After a fall of 16 straight months in the international oil market,
oil prices have comfortably cruised at US$33-34 per barrel, with
the peak at US$35-36 per barrel. To gauge the impact of this on the
global petroleum industry and oil market, the China Internet
Information Center (CIIC, WWW.CHINA.ORG.CN) invited Song Wucheng, a
senior research fellow with the Macro-Economic Research Institute
under the State Development Planning Commission, to provide his
opinions.
CIIC: What is the in-depth reason for this straight surge of oil
price? What new changes have emerged in the supply-demand chain in
the international oil market?
Song: The rise was a result of multiple factors interacting. It was
fundamentally a reflection of the supply-demand chain between oil
importing and exporting countries, and a white-hot battle to
maximize their respective interests.
At
a meeting held to find ways to cut production in March 1999, the
Organization of Petroleum Exporting Countries (OPEC) agreed to
limit daily production to balance the cartel's basket of crude
prices at US$18-20 per barrel. Non-OPEC oil producing nations like
Russia, Norway, Oman and Mexico also inked the bill, which
triggered the straight markup till now. In March 2000, OPEC decided
to raise the basket price to US$22-28 per barrel. Under the new
price mechanism, if the price stays above US$28 for 20 working days
or below US$22 for 10 working days, crude production would be
adjusted by 500,000 barrels a day either way, in a bid to stabilize
prices. Venezuela's president, Hugo Chavez, also executive chairman
of OPEC, called for even greater compliance by all OPEC and
non-OPEC producers concerned to retain the current profit level and
to resist pressure from certain powers, in his politically
highlighted visit to the other ten OPEC member nations.
That naturally aroused a strong reaction from consuming nations. An
anti-trust organization of the US Senate passed a bill stating that
the president could start a sanction bill against OPEC members if
the price surpassed US$28 per barrel by 27th July, 2000. When Brent
oil went beyond US$34 per barrel on the London market on the 8th of
September, the ministerial conference of the European Union's 15
member nations issued a joint communiqui urging OPEC to raise daily
production. On the 10th of September, the finance ministers'
conference of the Asia-Pacific Economic Organization's 21 member
nations passed a decision requiring OPEC to boost production and
stabilize prices. Under great pressure from consuming nations, on
the 10th of September, OPEC compromised by raising output to 500
thousand barrels per day from the 1st of October 2000 at the Vienna
conference.
Now that oil prices have become a political matter, producing and
consuming nations struggle for their respective interests. In the
meantime, the continuous rise in prices has kindled the tension
between consumers and the state, like street demonstrations, and
sieges of refineries and gas stations to protest high oil prices in
England and France. Besides tightening the supply-demand chain,
media propaganda, overheated marketing promotion and distorted
reports caused consumers to hoard heating oil for winter, which in
turn contributed to the high oil prices.
CIIC: What will be the trend of international oil prices? How long
is this situation likely to continue?
Song: I think the crude oil price may cruise at a high level, above
US$25 per barrel, from the forth quarter to the next first quarter
because of the interaction of OPEC and the international community.
OPEC will reduce production when it's excessively low. And the
international community will jointly intervene if it's over US$28
per barrel.
The IMF (International Monetary Fund) predicted that the average
price would be US$24.5 in 2000. The OPEC prefered US$25 as the
basket price. According to President Clinton, a range of US$22-25
is acceptable. He also expects a drop from next year's second
quarter and a stable US$18-25 per barrel.
CIIC: China is an oil producing but also a consuming nation. How
will the high oil price affect China's economy?
Song: China has experienced a great impact from the two big
fluctuations in the international oil market since 1998. I think
that this is because of the incomplete separation of our petroleum
industry from the planned economy mechanism.
We
recorded a great loss in 1998. CNPC (China National Petroleum
Corporation) and Sinopec Corp (China Petroleum and Chemical
Corporation) reported losses of over 10 billion yuan, and CNOOC
(China National Offshore Oil Corporation) reported over 4 billion
yuan in losses. The upriver industries have stepped into a
worse-than-ever plight. The outdated adjustment mechanism prevented
us from importing or exporting more oil according to the spot
price. In the first half of 2000, China imported 32.41 million tons
of oil more than in the same period of 1999, while exports shrank
to only around 3 million tons. We paid an additional US$3 billion
because the oil price had jumped to US$192 per ton from US$101 per
ton in 1999. Sources said China might pay more than 40 billion RMB
for oil imports in 2000 because the operational mechanism caused by
structural problems in the reform can't well adapt to the market.
The US saved US$5 billion by importing more than 100 million tons
oil when the price was low in 1998.I think we should radically
speed up the marketing mechanism process. Especially after China's
entry into the WTO, a change in the price adjustment mechanism will
be even more urgently needed to give full play to the market
mechanism and make enterprises the main stream of the market.
CIIC: What measures should China adopt to cope with the high
prices?
Song: My recipe for China is:
1.
Revitalize our petroleum exchanges.
The state set up several exchanges in 1995, but had to abolish them
for some reason. After WTO entry, enterprises will be the real main
stream of the market without government intervention. It is
necessary to rebuild an oil exchange to attract international oil
resources and international fund; ensure open and fair trade to
restrain smuggling and speculation, and stop leaks; and integrate
with the international market.
2.
Speed up the establishment of a strategic oil reserve
The strategic oil reserve project is already listed in the Tenth
Five-Year plan, with an expected reserve capability of five million
tons. I think we need to speed up the process still more. The funds
can be raised by issuing treasury bonds or by the state and
enterprises supplying them. Funds are raised by the state in the
U.S., and by enterprises in France. The Japanese government and
enterprises share the burden of supplying such funds. It is
feasible to encourage enterprises to conduct the setting up of an
oil reserve if the state forms the relevant economic policies.
3.
Attach importance to an oil importing strategy in accordance with
domestic, international and future situations.
4.
Stick to a low-cost strategy. Low cost should be accented by
petroleum companies even when oil prices are high. International
competition is actually competition of price, cost and quality.
5.
Science and technology should be given priority to boost the
petroleum industry. We should develop more high-value-added and
hi-tech petroleum products.
6.
The government should spare no efforts to help stabilize the oil
price level and the international oil market.
(CIIC 11/01/2000)