China gets a lot of blame. Its slowing economy is threatening to tip the global economy into recession. Commodity prices are down 34% this year, partly because of lower demand in China. The devaluation of the yuan in August triggered a global stock market correction. China might be ground zero for the next emerging market debt meltdown, following years of breakneck lending to achieve growth targets.
Yesterday we wrote about why the price of oil has fallen 68% since its recent highs in June 2014. In short, oil supply has risen more than oil demand.
One thing that isn’t China’s fault is the decline in the price of oil. Since June 2014, China’s consumption of oil has actually increased by 3.5%, according to U.S. Energy Information Administration data. That’s compared to 2.4% in the growth of total world oil consumption. Meanwhile, total supply has increased by 3%.
In fact, China is actually helping to increase the price of oil. According to Bloomberg, last week the Chinese government said it would stop cutting the price of fuel (which is linked to the price of oil, but which is controlled by the government) even as the price of oil continues to fall.
Bloomberg reported, “China’s decision to suspend fuel price cuts as crude continues its decline is sending a signal to the Organization of Petroleum Exporting Countries that prices are too low, according to a report from Sanford C. Bernstein & Co. The move gives oil a price floor around $38, according to the analysis.”
Cheap oil results in higher consumption – which makes China’s environmental and air quality problems even worse. So the Chinese government’s decision to not pass on savings to consumers shows authorities want a higher oil price.
What does this all mean? Concerns about the economic slowdown in China have affected the price of most commodities. But the data shows China has been more than pulling its weight to help oil prices, as its oil consumption growth has remained strong – and the Chinese government even wants a higher oil price. As we said yesterday, it looks increasingly likely that next year China will get want it wants.