Chinese lower their intended purchases

One of the advantages of writing in a team such as here at TOD is that that are relevant issues that go beyond just pulling oil out of the ground, and we have folk better qualified than I to talk about those issues. And one of them has, I suspect, just appeared. The Chinese have invested quite heavily in creating a middle class. And have been encouraging them to buy cars. Now they are suddenly changing their tune, and one wonders if this will have societal impacts over there. The change is, I suspect, signalled, by their just announced decision not to immediately fill their Strategic Petroleum Reserve. One wonders what will be the likely implications of their having awakened this sleeping tiger, partially fed it, and now trying to sedate it again. (One can see in the UK some of the reaction to suggested restraint in that temperate isle).
Bloomberg has a quote from the Chinese vice chairman of the National Reform and Development Commission
China, the world's second-largest oil consuming nation, will delay purchases of the fuel for its emergency stockpile because prices soared to records, a government official said.

"I can tell you clearly, we are not going to buy now," Zhang Guobao, vice chairman of the National Reform and Development Commission, China's top economic planning agency, told reporters in Beijing today. The government had planned to start filling the stockpile by the end of this year. . . . . ."We are studying and trying to find other ways to build our oil inventory on a gradual basis," Zhang said. "We have mapped out a plan to build our oil inventories and related facilities are under construction. We are yet to decide."

The decision whether to build a stockpile to cover 90 days of consumption or 120 days hasn't been made, Zhang said. China's oil consumption has more than doubled in a decade to an estimated 6.65 million barrels a day in 2005, according to the International Energy Agency. The proportion met by imports has risen from zero to about 44 percent.

"The basic policy for China's energy industry is to rely on domestic supply," Zhang said. "China is able to maintain production of crude oil at around 180 million tons a year over the next 20 years," or about 3.6 million barrels a day, he said.

The story is being picked up elsewhere. The Pakistan Daily Times also comments on the speech.
China, whose voracious oil import appetite took the world by storm last year, cut its August crude imports by 6.1 percent from the year-ago period to their lowest levels in eight months at 2.06 million barrels per day (bpd), as refiners reduced purchases amid heavy losses on domestic sales, customs data showed. Undermining prices further, the world’s No. 2 oil consumer reiterated on Tuesday it would not use imported crude to fill newly constructed strategic reserves. “Currently the international oil prices are at high levels. Against this backdrop, we would face big risks if we buy oil from the international market,” said Zhang Guobao, vice director of the National Development and Reform Commission.
Of course some of the oil reduction may also have been brought about by the problems that they have had in the South due to the weather, and the increasing amounts of power becoming available from their electric grid, since it will lower the need for generators. On the other hand it may also have an impact on those companies that have been supplying the voracious U.S. appetite for goods, with all the implications that may bring. Technorati Tags: , ,
The Chinese are facing the fundamental issue in risk management.  If indeed they do not start filling their SPR, they could be making a big mistake if the price of oil keeps rising.  Obviously, if they believe the price of oil is going to fall, it seems to make sense to delay filling the SPR. However, this is an uncertain world.  The smart thing to do is to start filling the SPR at a low rate depending on their estimate of the probablility that oil prices will not fall.

Unfortunately for the Chinese, the analysis is complicated by the fact that their actions will be significant enough to influence the oil price; if they don't buy the oil price may fall but as soon as they start buying, the price may rise.  Nevertheless, I doubt that the change would be large enough to change my above recommendation.

Related announcement from Xinhua:
China, capable of turning out 180 million tons of crude oil yearly in the next 20 years, enjoys a huge potential in developing new oil and gas resources, a senior government official said here Tuesday.

The prediction is based on the third general survey of national oil and gas resources by the National Development and Reform Commission(NDRC)recently, said Zhang Guobao, vice chairman of NDRC at a press conference held by the State Council Information Office.

"The outcome of evaluation on the oil and gas resources was better than former data," said Zhang.

According to Zhang, China has a large potential to develop new oil and gas sources, especially natural gas, which is still in the initial development stage.

"As long as an all-out effort is made in exploration, it is
possible to find new oil and gas resources in China, " Zhang said.

Xinhua article
How many barrels of oil is 180 million tons?
There are 42 gallons in a barrel. A gallon weighs about 7.5 pounds. A barrel then weighs 315 pounds. So a ton has about 6.35 barrels. But then the Chinese might be using metric tons which are about 225 pounds more.
i know this is off topic, but i posted a comment about the American Red Cross here.  since so many of us (myself included) thinks (or thought) donating to them was a good way to help, it behooves us to know what they are about.  
I was under the assumption that the Red Cross never guaranteed that any donation (whether monetary or material) would go to a specific cause, so hearing that the Red Cross wanted to add the 9/11 money to their "war chest" isn't surprising. I know that on the local freecycle list a lot of people were mad about this (mini rant: there were people upset that the red cross wouldn't ship baby clothes and other large bulky items directly to new orleans. Excuse me, if you want your particular donation to make it to X location, ship it there yourself. Oh, is that too expensive? Well, now you know why the red cross won't do it. It would be a waste of resources; as long as there are local poor who need the materials it should stay local. Monetary resources are likely to get more spread out, but they tend to stay mostly in-country with a bit of a war chest for natural disasters where-ever.

