Don’t Blame China for Plunging Oil Prices

Like other markets buffeted by Chinese economic headwinds, the oil market is in free-fall. But China’s slowdown isn’t really doing much to dampen its thirst for oil.


China’s economic woes have rattled stock and commodities markets around the world, leading many traders to blame Beijing for plunging oil prices. They’re wrong: China had record levels of oil consumption in 2015 and is set to keep growing this year, making continued Chinese thirst for oil a rare bright spot in an otherwise dismal market.

“The panic around China is overdone,” said Michal Meidan, an Asia analyst at Energy Aspects, a consultancy.

Investors worry that China, the engine of world economic growth, is suffering the long-feared hard landing. GDP growth last year hit a 25-year low of 6.9 percent — and those are government figures widely seen as inflated; real growth could be much lower. Indicators from the real economy point to a sharp slowdown: Factory activity contracted all year, rail traffic is down, and electricity consumption flatlined. Citing China’s troubles, the International Monetary Fund on Tuesday trimmed its forecast for global economic growth this year and next. Stock markets are also reacting: The Dow Jones industrial average nosedived more than 500 points Wednesday before recovering somewhat in the afternoon to close down about 1.5 percent.

And those gloomy sentiments are infecting the oil market, too. Crude prices plummeted about 7 percent in New York and more than 5 percent in London earlier on Wednesday, furthering a rout that has already cut the price of oil by 30 percent just since the beginning of the year. Oil now trades at about $28 a barrel, down roughly 75 percent from its giddy highs in the summer of 2014.

Oil is in free-fall because the market is still oversupplied — OPEC countries and Russia are still pumping with abandon — and the lifting of sanctions on Iran could soon flood the market with even more unwanted barrels of crude.

China’s stumbles are also feeding the oil bears. When the world’s biggest oil importer is knee-walking to its lowest growth in a generation, it just stands to reason that demand for oil there will take a tumble, too.

But that’s not really the case. Last year, despite economic headwinds all year, China registered an all-time high in oil consumption. Expectations for 2016 are for continued growth, if not quite as robust as last year. Both OPEC and the International Energy Agency (IEA) expect Chinese oil demand to grow somewhere around 3 percent this year. In other words, as alarm bells ring about the supposed crashing Chinese economy, it is poised to gobble up 1 million more barrels a day of oil products than it did during the heady days of 2014.

For China, the most important point isn’t a slowdown from growth rates of about 9 percent a year to growth of 6 or 7 percent. Rather, it’s the rebalancing away from heavy industry that fueled decades of export-led growth toward services and domestic consumption.

That shift is having huge impacts on suppliers of commodities from aluminum to zinc, which for years could count on the Chinese economy devouring ever-increasing amounts of metals and minerals. And that shift does dampen demand for some oil products, like diesel, which grew only slightly last year and which is set to shrink a bit in 2016.

But other bits of the oil barrel that have less to do with heavy industry and more to do with the consumption habits of a growing middle class are still in hot demand.

Chinese gasoline demand grew almost 9 percent last year, and the IEA figures it will grow another 8 percent this year. Passenger car sales grew more than 7 percent in 2015 to a new record high, fueled by a government tax cut in the fall meant to tempt wary buyers to make big-ticket purchases; passenger car sales are expected to grow even more this year. Sales of SUVs in particular are booming.

Likewise, jet fuel use rose 15 percent last year and will rise about 8 percent this year. Other oil products, such as liquid petroleum gas (LPG), which in China is used for heating, for industry, and for petrochemicals, are also growing steadily. LPG consumption jumped more than 20 percent last year and will grow another 8 percent this year, according to the IEA.

On top of all that, China is still filling up its strategic petroleum reserves, taking advantage as it has over the last year of cheap prices to build up stockpiles like rich countries have done for decades. Energy Aspects expects China to snap up another 150 million barrels of oil for commercial and government reserves this year. That kind of continued demand to fill oil reserves adds up to hundreds of thousands of barrels a day of extra oil purchases for China and will likely last through 2016.

“China wasn’t the driver of higher global demand in 2015, and it won’t be the driver of a demand slowdown this year, either,” said Meidan.

Underscoring China’s ongoing need for new supplies of energy, Chinese President Xi Jinping and Saudi King Salman on Wednesday officially opened a state-of-the-art refinery jointly owned by Saudi Aramco and China’s state-owned Sinopec, which has become the Saudi oil giant’s biggest trading partner. The two companies also signed a “strategic cooperation” agreement meant to help Saudi Arabia and China work together to develop new sources of oil supply.

Falling prices have already hammered some higher-cost oil producers, especially in the United States, and oil production outside of OPEC this year is expected to decline for the first time in eight years. If China’s demand for oil does indeed stay relatively strong, despite all the gloom-and-doom headlines about economic woes, that will eventually help build a floor for oil prices and set the stage for a comeback.

“Some of the very factors that have pushed prices down in the last 18 months will cause them to rebound in the next 18 months,” Antoine Halff, former head of oil industry at the IEA and now director of the global oil markets program at Columbia University’s Center on Global Energy Policy, told the Senate energy committee on Tuesday.

Photo credit: FAYEZ NURELDINE/AFP/Getty

Keith Johnson is a senior staff writer at Foreign Policy. Twitter: @KFJ_FP

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