The National Geographic documentary Aftermath: World Without Oil predicts a bleak future for the day we finally run out of liquid fossil fuels: power cuts, famine, martial law and the like. Of course, that’s still far off, but the ongoing unrest in the Middle East is now having a more immediate impact on oil prices. US gasoline prices are up 25¢ a gallon, for instance, and Spain is even reducing speed limits to encourage more economical consumption.
What about the impact in China? About a tenth of Libya’s oil goes to the Chinese (about 150,000 barrels a day last year) and the uprising has already seen Libyan production fall by half. Saudi Arabia eased wider anxiety last week by promising to supply the shortfall.
But analysts have also predicted that even if just Libya and Algeria were to cease production, oil could hit $220 per barrel. Fears of further cuts to supply propelled oil futures (for Brent Crude) to $120 a barrel last week, the highest since oil peaked at $147 in July 2008.
That makes it instructive to take a look at how China fared during the last major oil spike: within a few months exports were down and millions of factory workers were laid off because of recession in the US and Europe. But GDP still grew more than 9% in the year after – thanks to liberal bank loans and an unprecedented $586 billion stimulus plan.
A similar stimulus effort would be unlikely this time around, although China has tried to prepare in other ways, steadily building up its oil holdings from 16.3 billion barrels in 2008 to 20.35 billion barrels at the beginning of last year. That’s largely due to a buying spree by China’s state-owned giants CNOOC, Sinopec and PetroChina.
But China’s dependence on oil imports is also growing. Domestic production has been more or less stable (around 4 million barrels per day) but the country consumed 10.2 million barrels a day in November last year (way up on the 7 million recorded in 2008).
That shouldn’t come as any surprise: just take a single datapoint as an example – there are over 30 million more cars on the road today than there were in 2008.
One immediate question is what higher oil prices mean for Chinese inflation. Not too much, says Deng Yusong, an economist at the Development Research Centre, who told Hexun.com that the weighting of oil in China’s consumer price index was too small to push the inflation gauge up signficantly (Reuters estimates that prices for fuel, including oil, account for just 1% of the CPI basket).
But others say this overlooks the impact of the oil price on the cost of food, with increases in farming expenses, as well as the transportation costs of agricultural commodities. Food’s own weighting in the CPI basket was reduced last month, but it still accounts for close to a third of the calculation.
How might the government respond? HSBC China economist Qu Hongbin warns that oil at $150 a barrel could add 2.5% to headline inflation. But he also thinks that China is better placed than many of its counterparts to withstand an oil shock. “China’s government has deep pockets to pay subsidies to offset higher oil prices,” Qu says.
Longer term, of course, the increases in oil price reinforce Wen Jiabao’s call for a new focus on a higher quality of GDP growth (see page 8). Further support: Gavyn Davies, writing on FT.com last week, highlighted that the higher energy intensity of emerging economies means that a $20 per barrel price increase costs them about 1.1% of GDP, compared with 0.8% for the developed world.
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