Hearing that the US Red Cross co-ordinated with Homeland Security, even tho Homeland Security drug it's feet also isn't really a surprise.

I'm sure that there probably is an association which would be better at giving Aid, but if you're looking at large associations (so one doesn't have to spend a lot of time trying to find someone to give the money to) the Red Cross seems to be far better than the other alternatives. Well, at least the one alternative that I know being the United Way. They seem to have a history of lots of embezzlement and higher administrative costs (not counting disappearing funds).

The generic war chest is a good thing, because that way the big emergencies which get people to potentially over-give help cover the smaller emergencies which don't make the paper.

since 8 of the 50 board members of the ARC, including the CEO (Marsha Evans) and the Chair of the Board (McElveen-Hunter), were both appointed by US Presidents, i have serious doubts about ever giving to the ARC again.  it appears to be a large waste of individuals' money and instead a way to divert it to the powerful and connected; instead i'm giving to a couple local groups and the NAACP which is working with Civic Action to coordinate housing for victims.  I hear ACORN is a good locally focused group as well.  

McElveen-Hunter was appointed by Bush in June 2004. Her Red Cross bio says she is the "former U.S. Ambassador to Finland (2001-2003) and the CEO and owner of Pace Communications, Inc., the largest private custom publishing company in the United States. The company's clients include such Fortune 500 companies as United Airlines, Delta Air Lines, AT&T, Carlson Hotels, and Toyota."

McElveen-Hunter donated more than $130,000 to the Republican Party since 2000, RAW STORY has found. Her largest donations were $25,000 to the Republican National Committee in April 2004 and $100,000 in July 2000. In May 2000, she gave $1000 to "Bush for President, Inc."

Marsha J. Evans, President and Chief Executive Officer of the Red Cross, is a Rear Admiral in the Navy and the Director of Lehman Brothers Holdings, Inc., a global investment bank serving the financial needs of corporations, institutions, governments and high-net-worth investors worldwide, according to the corporation's web site. Evans also sits on the boards of the May Department Stores Company and Weight Watchers International and was recently elected to the board of the Huntsman Corporation, a large chemical and plastics manufacturer. She is also a presidential appointee to the Board of Visitors of the U.S. Military Academy.

ARC only gave to victims $10 Million of the $50 Million it collected for the 1989 Loma Prieta earthquake.  According to one researcher, critics also protested holdbacks following the Oklahoma City bombing in 1995, Red River flooding in 1997 and a San Diego fire in 2001.  After 9/11 the ARC held back more than half of the net $543 Million it had raised.  Putting that money in a Liberty Fund, doesn't make me or the victims feel any better.  

While courts have considered the Red Cross a "government instrumentality" immune from state taxation, they have not viewed it as such for purposes of religious discrimination or Freedom of Information Act claims. In other words, the Red Cross obtains the tax benefits of being a "government instrumentality," but is exempt from the obligations that government carries.

One federal court noted that, "Close cooperation with government is essential to the work of the Red Cross. A perception that the organization is independent and neutral is equally vital."

The Supreme Court has found that "time and time again, both the President and the Congress have recognized and acted in reliance upon the Red Cross' status virtually as an arm of the Government."

That's got to put more bearish (downward) pressure on the energy markets. I wonder if we might see oil fall back to the $60 range or even the $50's.
It will, there will be enough positive reports, temporary flooding of the market (from european reserves) and postponed buying for emergency reservers to ease the market for a while. People will sigh and put away that memory of high prices, turning them into positive consumers again, they will order their new SUV's and take a new low mortgage rate loan and move to that new home far away from where they work.......only to be totally surprised by the next price wave. And who knows, maybe Bush can order the IEA and the rest of the world  once again to send "emergy" oil to keep amarican consumers in control......and maybe not
CERA predicted mid-term oil prices of $40.

Since just 6 years ago, prices were around $20, I'd say that the market may slip further - at least to $50, if not $40.

What's that?  Higher market prices have caused a reduction in demand???  Quick--someone start rewriting the economics textbooks, because they never mentioned anything like... Oh.  Never mind.

