“The Role of China in the World Oil Market”

Raymond Li, The Hong Kong Polytechnic University

In year 2015, absolute oil consumption in China reached 559.7 million tonnes, making the country the second largest oil consumer in the world, just after the United States. In the same year, nearly 60% of the oil consumed by China was imported. In order to diversify and secure the sources of oil imports, China has been proactive in building transnational oil pipelines, negotiating bilateral oil deals and making investments in overseas oilfields. In 1989, the Middle East and the Asia-Pacific region supplied all of China's crude oil imports, with Indonesia alone accounting for 40.1 per cent. But by 2015, China was importing oil from practically all regions of the world.

This study examines the “Chinese impact” on world oil prices by employing a cointegration and VECM analysis. Generalised impulse-response functions generated from the VECM show statistically-significant positive response of the Brent oil price to a shock in Chinese net imports with approximately nine months’ lag. The forecast error variance decomposition analysis further suggests that shocks in Chinese net imports can explain up to 13 per cent of the forecast error variance in the Brent price 12 months after the shock.