China’s domestic oil production has lagged the rapid growth in the country’s oil consumption since 2000, leading to a large, and growing, reliance on crude imports to meet demand. Factors including China’s current market structure and regulatory environment impede further development of the country’s oil industry, despite a number of policies aimed at protecting domestic producers.
Using a short-run equilibrium model of China’s oil and gas supply industry, calibrated to 2016 data, the authors assessed the impact of market access barriers on China’s domestic production.
Key findings included:
- Lifting all import constraints could have increased China’s import demand by around 0.29 million barrels per day in 2016.
- Opening China’s market to cheaper oil imports in 2016 could have saved approximately $2.8 billion, equivalent to 1.7% of the country’s oil supply costs, primarily due to import substitution for the roughly 9% of domestic production that operates uncompetitively.
- Improved utilization of the country’s pipeline network could cut China’s oil transportation costs by up to $600 million.
- The level of uneconomic oil production in China is highly sensitive to the international oil price. At $50/bbl about 9 million tonnes of domestic supplies are found to be uneconomic, accounting for about $2.5 billion of additional costs. At an average $80/bbl the number drops to 6.6 million tonnes, at a cost of $1.1 billion.
- Rising crude oil import prices since mid-2017 may allow policymakers to further deregulate China’s domestic oil sector.