On a more serious and less snarky note, this Chinese reaction to market prices should have been easily predicted.  A lot of people talk about how the demand for oil is price inelastic in the short run, which it certainly is.  But that's true only within the context of a particular infrastructure, like that of the US, where so much of our oil consumption (i.e. motor fuel) is almost impossible to replace on short notice.  

By comparison, China, which does not have a massive infrastructure built up over decades of reliance on and exploitation of cheap oil, can more easily cut back on oil consumption.  That whole centralized, authoritarian government thing doesn't hurt, either.  (And no, that's not a negative comment about Democracy, just an honest observation that their government organization can impose its will on the people with ease.)

I think that a great deal of caution is called for in interpreting China's "slowing" oil demand.  First of all, that gov't has a history of jerking around the commodity markets pretty hard - they did it with soybeans a couple of years ago, and IMO are doing it with oil now.  Second, there is no objective evidence that their economy is slowing - here are a couple of excerpts from a press release from the Chinese gov't today:

"China's car industry grew 16 percent year on year in August, with car production soaring 46.3 percent, according to statistics released by the National Bureau of Statistics (NBS) Wednesday.
According to a monthly NBS report, the industrial value added of the industrial sector, covering all state-owned enterprises and non-state enterprises, each with annual sales of over 5 million yuan, reached 596.8 billion yuan (73.7 billion US dollars) in August."

"For the January-August period, the industrial sector posted a growth of 16.3 percent, with the industrial added value reaching 4,411.5 billion yuan."

There is no way to sustain that kind of growth without eventually coming back to the oil import market full scale, or alternatively buying production abroad (witness the chinese purchase of Encana's Ecuador assets yesterday).

"implications of their having awakened this sleeping tiger, partially fed it, and now trying to sedate it again"

Is there a metaphor contest? I would nominate this one -- very amusing.

Having as they say "The Mandate of Heaven", the Chinese political leadership is now attempting to manipulate the market -- this has been mentioned in other posts here. Latent demand due to higher income remains but oil purchases can be lowered due to policy. Here's some interesting stuff from Bloomberg Oil may average $93 in 2007 reprinted by the Gulf Times out of Qatar. From the Canadian Imperial Bank of Commerce's chief economist
Consumption in China, the second-largest user of oil after the US, and in other expanding Asian economies, is sensitive to rising income and not prices, the CIBC economists said in their report. Per-capita energy use in China in 2003 was about one-tenth of the US rate, according to the US Energy Department.

"About 42% of the growth in global demand is coming from China, where there is virtually no price sensitivity to demand,'' Rubin said in a separate phone interview. "There's a huge relationship to income growth there, but a very uncertain relationship to price at all.''
"About 42% of the growth in global demand is coming from China, where there is virtually no price sensitivity to demand,'' Rubin said in a separate phone interview. "There's a huge relationship to income growth there, but a very uncertain relationship to price at all."

I am surprised that Rubin does not mention the obvious reason. The Chinese subsidize energy prices which means that retail prices do not immediately respond to the world oil price.

Exactly right. Which is why "free market" economics models of prices, supply and demand do not apply to the controlled economy in China. Other Asian countries (Indonesia, Thailand, India) are rolling back subsidies which are no longer affordable. Not China, not yet.
I read this a bit more simply: the Chinese are not buying now because the (current short-term) price is too high, and buying more would drive it up further. As for their statement that China is planning to rely on domestic production: no hint of truth there. They are buying leases in Canada, bidding for Unocal, sending drilling crews to Wyoming. And that's before the military jumps in:

From the San Francisco Chronicle, 11 September: "In a muscular display of its rising military and economic might, China deployed a fleet of five warships on Friday near a gas field in the East China Sea, a potentially resource-rich area that is disputed by China and Japan.

The ships, including a guided-missile destroyer, were spotted by a Japanese military patrol plane near the Chunxiao gas field, according to Japan's Maritime Self-Defense Forces. It is believed to be the first time that Chinese warships have been seen in that area.

Although the fleet's mission was unclear, the timing suggested that it was no coincidence. The warships appeared two days before a general election in Japan, whose results could greatly influence relations between Asia's two great powers, and weeks before China is scheduled to start producing gas in the area, despite strong Japanese protests."

The Chinese hold over $700 billion in US Treasury bills. They can buy anything they want. They are simply holding off until it's a bit more opportune. I wouldn't fill my SPR in the aftermath of Katrina, either. Would you?

"As for their statement that China is planning to rely on domestic production: no hint of truth there."

You're misinterpreting the statement (and it seems you're not alone).  They are planning to rely on domestic production in lieu of drawing down the SPR in the event of supply disruption.

That is to say, the cost to fill the SPR at current prices exceeds the risk-adjusted value of a full SPR, in light of domestic production capacity currently in place.