China to benefit most from plunging oil price – for now

March 11, 2020 11:35
China spends roughly US$240 billion on oil imports each year. So lower oil prices will help the nation save huge costs and ease inflation pressure. Photo: Reuters

Russia has refused to cut oil production in OPEC+ talks held over the weekend. As a result, Saudi Arabia, the world’s largest oil producer, threatened to ramp up its output, triggering a steep fall in crude price.

Saudi and Russia, the world’s top two oil exporters, shipped 8.3 million and 5.23 million barrels per day (bpd) respectively in 2018, followed by Iraq, the United States and Canada, which exported 3.8 million, 3.77 million and 3.6 million bpd respectively.

Will Saudi Arabia become the biggest loser in the price war? Not necessarily. The kingdom’s oil production cost is only around US$10 per barrel, and as such, it may still be able to make a profit as the oil price tumbles.

For Russia, oil production cost is higher at around US$30 per barrel as most of its oil reserves are in the deep sea. Therefore, it might face huge financial losses at current prices.

Also, Saudi Arabia is in a much better financial position to wage a price war in the long run. Russia, on the other hand, has been grappling with stagnant economic growth, which increases its reliance on oil exports to keep social and political stability.

The US has become a net oil exporter in recent years thanks to soaring shale oil output. The nation will also suffer losses given that the production cost of shale oil is above US$40 per barrel. However, oil export only represents less than 1 percent of its GDP.

Demand for electric car could get hit with the availability of cheap gasoline, hurting leading US electric vehicle makers like Tesla.

As the world’s largest oil buyer, China appears to be the biggest winner as the oil price tumbles.

China imported 8.4 million bpd in 2018, accounting for 20 percent of global oil trade. The nation spends roughly US$240 billion on oil imports each year. Lower oil price, thus, will help the nation save huge costs and ease inflation pressure.

China’s inflation surged to 5.4 percent in January due to pork supply shortages coupled with supply disruptions caused by the coronavirus outbreak.

Now, China’s central bank has more leeway to provide strong monetary stimulus without worrying too much about inflation pressure.

With all that said, everybody would face a no-win situation if the oil price slump leads to major geopolitical turmoil.

Russia and many other oil exporters depend heavily on oil revenue. They may face economic hardship – and instability – if their oil revenue slumps.

This article appeared in the Hong Kong Economic Journal on March 10

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist