China slipping on high oil prices

China’s economic minders have always prided themselves on the fact that despite the country’s insatiable appetite for energy its booming economy has remained largely insulated from fluctuating international oil prices. But when prices hit $100 per barrel in early January, the unease among officials and pundits was palpable. “China is vulnerable precisely because it has never experienced an oil crisis,” says Zuo Xiaolei, chief economist with Yinhe Securities. “Our energy contingency planning is only in its initial stages and sharp increases in oil prices are bound to have a big impact on the country.”

While the United States has held oil reserves since 1976, and Japan since 1980, China’s national oil reserve stockpile is only now taking shape. What is more, China’s current overall

reserves equal just half a month’s consumption — a drop in the sea by the standards of the country’s roaring economy. In 2003 China overtook Japan in becoming the world’s second largest oil consumer. Last year the country relied on imports for 50 per cent of its oil needs. With an economy growing at a double-digit rate for the last four years, the country’s

oil consumption is projected to rise by 15 per cent annually.

But oil’s rise to $100 a barrel is bad news not only for the country’s long-term energy security. The sharp increase comes at a challenging time for an economy, which has been trying to shift gears and prime domestic consumption as its new driving engine. While strong exports remain a significant force fuelling economic growth for China, the country’s mandarins have been trying to boost domestic consumption to bring the booming trade surplus down and reduce tensions with trade partners. In the US and Europe, China is often presented as a competitor for jobs and profits and accused of manipulating its currency to preserve its dominance as an exporter.

But efforts to support domestic consumption and alleviate trade tensions now seem threatened by higher oil prices. “If all of a sudden people have to pay more for energy commodities they would naturally want to reduce their other expenditures,” said an editorial in the Beijing Youth Daily this week, voicing public concern.

But what worries Chinese leaders most is the effect soaring oil prices would have on stubborn inflation they have been battling since last year. Nearly every month in 2007 has brought a new decade-high figure in inflation. Consumer prices were up 6.9 per cent in November. In October they were up 6.5 per cent. While low compared with the 20 per cent plus inflation rates of the early 1990s, it stoked fears of social unrest among the rural and urban poor. In late 1980s inflation problems triggered economic turmoil and were blamed for social disturbances that culminated in the infamous Tiananmen democracy crackdown.

Aiming to ease fears that its growing thirst for imported oil will drive up already high prices, China issued a white paper on energy policies in late December, pledging not to disrupt international markets. “China did not, does not and will not pose any threat to the world’s energy security,” the document stated, aiming at fears that Beijing’s global search for oil and gas might create diplomatic friction and jeopardise other nations’ interests. — IPS