Comparison of China's oil import risk: Results based on portfolio theory and a diversification index approach

doi:10.1016/j.enpol.2009.04.031

Energy Policy

Volume 37, Issue 9, September 2009, Pages 3557-3565

https://doi.org/10.1016/j.enpol.2009.04.031 Get rights and content

Abstract

In recent years, the international oil price has fluctuated violently, bringing about huge risk for the international oil trade. In fact, the risk of crude oil and petroleum product imports is different because of the different import origins and prices. Which import risk is lower for China? From the perspective of oil supply security, how should China portfolio crude oil and petroleum product imports to minimize its oil import risk? Using portfolio theory and a diversification index approach, this paper compares and analyzes the supply, price and transport risks of crude oil and petroleum product imports. Our results show that the following: (1) Specific risk (diversification risk) and marine transport risk of China's petroleum product imports are lower than that of crude oil imports. (2) The average rate of return of China's petroleum product imports is higher than that of crude oil imports. Moreover, the average import price variance of petroleum product imports is lower than that of crude oil imports. Thus, the systematic risk (price risk) of petroleum products is lower too. Therefore, from the perspective of oil supply security, China should increase petroleum product imports to decrease its oil import risk.

Introduction

With its ever growing industrialization and urbanization, China's oil demand has been increasing rapidly. In terms of the customs statistics of crude oil trade, China was in balance over the period 1993–1996, but became a crude oil net importer in 1996. Since then, China's crude oil imports have increased rapidly, increasing to 163.19 million tons (Mton) in 2007, an increase of 621.76% compared with that in 1996. China's crude oil exports decreased rapidly since 1996, being only 3.89 million tons in 2007, a reduction of 422.37% compared with that in 1996 (State Statistical Bureau, 2005, State Statistical Bureau, 2008). China's petroleum product imports increased slowly over 1993–2007, an increase of only 95.49%. However, petroleum product exports increased rapidly, increasing by 223.59% because the price of petroleum products was set by the Chinese government to be lower than the international price (as shown in Fig. 1, Fig. 2). Thus, China's risk of oil trade has increased, putting great pressure on its oil supply security.

China's crude oil imports follow the practice of “buying when the price is rising and not buying when the price is declining”. The Chinese customs statistical data show that China imported 2.98 million tons oil in the first two months of 1999, when the relative price of oil was low, a decrease of 40% compared with that in 1998. With the increase in oil prices, China's oil imports also increased rapidly. Crude oil imports reached 4.33 million tons in March 1999, an increase of 166% compared with that in February 1999, which was the highest since January 1998. On the other hand, when the oil price hit $US31.0/bbl, the highest point since 1995, China imported 6.49 million tons of crude oil in November 2000, an increase of 10% compared with the previous month. However, when the international crude oil price declined from December 2000, China's oil imports decreased too, China imported only 3.7 million tons when the price was $US25.62/bbl in January 2001, a decrease of 2.79 million tons (as shown in Fig. 3).

Moreover, China's crude oil and petroleum product imports transportation risks are different due to different transportation routes. China's crude oil imports mainly depend on the volatile Middle East, Africa and South America, making up 83.71% of total imports in 2007. The International Maritime Bureau statistical data show that global piracy attacks were focused almost exclusively in the Malacca Straits, Somalia's waters, Gulf of Aden, Persian Gulf, Gulf of Guinea and Caribbean Sea in 2007 (as shown in Fig. 4), where lie the vital ship routes for China's crude oil imports. China's petroleum products have mainly depended on Singapore and Korea, the share being about 65% in 2007. These ship routes were away from the areas of piracy attacks, so the specific risk of petroleum product imports was lower than that of crude oil imports.

This paper compares and analyzes the import risks of crude oil and petroleum products, and explores import strategies as to how China should portfolio crude oil and petroleum product imports to minimum its oil import risk.

The structure of this paper is as follows. Section 2 reviews the literature on risk assessment and diversification of oil imports. Section 3 describes the data sources and methodology. The results and discussions about the import prices variance, yield rate, diversification index, marine transport risk and portfolio risk of China's crude oil and petroleum product imports are presented in Section 4. Finally, major conclusions are drawn in Section 5.

Section snippets

Literature review on risk assessment and diversification of oil imports

In the field of oil import risk, Gupta (2008) assesses the relative oil vulnerability of 26 net oil-importing countries for the year 2004, using the principal component technique adopted to combine the ratio of value of oil imports to GDP, oil consumption per unit of GDP, and other individual indicators into a composite index of oil vulnerability. Such an index captures the relative sensitivity of various economies towards development of the international oil market, with a higher index

Data sources

The data of China's oil imports and exports in the period 1993–2007 are taken from China's Foreign Economic Relations and Trade Yearbook and the China Custom Statistical Yearbook. The international oil spot prices (crude oil, fuel oil, gasoline, diesel oil and jet oil) in 1995–2006 are taken from Energy Information Administration (EIA), US Department of Energy. To keep the data consistent, we selected New York Harbor oil spot prices. The data of monthly China's oil imports and import costs in

Specific risk comparison between China's crude oil and petroleum product imports

To lower oil import risk, the Chinese government has been actively paying great attention to diversifying the source of oil imports. Based on Eq. (1), we calculate the diversification indices of China's oil imports over the period 1994–2006 (shown in Fig. 6). The results show that the diversification index of China's petroleum product imports presents an upward trend over the period 1994–2006, except for a fleeting decline over 1998–2000. The index rose rapidly in 1994–1997 because the

Conclusions and policy implications

As the second largest oil consumer and the third largest oil importer in the world, China's oil import security exist some risks, which attracts much attention. Chinese crude oil imports follow the practice of “buying when the price is rising and not buying when the price is declining” and “the higher oil price, the more oil imported” has brought large market risks and economic loss. China's oil import excessively depends on the volatile Middle East regions and most of the new import sources

Acknowledgements

The authors gratefully acknowledge the financial support from the National Natural Science Foundation of China under Grant Nos. 70425001, 70733005, 70701032, the Natural Science Foundation of Beijing under Grant no. 9082015, the Knowledge Innovation Program of Chinese Academy of Sciences No. O801141601, and the National Key Projects from the Ministry of Science and Technology of China No. 2006-BAB08B01. The authors also thank Dr. Hong-Min Zhang from Shanghai Futures Exchange for providing raw

Dr. Gang Wu is an Assistant Professor at the Center for Energy and Environmental Policy Research of the Institute of Policy and Management, Chinese Academy of Sciences, China. His research field is energy security and policy.

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Comparison of China's oil import risk: Results based on portfolio theory and a diversification index approach

Abstract

Introduction

Section snippets

Literature review on risk assessment and diversification of oil imports

Data sources

Specific risk comparison between China's crude oil and petroleum product imports

Conclusions and policy implications

Acknowledgements

Energy Policy

Energy Policy

Energy Policy

Applied Energy

Energy Policy

Energy Policy