Chinese Oil Production Falls Below Demand

China faces a major drop in oil production which coincides with the OPEC drive to increase prices. China is one of the world’s largest oil suppliers. However most of its crude stays within its borders. If domestic output in 2017 experiences the same level of decline as in 2016, China will need to direct a major portion of its budget towards oil imports.

Chinese oil production drops due to old technology.

Why Has Chinese Oil Production Dropped?

While China has some of the largest oil reserves in the world, many of these reserves are older and becoming less efficient to work. After global oil prices fell to below $45 per barrel in 2016, China decided to shut down some of the fields owned by government backed companies which used more expensive production methods. This caused annual production to drop by 4 million barrels. Until this point, China had not seen oil production decrease in almost 10 years, and this was the largest drop in 25 years.

Why Won’t China Benefit From Higher Oil Prices

The increase in oil prices comes too late for China to recoup some of its costs by exporting its own oil supplies, because China’s fields can only be exploited through intensive methods. The government has not modernized its equipment in some time, and after paying to upgrade its equipment experts expect that $50 per barrel will go just towards production costs. At current prices, this will leave only $5 of profit available per barrel.

How Much Oil Does China Import?

China imported more than 8 million barrels of oil in 2016, an increase of 13.6 percent over 2015. That number is expected to grow by almost 5 percent in 2017. China is the world’s largest oil importer, and China National Petroleum Corp (CNPC), the country’s largest oil company, expects that the country will soon be relying on imports for more than 65 percent of its domestic oil related needs.

Why Does China Import So Much Oil?

Some analysts have noted that judging the state of China’s oil reserves is difficult, because part of the imported oil is destined for refineries which process the incoming crude and then place it for sale on the international market. Because of low labor costs, China is frequently able to supply refined oil products for less than other oil producing countries, even though they are buying the raw crude at higher prices. China is also suspected of placing large amounts of imported crude into storage, where they might be letting it sit while waiting for prices to go up.

Will American Tariffs Hurt the Chinese Economy?

China faces several difficulties if they are forced to rely on the global marketplace. President-Elect Donald Trump has all but declared war on China due to its export dumping, which hurts American manufacturers. Trump has also accused China of conducting corporate espionage to gain access to patents on American products.

Why Is China’s President Meeting with the Business Elite in Davos?

If Trump places a tariff on Chinese goods, then exports to the United States will drop. Chinese President Xi Jinping is already trying to find new homes for Chinese products. The Chinese leader will be the first to attend this week’s World Economic Forum in Davos, Switzerland. Xi has already set up meetings with British Prime Minister Theresa May, as well as several prominent foreign investors.

China’s Problem with Foreign Investment

President Xi has increased restrictions on transfers of cash out of China since taking office. This has slowed down the rate of foreign investment. In 2016, the amount of foreign direct investment in the country fell by almost 7 percent when measured in dollars. At Davos, Xi will praise the benefits of a global marketplace. The corporate elite conference attendees will probably ask how Xi balances globalization with his country’s actual drop in two-way trade.

How China’s Oil Woes Affect Trading

Oil prices will go up in 2017, barring an unexpected discovery of an oil field. Taking China out of the equation as a competitor makes this outcome even more likely. Rising oil prices will also hit Chinese manufacturers hard. However, additional American tariffs will make these companies wary of increasing prices to offset higher production costs. Look for China’s Shanghai Index to fall in the short term.