this month it will be assessed on value. A similar reform for oil and gas began in 2010, and the rate was raised in the autumn.
Xinjiang, the ethnically divided region that is home to 40 per cent of China’s coal as well as large oil and gasfields, recently wrested the right to tax local retail products sales from China National Petroleum Corp, the state-owned parent of listed group PetroChina. That should help Xinjiang meet its massive infrastructure spending commitments, and keep China’s domestic energy flowing even with commodities prices at multiyear lows.