China is vulnerable to potential oil price shock

As the world’s largest energy consumer, China is particularly vulnerable to any potential oil price shock. Turmoil in Libya and the Middle East has pushed oil prices to the highest level in 2 ½ years and fear is that the world could see US$140 a barrel oil prices again. Aside from being the biggest consumer of energy, China is also seen as the driver of global economic recovery. A spike in the cost of oil could have a major effect on China’s economy, which is already dealing with rising inflation and a runaway real estate market. Na Lu, an adviser on China strategy to Scotia Capital, recently stated that rising oil prices could be a real problem for China. Na says, “The oil price spiking higher is either going to translate into slower economic growth in China or higher inflation and that is not desirable at this stage.” Coal still remains the biggest source of fuel in China but oil is continuing to grow in importance in the economy, including a growing dependence on foreign oil. China typically uses nine million barrels of oil a day, of which 4.869 million barrels are imported. In the short term, China is well positioned to ride out a sudden increase in oil prices, with commercial crude oil inventory up 2.5% at the end of January, and inventories of refined oil products up 11% from the previous month, according to the state news agency Xinhua. In the long-term, record oil prices would have an impact on Chinese and foreign investors and damaging effect on the Chinese economy as a whole, analysts believe. (February 26, 2011)