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Judging from the number of cars on the streets in Beijing, a passerby might think the advent of $120-per-barrel oil is going unnoticed in China, the world's second-largest consumer of crude.
In fact higher prices are already impacting China's demand for oil. But there's a caveat: experts say that China's crude imports could actually increase because of events in the Middle East, at least in the near term.
The reason is that China buys a lot of foreign crude in an effort to fill its Strategic Petroleum Reserve, a secretive project that will secure stockpiles of 85m tonnes of crude by 2020, or roughly 595m barrels"”enough to last the country three months in an emergency.
Chinese companies also maintain "commercial reserves," which totaled 168m barrels of crude at the end of 2010. The demand to fill these reserve tanks fueled more than 500,000 barrels per day of crude stockpiling during the first eight months of 2010, according to calculations by Reuters.
Although the government doesn't disclose information about when the strategic stockpile is filled, state media say those efforts will be "expedited" this year, which could set new records for Chinese oil imports. Events in the Middle East"”and the anticipation of higher oil prices in future"”will further accelerate the stockpiling.
According to K.F. Yan, director of IHS Cera in Beijing, the stockpiling will be particularly pronounced because reserves were run down last year. The government's rush to meet energy targets by the end of 2010 sparked a huge demand for diesel to use in generators, as a way to circumvent state energy controls.
"In the fourth quarter of 2010 crude stocks dropped very, very sharply, so with or without events in the Middle East they need to refill the tanks. . . Another factor is that we may see the completion of some [strategic petroleum reserve] and commercial reserve tanks in 2010." He estimates that several million tonnes of crude could go into the reserve this quarter.
So even as demand at the pump may be abated by high prices, short term demand from China could be quite high. Inflation has a role to play as well: Pump prices were raised on Sunday but the price hike was lower than it should have been, according to the government, because of inflationary fears. If inflation continues to be a problem in coming months, the government could delay changing the price of oil (and force refineries to operate at a loss.) That's bad news for the refineries, but good news for the taxi drivers of Beijing.
Related reading: Oil spike: pros and cons for Brazil, beyondbrics Oil spike: Asian emerging markets and $120 oil, beyondbrics Saudis seek to calm oil panic, FT
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