How China's Slowing Crude Oil Demand Could Affect Crude Oil Market

How China’s Slowing Crude Oil Demand Could Affect Crude Oil Market

The crude oil market has for a very long period now remained one of the most lucrative businesses in the world. In fact, such countries as Saudi Arabia, Iran, and Nigeria use the money acquired from the industry in balancing their national budgets. China and the United States, on the other hand, remain the biggest buyers of crude oil in the world. As at the year 2015, China was ranked as the world’s second largest buyer of crude oil. China controls about one-third of the entire crude oil market and, therefore, its slowdown on the use of oil would adversely affect the crude oil market in the world, leading to budget deficits in some of the world’s largest crude oil producers. The paper, therefore, shows how China’s slowing oil demand would affect the crude market.

The Current Chinese Oil Demand

The Chinese oil demand currently stands at 9.2% increase from 1.6% in 2014 and 5.7% in 2015 (Song, Fang, Zhang, & Wu, 2016). The increase in the Chinese demand for oil got necessitated by the fall in the entire crude oil market in the world. With the drop in the prices, the major economic countries in the world such as China and the United States have embarked on the storage of the crude oil in reserves for their local oil production. China is currently focusing on the demand sparked by its domestic needs as opposed to the major projects funded through credit. From early 2016, the demand for crude oil in China has tremendously reduced, therefore, ringing a bell for a tough time in the crude oil market (Song et al., 2016).The decrease attributes to the fact that the slow economic growth witnessed in China towards the end of the year 2015 and early 2016 arise from the industrial performance (Song et al., 2016). In fact, the consumption of diesel used by the majority of the industries in China has reduced while the kerosene and gasoline demands remain high. The passenger vehicle demand attributes about 66% of the total oil demand in China which is expected to slow down as China switches into less energy consuming vehicles (Song et al., 2016). What is, however, shocking is the fact that as at the end of the year 2015, China consumed about 10.32 million barrels of oil (Song et al., 2016). The consumption is huge enough to control the prices of oil in the world. At the year 2015, the oil prices had gone already too low yet the Chinese demand for crude oil was too high, it is estimated that with the fall in the oil demand in China, the prices of the crud oil market will be adversely affected.

How the Chinese Slowing Oil Demand Affects the Crude Oil Market

The Present Production Levels of Crude Oil on the International Market

Currently, the production of crude oil in the world is way above the demand levels in the world. In economics, when the supply exceeds the demand, the effect is a reduction in prices. It is this assumption that saw the reduction in crude oil prices all over the world leading to a huge purchase of crude oil by China into its reserves. The current crude oil inventory builds stand at 1.8 million barrels per day, a figure arrived at by the United States Energy information Administration (Barslund & Alcidi, 2015). The administration anticipates that the builds will further slow down to 0.6 barrels per day, which show that, indeed, the demand levels for oil are slowly going down in 2016 (Barslund & Alcidi, 2015). The demand for crude oil depends on the economic activities engaged in by various states. A higher economic activity means that the consumption of crude oil will be on the rise. On the other hand, low economic activities lead to a reduction in the demand for crude oil. Since the production of crude oil in the world today is way above its demand, any reduction in the economic activities of the major purchasers like China and the United States would significantly reduce the international crude oil prices so that crude oil companies can sell.

 

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China’s switch to less energy economy leads to low demands of crude oil and thus, affecting the international crude oil demand and prices. In its observation, the International Energy Agency argues that the switch by China to a less intensive energy economy will significantly lower crude oil prices in the world (Mu & Ye, 2011). China is currently rated the second crude oil consumer in the world after the United States and, therefore, any reduction in its demand means a decrease in the general world’s crude oil demand (Mu & Ye, 2011). OPEC has failed to regulate the production of crude oil, leading to overproduction of up to an extra five million barrels per day. The reduction in China’s crude oil demands will, therefore, worsen the situation. China’s switch will also mark the beginning of most countries adopting less intensive energy economies to cut down on their expenditures on crude oil.

In a nutshell, therefore, China’s economic transformation into a less energy intensive one means that the use of crude oil domestically is affected. If the oil producing companies maintain their present crude oil production rates, it means that crude oil in the reserves will rise. Since there is no equal demand to the production rates, the prices will fall. A fall in prices, therefore, affects both the oil producing companies like Murphy Oil Corporation, Chevron Corporation and ConocoPhillips (Barslund & Alcidi, 2015). The national budgets of the countries relying on the sale of oil to finance much of its activities such as Saudi Arabia, Iran and Nigeria will eventually feel the effects. The role played by China in the regulation of crude oil prices in the world cannot, therefore, be underestimated.

Analysts have further warned that, with the deceleration of the Chinese economy, the need for oil also goes down. The Performance Managers Index (PMI), for example, has gone down due to the slowly decelerating Chinese economy (Barslund & Alcidi, 2015). Since the steady rising Chinese economy had been projected to consume a lot of oil and thus, lead to the international crude oil production increase, any reduction could jeopardize the anticipated sales of oil companies. China’s economic stagnation has, therefore, negatively impacted on the projected production rates of the major oil companies. The oversupply of crude oil occasioned today is a result of the anticipation by the majority of oil businesses in the world that China’s economy would increase steadily and thus, open up a market which did not add up. Companies oversupply, therefore, stands at five million barrels per year (Barslund & Alcidi, 2015).

 

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Conclusion

China is the second country in the world regarding economic development after the United States. It is also the second-largest consumer of crude oil in the world. Consequently, China has a significant role to play in the regulation of the international crude oil prices in the world. With the stagnation of the Chinese economy and the switch to a less energy intensive economy, the demand for crude oil has started depreciating. Since there is already an oversupply of crude oil in the world up to a tune of five million barrels per day, the decrease in the demand for crude oil in China will worsen the situation, thus, leading to a steady reduction in the crude oil prices on the international market.