CHINA AND $90 OIL

China/energy analyst: "(The rise in prices) has been absorbed step-by-step from $60 to $70 to now $80 and $90. I would be very surprised to see China's oil demand fundamentally affected up to $100…"

Why China Can Withstand $90 a Barrel Oil – And Higher
David Winning and Natalie Obiko Pearson, October 19, 2007 (Dow Jones Newswires via RigZone)

WHO
The Chinese government (Zhu Zhixin, vice-minister, National Development and Reform Commission); Chinese oil companies (China National Offshore Oil Corp. Ltd., PetroChina Co.); Simon Wardell, London energy analyst, Global Insight; International Energy Agency (IEA); Keun-Wook Paik, China/energy expert, Chatham House

Oil closed over $90/barrel on Friday. (click to enlarge)

WHAT
China is better positioned than most other nations to withstand the rising price of oil without sacrificing growth due to 2 factors: (1) government subsidies to consumers financed by windfall taxes on its oil companies for all oil over $40/barrel, and (2) $1.43 trillion in reserves from booming exports.

WHEN
China is expected with certainty to maintain its policies in the face of rising oil prices thru the 2008 Olympics in Beijing. Most analysts believe the government will not let growth flag afterwards either.

WHERE
The cost of oil is an international matter. China’s ability to resist its negative impact comes from its booming exports to the US and Europe. It also offsets the problem buying cheaper oil from places like The Sudan as well as drawing heavily on its own domestic supplies of coal.

WHY
- China’s foreign exchange reserves totaled $1.43 trillion at the end of September.
- The IEA said Beijing will do whatever is necessary to sustain demand and maintain stability.
- The dollar's weakness makes oil cheaper in other currencies.
- China’s yuan, is set to the dollar but lower dollar rates stimulates China's export market.
- Only about 10% of China energy comes from imported oil (3.3 million barrels/day). And less traditional sources (50.5 million barrels from The Sudan, January-August 2007) are cheaper. (Sudan Dar Blend is acidic and therefore cheaper than the sweet crudes required by US customers.)
- One problem: China has only amassed 21 days of reserves (OECD countries: 53.5 days). And high prices are making it too expensive to expand strategic reserves quickly, leaving China vulnerable to supply disruption.

This trend has been some time in developing and China is ready to deal with it. (click to enlarge)

QUOTES
- Simon Wardell, analyst: "There will be at some point a limit to [windfall taxes] unless (the companies) get additional funds from the Chinese government…"
- IEA monthly oil market report: "The Chinese government will most likely do the utmost to keep the economy growing, through heterodox means if necessary…[Talk of rolling back subsidies or imposing a fuel tax on consumers] should probably not be taken at face value…"
- Zhu Zhixin, Chinese planner: High oil prices "may encourage enterprises that use a large amount of oil to adopt energy-saving measures and reduce emissions to increase efficiency and economic returns…"
- Keun-Wook Paik, Chatham House: "It has become very expensive to fill up those reserves…The Chinese government will sooner or later start to express their anxiety about the high oil price."