International crude oil prices have been on a roller coaster the last two years. Crude futures on the New York Mercantile Exchange rose from their lowest levels at US$26 per barrel in February 2016 to US$76.9 in October 2018, only to drop by 30 percent in November, affecting the global economy.
China has felt the impact. As the world’s largest net importer of crude oil in 2017, China saw imports rise 8.1 percent year-on-year between January and October 2018, Lin Boqiang, director of Energy Policy Institute at Xiamen University wrote for yicai.com. Oil accounts for only 19 percent in China's energy consumption. While not directly affecting China's economy, fluctuations in oil prices translate into fluctuations in the performances of enterprises throughout the oil industry chain, adding to their uncertainties and operation risks. Factoring in the uncertainties, financial institutions often charge higher interest on borrowers, pushing the cost of fundraising up for enterprises. The fluctuations also adversely affect the country’s efforts to curb oil consumption and reduce its reliance on oil imports.
To counter the adverse impacts, Lin proposes that China ramp up its strategic oil reserves. Storing oil or flooding the market can curb price swings from speculation. Oil reserves also consolidate market confidence in cases of geopolitical crises. China can also exploit its shale oil and shale gas reserves – the country ranks third globally in terms of technical reserves of shale oil.
The launch of China’s crude futures in March marked a first step in competing for oil pricing power. However, the market is dominated by domestic crude oil producers and traders. It is necessary to increase its sway by further opening up to more crude producers and international traders, Lin said. In the long run, China needs to lower the proportion of oil consumption in its energy mix by encouraging the use of alternative energy sources. Rail and electric vehicles are two good options, he noted.
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