an overlook scene of the supertankers on the sea from Singapore

According to China Custom, China’s daily average import of crude oil amounted to 7.37 million barrels on April 2015, while for the US, the daily import volume of the corresponding period was 7.2 million barrels. That’s the first time for China to surpass the US in terms of the daily import volume of crude oil. And since then, China’s crude import has constantly kept in a high level, take the year of 2015 as an example, the annual import of crude oil of 2015 was near to 340 million tonnes, which is 1.5 times higher than that of 10 years ago. And it was exactly in the year of 2015, China surpassed the US to be the biggest oil importer across the globe.

External Cause I: Declining Demand of Former No.1 Importer

During the past five years, the crude oil import of the US has decreased by 30%. On one hand, it was the slow economic recovery and stagnant domestic consumption of the US to be blamed for the declining demand on crude oil; on the other hand, which is of the most importance, the output of the domestic crude oil in the US has continually increased and frequently hit the record high with the development of the shale revolution, which has further decreased the import crude oil as a percentage of the domestic consumption and thus caused a continuous slide on the import volume of crude oil in the US.

External Cause II: Fierce Competition among Crude Oil Supply Market

The golden age for the oil market ranged from 2004 to 2014, during which the international crude oil price had all the way remained high with the price of more than USD100 for over three years, and therefore the exporters of the crude oil has actually enjoyed the pleasure of making money out of very little input.

The capital has always been a loyal follower of making profit, and thus all kinds of investments flooded into the oil and gas industry. The traditional oil producing countries of OPEC switched their steps on oil and gas exploration to top gear; while the United States, which has been regarded as an up-rising star in the industry, has rapidly given birth to the shale revolution by making use of its advantages of finance and technologies. At one time, the conventional oil productivity was in a steady growth; meanwhile, the unconventional shale oil, oil sand, and the extra heavy oil made their entry to the industry.

However, at the same time, due to the sluggish global economic growth, the speed increase of the crude oil demand went through the fall after rise, and gradually, the oil industry has been under the pressure of “overcapacity”. With the plummet of the international oil price on the August 2014, the whole industry was stuck in a dilemma, and the business wars waged on market capturing turned to be fiercer and fiercer.

Currently, the OPEC determined the inferior limit of the international oil price, while the producers of shale oil of the US determined the superior limit. Saudi Arabia, the benchmark of the former, took the lead to implement the strategy of “making some necessary concession to secure the market share”, and Iraq and Iran have also frequently hit the record high in terms of their oil import; the latter managed to hold on its business by the means of cost control so as to break through the darkness before dawn. The once-proud-and-arrogant oil magnates showed a low-profile stance to their major clients including China, and made great efforts to provide their customers with various favorable terms, thus to try their best to capture the prime market.

External Cause III: “Exchange Oil for Loan”

In the age of high oil price, many members of OPEC leaved crude oil as a pledge to raise large-scale financing. And nowadays, with the value of the mortgage sharply depreciated, they have had to repay the loan with oil products several times that of it used to be. While at present, China turns to be the biggest winner as a creditor country with tens of billion dollars of loans mortgaged on oil.

According to Reuters, for repaying a USD50 billion loan, 1 million barrels of daily oil export would be enough when the oil price was USD120 per barrel; while when the price plummeted to USD40 per barrel, the daily oil export then should be increased to 3 million barrels. This statement may, from another point of view, help to explain why recently supertankers crowded around Qingdao Port and China suddenly submerged by oil.

Internal Cause I: China to be a Major Oil Consumption Country

According to Economy and Technology Research Institute of PetroChina, in the recent years, the oil consumption in China’s market has gradually increased; meanwhile, the domestic output of crude oil has been stabilized at around 200 million tonnes, which consequently increased the country’s external dependence of oil consumption. For example, in 2015, the oil consumption of China was about 540 million tonnes, with the proportion of external dependence of 60.6%. Calculated on the base of the current situation, the total volume of oil consumption of China will amount to 600 million tonnes by the year of 2020; and by 2030, 80% of the oil consumption of China would be provided by foreign producers.

Internal Cause I: Great Need from Teapot Refineries

Since the Chinese government canceled import restrictions on the private refinery plants in 2015, the development of newly built independent refineries, which have been called as “teapot refineries” by the foreign media, is booming, meanwhile, those refineries have gradually turned to be a main force in importing crude oil. According to China Petroleum Purchase Federation, 27 private refineries have applied for import quota by Feb. 2016, some of which have already received their quota. Generally speaking, the total annual importing quota is 89.5 million, which means 1.8 million barrels per day. The refineries would buy bulk crude oil after getting their purchase quota and thus stimulate the increase on the import demand.

Internal Cause III: China has quickened its National Strategic Oil Reserves Plan

China launched the National Strategic Oil Reserves Plan in 2003 and intended to complete the constructions of the base of the strategic oil reserves by dividing the project into three phases in 15 years. According to the Medium and Long Term Plan for National Oil Reserves, China will complete the construction of phase I and phase II of the oil reserves project before 2020, by then it will form an oil reserve for 100 days net import volume and attain to the “reference” level of strategic oil reserves regulated by the International Energy Agency.

As the oil price went down since the middle of 2014, some of the industry insiders suggested an increase on oil reserves for China, and therefore to seize the opportunity to offset the shortfall caused by the relatively late starting on the strategic oil reserves. According to Reuters, China will increase the strategic oil reserves by 70 million to 90 million barrels in 2016, which as twice as that of last year in terms of the purchase scale. However, the shortage of the warehouse, as one of the obstacles, may act as a drag on its way to fulfill the plan of oil reserves.

*This article is edited and translated by CCM. The original article comes from Jiemian.com.

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