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Sinking OIl Prices Cut Both Ways for China

FILE - PetroChina's logo is seen at its gas station in Beijing.
FILE - PetroChina's logo is seen at its gas station in Beijing.

As oil prices slide, China, the world’s largest importer, is benefiting in many ways. But analysts say as long as the slide continues, the risks and challenges that Beijing faces could mount.

According to government statistics, China’s oil imports grew by nearly 10 percent last year, to nearly 2.3 billion barrels (308 million tons). As prices have fallen from around $115 a barrel in June to less than $50 this week, importers are saving tens of billions of dollars.

Officials say the slump is providing a good opportunity for Beijing to build its oil stockpile. State media argue it is helping keep inflation in check and boosting economic growth.

But as oil prices remain low, some have voiced concerns about the risks that poses to China.

Tan Hao, a senior lecturer at Australia’s University of Newcastle, says risks include a greater reliance on oil products that could further threaten China’s environment as well as over-reliance on oil imports and oil related financial assets.

Threat to new energy technologies

He says the slide also threatens to stifle the development of new energy technologies in China.

“In an economic sense, yes, China benefits from the recent sharp fall in oil prices," Tan admitted. "But, we should also bear in mind that there are some negative sides of the falling oil prices, especially the unwanted affects on the ongoing energy transition currently under way in China.”

While widely unpopular, one way authorities could help avoid that, Tan and other analysts argue, is by raising the country’s oil consumption tax. China has raised its tax on oil three times since November.

“In theory it is a good thing because if as the government promised, the increased tax during this round of falling oil prices is spent on environment measures, spent on renewable energy, then that is good," Tan said.

The problem though is transparency, he adds. Citizens in China generally know very little about how the government sets the rate for the tax and how the funds are used after they are collected, Tan says.

Long term strategy

The government has left little room for any discussion as well. According to China Digital Times, whose blog documents Chinese government censorship directives, websites in China were recently told to not allow any commentary on the tax hike that was announced this week.

Energy analyst Matt Ferchen says China has an opportunity to think about how oil fits into its energy mix and pricing.

“But as of now, I do not really hear any bold initiatives along these lines, the only thing I hear about is stocking up on oil.”

Lower oil prices could challenge long-standing perceptions about China’s relations with commodities rich countries, he adds. Countries such as Venezuela that have long relied on oil exports to friendly allies to support their economy are now looking to Beijing for help.

“If it was not clear before, it should be very clear now that something is deeply wrong or can go wrong with this assessment of this sort of complementary win-win relationship," Ferchen said. "China now finds itself in a very difficult position.”

Ferchen says China must make the difficult choice of putting more money into Venezuela to ensure it can recoup its investments or walk away from the favored relationship.

Some believe the bargaining power of resource rich countries may be weakening, but relations between countries such as China and Venezuela will remain strong because both need each other.

Earlier this month, China hosted a meeting of left-leaning Latin American leaders and pledged to provide them with billions of dollars for regional projects. A day after the meeting, Venezuelan President Nicolas Maduro said he had received pledges of $20 billion to help his beleaguered country.

Some say China’s increased efforts in Latin America are an attempt to counter U.S. influence there.

Yan Xuetong, the head of Tsingha University’s international relations department in Beijing, says its more about increasing China’s engagement.

Yan says the reason China is expanding its engagement with Latin America from economics to political cooperation is to use that political engagement to strengthen and stabilize its economic efforts there.

Yan also says that as oil prices are expected to continue to drop this year, countries in Latin America will be experiencing some economic problems. He says that without the momentum of political engagement, China’s economic activities in the region risk shrinking.