The Next Big Threat For Oil Comes From China
There is a widespread concern in the world regarding China’s decelerating economic growth. The slowdown, if it continues, threatens economic activity almost everywhere. Growth in Germany, for example, has already cooled due to its exports of high-quality machinery to China dropping precipitously.
Those in the oil market also worry about China. The country’s economic growth has been a key driver of global crude oil consumption. Indeed, China accounts for one-third of the International Energy Agency’s projected 2019 increase in world oil use.
Weak Chinese economic growth is not the end of the oil market’s prospective ills, however. Few recognize the additional trouble on tap from the Chinese independent refiners affectionally known as “teapots.” The danger occurs because lower oil demand growth in China comes just when independent refining capacity there is rising. The capacity growth has been financed primarily by debt, most likely supplied by China’s alternative lenders. As demand slows, these refiners will turn to international markets, dumping products in Singapore, the Americas, or Europe to earn hard cash. In doing so, they could plunge the global refining industry into a serious recession and drive crude prices down sharply.
This will not be the first time that refineries in Asia caused a crisis in the oil sector. In 1997, Korean refiners did the same during the Asian financial collapse. That incident is described in the December 1997 Oil Market Intelligence (OMI). The report begins by noting that Korean refiners had begun to seek exports markets before the crisis hit “mostly to employ 620,000 b/d of new refining capacity that came on stream since late 1966.” The effort intensified as domestic consumption collapsed:
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