The Organization of the Petroleum Exporting Countries (OPEC) and its Russia-led allies on Sunday agreed to a record output cut of 9.7 million barrels per day (bpd) in a bid to boost oil prices amid the coronavirus pandemic.
While international benchmark Brent crude rallied on Monday on the latest development in the oil world, doubt is still lingering as to whether the output cut might only support oil prices to go higher for a while or be enough to offset the loss of demand due to the coronavirus hit.
For many, China, as one of the world’s major oil importers, appears to have benefited from the recent collapse in oil prices, but in fact, an effective oil cut deal that could help keep oil prices in a more reasonable range would be more beneficial for the country’s overall economy.
It is true that a relatively low oil price may help China’s economic recovery by easing cost pressure in transportation and other chemical manufacturing sectors. Also, the decline in international crude prices means that China can spend less on oil imports. Moreover, a recent Bloomberg report said that China had taken advantage of the price plunge to snatch up cheaper oil build up its state oil reserves.
However, from the broader picture, China doesn’t want to see oil prices to go too low.
First of all, China’s oil industry, which has global coverage, needs to operate at an appropriate international crude level. In 2018, China’s domestic oil production reached 189 million tons, ranking seventh in the world. Meanwhile, Chinese enterprises have invested in a large number of oil and gas projects abroad, with most investing at $80 a barrel or even higher. Therefore, excessively low oil prices will not be conducive for the sustainable development of the domestic oil industry, and will pose risks for the investment return on China’s overseas oil projects.
Second, while relying heavily on traditional fossil fuels like oil, China, as the world’s largest energy consumer, is also actively engaged in adjusting its energy consumption structure by encouraging and developing clean energy. And reasonable oil prices are essential to prompt energy substitution, reduce oil dependence, and improve China’s energy efficiency.
In this sense, if the latest agreement to cut oil production can really help stabilize oil prices, it will be beneficial for China’s long-term energy strategy, which requires prices to move in a relatively stable range.