ECON60401 Financial Economics: Oil Price Volatility on China

Introduction 

In the contemporary period, one of the recent issues having noticeable impacts on almost all the global economies of the world is the concerning issue of oil price volatility in the global scenario. Oil being one of the most important raw materials for any industry across any corner of the world, much of the dynamics in the industrial sector as well as in the overall economic situations of the countries depends on the oil price fluctuations and volatility (Allen 2016). The report tries to analyze the impacts of oil price fluctuations on one of the most prominent contemporary economies, China, critically analyzing the policy and strategy frameworks present in the country to combat the concerned issue.

Implications of Oil Price Volatility on China 

The most common and widely used convention for the purpose of measuring the dynamics in the international oil price across time is the West Texas Intermediate, which is globally used for the purpose of measuring and reporting the changes in the oil prices across the globe (Chen and Hsu 2012).

Figure 1: Oil Price Volatility (WTI Measured) over the years

(Source: Oil-price.net, 2017)

The above figure shows the dynamics in the oil market and the changes in the oil prices over time. As can be seen from the above figure, there has been significant changes in the prices of oil globally and there are presence of significant numbers of peaks and troughs in the international oil prices, especially in the recent period. This thereby makes the oil price volatility one of the major issues of concern in the contemporary period as it is expected to have both negative as well positive implications on the global economic scenario.

China, over the years has developed significantly in terms of economic aspects, succeeding tremendously in economic growth and productivity grounds. The country is, in the recent periods, one of the fastest growing economies, with growth rates being the highest in the international framework. Much of this impressive performance of the economy of the country is attributed to the immense development and productivity of the manufacturing sector of the country, which makes the industrial sector of the country one of the most powerful ones in the world (Zhang and Chen 2014).

Being highly active in the manufacturing domain, the country requires huge amount of raw materials to sustain their economic development, oil being one of the primary ones. Though China itself has several source of oil, it is a net importer of oil and related materials, with the demand consistently increasing with increase in its manufacturing, industrial activities and expansion of international domain of its commercial activities (Broadstock, Cao and Zhang 2012).

Figure 2: Gap between the production and consumption of oil in China

(Source: Crudeoilpeak.info, 2017)

As can be seen from the above figure, though the production of oil in the country has increased over the years and is expected to be increasing in the near future, the consumption of the same in the country has been increasing at a significantly faster rate with time. This has led to the creation of a huge gap of excess demand for oil in the country in the recent periods, which makes China a net importer of this resource.

Given this fact, the recent oil price volatility, consisting of considerable fluctuations, has huge implications on the economy of the country, as much of the industrial prospects and cost effectiveness depend on the prices of oil prevailing in the market. China being a net importer of oil, a fall in the price of the same is expected to have beneficial impacts on the overall industrial performance of the country, while a sudden increase in the price can lead to stagnation of the industrial activities of the country to a considerable extent. As can be seen from the empirical evidences, the worst hit of oil price fluctuations, apart from the industrial sector, is also the transport sector of the country, which in turn has implications on the industrial as well as import export sector of the country as well.

Government policy framework 

The government of China, in face of increased oil price volatility, has been taking several measures in order to reduce the negative implications of these fluctuations. One of the primary strategies of the country is to increase the productivity in the domestic oil production sector, which has been implemented with the objective of attaining self-sustainability and reducing external dependence for the supply of the same (Ju et al. 2014).

However, though this strategy seems to be a potential one, it will take time for the results to be acquired by the economy of the country. Apart from increasing the domestic oil extraction, the country has also started concentrating in development and implementations of alternative resources of power, mostly renewable. This is also expected to decrease the vulnerability of the country significantly from the frequent fluctuations of the international oil prices. In the recent period, China has three main oil producing regions, namely the Daqing, Liaohe and Shengli, which were highly productive a few decades ago. However, in the recent periods, the level of production of oil in these zones have been depleting extensively due to the depletion of the natural resources. In fact, these regions now need additional investment of huge amount in order to sustain their current level of production. However, the country is fighting this problem of scarcity in a potentially efficient manner (Brookings.edu, 2017).

China, in the recent years, has resorted to buying of oil wells and oil fields of small and medium sizes in different parts of the world, which includes Canada, Texas and Peru. The country has also started investing in the oil related projects of India, Russia, Venezuela and Papua New Guinea and others, thereby creating strong supply pipelines of oil for the country. several deals on part of the country, with Kazakhstan and Iraq have proved to be highly promising in combating the crisis faced by the country due to the fluctuating  global oil prices.

Recommendations and Conclusion 

Apart from the strategies and correcting policies taken by the governing authorities of the country to reduce the adverse effects of oil price fluctuations on the economy of the county, the country, like that of the USA and Japan, can start maintaining adequate oil reserves. This can in turn help the country to maintain a more or less stable supply of oil, even when the prices are high and the global supply is low. China has been recently building new way outs to combat the sufferings faced by the country due to the high fluctuations in the global oil prices, which affect the commercial as well as the daily life of the country considerably. Though in several cases these policies are showing promising potential, the governing authorities of the country needs to focus more on the creation of oil reserves and alternative source of energy as well as ensure their proper implementation for long term benefit and sustainability of the economy of the country.

References 

Allen, R.E., 2016. Financial crises and recession in the global economy. Edward Elgar Publishing.

Broadstock, D.C., Cao, H. and Zhang, D., 2012. Oil shocks and their impact on energy related stocks in China. Energy Economics, 34(6), pp.1888-1895.

Brookings.edu, S. (2017). China’s Changing Oil Strategy and its Foreign Policy Implications. [online] Brookings. Available at: https://www.brookings.edu/articles/chinas-changing-oil-strategy-and-its-foreign-policy-implications/ [Accessed 8 Dec. 2017].

Chen, S.S. and Hsu, K.W., 2012. Reverse globalization: Does high oil price volatility discourage international trade?. Energy Economics, 34(5), pp.1634-1643.

Crudeoilpeak.info (2017). China Peak Oil. [online] Crudeoilpeak.info. Available at: https://crudeoilpeak.info/global-peak/china-peak [Accessed 3 Dec. 2017].

Ju, K., Zhou, D., Zhou, P. and Wu, J., 2014. Macroeconomic effects of oil price shocks in China: An empirical study based on Hilbert–Huang transform and event study. applied Energy, 136, pp.1053-1066.

Oil-price.net (2017). How oil price volatility explains these uncertain times. [online] Oil-price.net. Available at: https://www.oil-price.net/en/articles/how-oil-price-volatility-explains-uncertain-times.php [Accessed 3 Dec. 2017].

Zhang, C. and Chen, X., 2014. The impact of global oil price shocks on China’s bulk commodity markets and fundamental industries. Energy policy, 66, pp.32-41