Who wins from low oil prices? China
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听, 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鈥檛 make money on oil, it buys it, relying on imports for almost 60 percent of its domestic oil supply, and is the听. 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.听
It can also buy more than it needs now and warehouse it for times when the price of oil rises again.
China鈥檚 press agency Xinhua quotes Bank of America Merrill Lynch, the US investment bank, as saying growth in China鈥檚 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鈥檚 current account balance would grow by 0.2 percent of GDP and consumer inflation would decline by 0.25 percentage points.()
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听. It fell further after the cartel announced it wasn鈥檛 lowering production.
That translates into enormous savings for China in foreign exchange. China鈥檚听听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,听.
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The US surge in production isn鈥檛 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鈥檚 economy is so sluggish that it could keep oil prices depressed for years,听, formerly Morgan Stanley鈥檚 chief economist for the Asia-Pacific region.()
Xie said Chinese industry is experiencing enormous 鈥渋nvestment overhang,鈥� 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鈥� 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.
鈥淐hina鈥檚 energy demand, the only source of growth for a decade, has fallen sharply,鈥澨�. 鈥淸T]he whole damn thing is driven by China. When the investment cycle turns down, everything goes down.鈥�
By Andy Tully of Oilprice.com
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