Mainland stands to gain from slumping oil prices
Updated: 2014-12-09 07:21
By Harry Ong(HK Edition)
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Global oil prices have declined steeply in the past five months owing to a combination of factors - the Chinese mainland's weakened demand for oil imports, rising output from previously disrupted producers such as Libya and Iraq, plus increased North American output. This trend gained momentum following OPEC's decision against a cut in its daily oil output from the existing ceiling of 30 million barrels. This controversial decision saw a further slump in Brent oil prices to $70 per barrel, a four-year low, while the West Texas Intermediate price dropped below $66 per barrel.
The plunging oil price can be expected to have a tremendous impact on global energy markets since the cost of oil has long served as a benchmark in the pricing of other energy sources, particularly natural gas. Meanwhile, for countries where electricity is mainly derived from oil-fired power plants, lower oil prices should reduce the price of power for domestic users.
As for an energy-hungry giant like the mainland, this plunge in oil prices will significantly level off its direct spending on imports of crude. Some market analysts claim that whenever oil prices fall by $1 it equates to a saving of about $2.1 billion on mainland import costs. Translated into today's low oil prices, it has been estimated that mainland's total spending on oil imports could benefit by as much as $25 billion, presenting a breathtaking bonus to its economy.
Furthermore there will likely be enormous knock-on advantages for multiple industries in the mainland, with transport and logistics likely to be among those reaping the greatest benefits from significantly lower operating costs.
Lower oil prices could also create a perfect platform for major energy importers to extend their strategic petroleum reserves (SPR). The mainland recently revealed it had accumulated 91 million barrels of crude in the first phase of SPR building, equivalent to around two weeks of oil imports. A second phase of stockpiling, due for completion by 2020, is now underway. This could add a further 80 million barrels to the mainland's invaluable stockpile.
Reacting quickly to the dramatic oil price reduction, mainland companies are also strengthening their own oil stockpiles against the inevitable turnaround when prices start rising. In line with this, it was reported that between October and November PetroChina's trading arm China Oil absorbed an unprecedented 24 million barrels of Middle Eastern crude.
While harboring difficulties for oil-exporting countries whose government budgets rely upon high oil prices to balance their books, the falling oil price will also likely strengthen the market competitiveness of energy-intensive heavy industrial products produced on the mainland.
A lower oil price scenario might also benefit the less affluent as this has been proved to be closely related to their incomes and to improving their living standards.
The benefits of an oil price slump are felt globally, and every major energy consumer economy will likely enjoy similar benefits to the mainland, though on a lesser scale, depending on their degree of industrialization and domestic reliance upon oil-driven energy. Hong Kong, for example, is a highly energy-efficient city with well-developed service industries. The benefits it gains will likely come from lower utility costs.
However, while recognizing the advantages of lower oil prices, we should also pay attention to the potential influence of the development of renewable energy.
It remains to be seen whether investors will continue pumping money into the renewable energy sector. If the clock is turned back with the result that fossil fuel usage increases, the problem of higher greenhouse gas emissions will result.
If lower oil prices persist, this could then lead to difficulties for policy-makers attempting to adopt effective measures to counter the future growth of fossil fuel consumption. Tougher environmental policies may also be needed to contain overall greenhouse gas emissions at acceptable levels.
Finally, fracking, the latest method of extracting more oil from the earth, has been demonstrated to cause various health and environmental hazards, including contamination of underground water.
The author is a former civil servant and journalist.
(HK Edition 12/09/2014 page1)