High oil prices not to drag down economy
By Lu Haoting (China Business Weekly)
Updated: 2004-08-31 13:58

The currently high oil prices, provided they do not last beyond half a year, will not derail China's fast economic growth, analysts said last week.

But China's policy-makers should make the development of an oil-safety strategy a top priority regardless of how long the oil prices remain high, they warned.

"The high oil prices are not likely to trigger an economic slowdown in China," said Xu Hongyuan, deputy director-general of the State Information Centre (SIC)'s Department of Strategy and Development.

"Compared with developed countries, China's energy mix is less dependent on oil. China is relatively less vulnerable to oil price changes."

Coal consumption, he added, still accounts for 67 per cent of China's current energy mix, while oil accounts for only 23 per cent.

Some economists recently suggested oil prices, hovering around US$50 a barrel, could drag down China's economic growth by at least 0.8 percentage point.

"Such predictions exaggerate the impact from this round of price hikes," Xu said.

"China will have to pay an extra US$8.8 billion to import its planned amount of 120 million tons, or 880 million barrels, of oil this year, if oil prices rise US$10 a barrel.

"But rising revenues from exporting industrial materials made from oil at higher prices should also be taken into account. So the actual impact on China's GDP growth for next year would only be 0.4-0.5 percentage point.

"And that would happen only if such a big hike lasted for a whole year."

US crude oil prices peaked at US$49.29 a barrel on August 20. That was its highest level since the contract started trading on the New York Mercantile Exchange 21 years ago.

But prices have slipped slightly since then, as Iraq restarted a pipeline from its northern fields, after a three-month halt, and resumed exports through its southern terminals for the first time in two weeks.

Fears about an output cut from Russia's leading producer, YUKOS, which is fighting off bankruptcy, have also eased since Russian President Vladimir Putin gave US President George W. Bush an assurance on supplies.

Some experts warn high oil prices may trigger inflation in China. The nation's consumer price index (CPI), a major indicator of inflationary pressure, reached 5.3 in July.

"But oil prices account for less than 2 per cent of CPI in China. The CPI increase is mainly driven by food prices, not oil prices," Xu said.

China's relatively inexpensive labour gives businesses in the country more room to manoeuvre as they try to cushion the impact from rising costs prompted by high oil prices, analysts said.

"Admittedly, some industries, especially the transportation sector, will see profits decline due to higher oil prices," said Han Wenke, vice-director of the Energy and Power Research Institute with the National Development and Reform Commission (NDRC).

China last Wednesday raised the price of refined oil products, the first time in three months, to reflect the oil price spike on the international market.

NDRC raised benchmark petrol rates by 240 yuan (US$28.92) a ton, and diesel prices by 220 yuan (US$26.51) a ton. The price hikes represent a nearly 7-per-cent increase.

China pegged its domestic refined oil products to average rates in Rotterdam, New York and Singapore.

Both Xu and Han warned if oil prices continue to hover around US$50 a barrel for more than half a year, "the situation will become serious."

"China's exports could shrink, because the nation's major export destinations, such as the United States and Europe, would suffer from economic slowdowns and, thus, import less from China in order to cut spending," Xu said.

Han said enterprises in China "would find it extremely hard to offset the higher costs resulting from higher oil prices."

China must develop a scientific oil-safety strategy if it hopes to minimize the impact of rising oil prices on its future economic development, experts said.

"First, the establishment of oil futures will help firms hedge risks and give China a say in setting international oil prices," Han said.

China rolled out fuel oil futures last Wednesday.

Fuel oil futures will allow China to test the waters before launching futures trading of more important oil products, such as petrol, diesel and crude oil, experts said.

"Fuel oil futures are the first step in what we hope will eventually include a full slate of oil derivatives," Shang Fulin, chairman of the China Securities Regulatory Commission, was quoted as saying by Reuters at the launch ceremony.

The event was held at the Shanghai Futures Exchange.

It marked the first time, in more than a decade, that China has traded futures of oil products.

China in 1993 opened oil futures exchanges in Beijing and Shanghai. They traded various oil products -- including crude oil, petrol, diesel and fuel oil.

They were closed in 1995 when the government tightened controls over the marketing of oil products and cleared up over-speculated futures markets.

Experts suggest the government should speed up establishment of a strategic oil reserve system.

"Establishment of a reserve system will help flatten domestic prices when there are international oil price hikes," Xu said.

"The reserve will also help avoid oil supply breaks resulting from wars or terrorist attacks."

China in March launched a project to build four strategic oil reserve facilities on the coast.

The United States has built an oil reserve that contains about 670 million barrels.

Experts suggest the Chinese Government should also encourage more domestic oil companies to participate in international oil exploration.

China became a net oil importer in 1993. It has since become the third largest oil importer, after the United States and Japan.

China's oil production has grown at an average annual rate of 1.7 per cent during the past decade, but oil demand has grown at an annual rate of 6.7 per cent.

The nation's crude oil imports rose 40.7 per cent, year-on-year, to 9.6 million tons in July, indicate figures from the General Administration of Customs.

Crude oil imports hit 70.6 million tons in the year's first seven months, up 39.5 per cent from a year ago.

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