The Chinese Puzzle

One often forgets that while we have hurricanes at this time of year (though it looks as though Irene is heading back out to sea, and the 10th depression this year is now dissipating), similar problems occur in Asia with typhoons, their name for the same thing (and they have seen their 10th severe storm already).

For example Typhoon Haitang hit Taiwan last month, disrupting tanker flow and this is now leading to severe fuel shortages in southern China. Further the rising prices are leading truckers to anticipate a fuel surcharge.
Lok Ma Chau China-Hong Kong Freight Association chairman Stanley Chiang said the union has suggested the levy because many self-employed truckers have lost income as a result of the fuel increases over the past year.
The continuing shortage has resulted in rationing of fuel in the region.
China's most prosperous city of Guangzhou has begun rationing gasoline and diesel to cope with a fuel shortage. Guangzhou experienced a monthly shortfall of approximately 12,200 barrels per day of oil products, Xie Zhaowei, secretary of Guangzhou's Petroleum Industry Association, said.

China National Petroleum officials said soaring oil prices and a refinery-imposed supply crunch led to a shortage in the consumer market. China's growing energy consumption is also a factor.

"Asia's largest oil refiner Sinopec relies on imports for much of its crude for refining, so the surging crude prices on the world market have greatly hurt the oil giant's refining business, when the central government still controls the price of domestic refined oil to stabilize the market," a CNPC official was quoted by the China Daily.
And there are the pictures of lines at gas stations, which are becoming endemic across Asia.

There is a lot of concern about the true nature of demand from China this year, since the level that it reaches may well control the overall balance between available supply, the demand at that price, and where it goes. In this regard there is a very thoughtful piece at Petroleumworld, citing the most recent IEA report (only the summary of which is available here).

"The IEA estimates that at the beginning of July suppliers to the Chinese domestic market were losing 20 dollars per barrel or more on every barrel of gasoil supplied. The average price of a barrel of gasoil on the Singapore market in July was 70 dollars.

The interpretation implied by the IEA data is that, insofar as suppliers are under state control, consumption of oil and of many derivatives -- the essential fuel of the growth of the Chinese economy -- is being subsidised and therefore stimulated at considerable cost by the government itself.

However, many other forces, driven by intrinsic growth of the economy -- an increase of car ownership for example -- have been the main power behind the rise of demand for energy and with it oil.

But IEA data also indicates that those Chinese traders or refiners that are not state-controlled -- and therefore are not subsidised and cannot afford to supply the domestic market -- and which also have freedom to export, are turning China as a whole into a net exporter of some products. These are gasoil, gasoline (petrol), and naphtha which is used as a petrochemical feedstock or to make gasoline.

It is thought that these products are being drawn into Asian markets by strong growth throughout the region, itself partly driven by growth in China, and also by a shortage of world refining capacity."
This, more nuanced review, is in contrast to the Newsweek opinion, which concludes that demand from China has fallen because the economy has slowed down.

I suspect that some of the slowdown in demand has been because of the limited capacity that China has had in its refineries, but with new ones coming on line, demand may now increase. Certainly, however, the situation is complicated by the prices charged and the role of subsidies. That seems to be an issue across Asia.

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I had this thought, back when China said they would have falling oil demand, and everyone said "how can they, with a growing economy."

My thought was that they were still command-and-control enough in China, to simply stop importing so much oil. That would lead to shortages, and rationing ... and confirm the Chinese governments "prediction" in a way not possible in a free market west.


I followed the link below the Summary and got the 54 page IEA Oil Market Report.

This is very interesting, especially when compared to the two Oil & Gas Journal articles that you linked to a few weeks back. They are very optimistic about the development of something near 1,000,000 bpd of new refning capacity being developed in China, despite the fact that price controls has suppressed refining margins.

Presumably China can force refiners to make losing investments, but the largest, Sinopec, is a public company. I know some countries (ie. Thailand) compensate refners so that they don't suffer from the price squeeze. It doesn't appear that China is though since refining margins have been low in the recent past despite demand growth.

The full report runs a month or two late (to get the latest one you need a subscription that costs over $2,000 - slightly beyond my budget). The latest published is from July 13. The question with the refineries is how rapidly are they going to ramp them up since they opened one in the last month that can handle 650,000 bd. If they start running that at full throttle (and I can't see why they wouldn't) they solve some of their supply needs. But putting that extra demand on world supply is one of those "last straws" that we worry about. Hence the overall concern.

The Petroleum world review of the latest report suggests that China is enforcing some subsidizing of price (as are India and some other Asian countries) but the additional question with these is whether they can afford to continue. And what happens to demand if they stop.

Thanks for the good links and alerting me to the delayed publishing of the Oil Market report (I must pay more attention to detail). It does seem clear that China is subsidizing prices, but I am curious about the mechanism. Thailand capped prices, but then paid refiners the difference so they remained profitable. My impression is that China is forcing the burden on the refiners. The evidence have seen is that Chinese margins have been low. However, of this is the case it is hard to imagine why they are so eager to expand. There seems to be a piece of the puzzle missing. I may look into this and add abt later. Thanks again for the good links.

China has to ration fuel. So does the United States:

This is a poorly written article, but the gist is that gas stations are closing in Arkansas, leaving people to drive further for fuel at remaining gas stations, which are limiting purchases to $20 so that they don't run out of gas between deliveries. Sounds like gas rationing, doesn't it?