LOGO
How Costly is China’s Oil Import?
Welfare Loss Estimation of Foreign Oil
Dependence 2001–2015
Zhan-Ming Chen1, Shipei Zeng1, Leo Lester2,
Lin-Ting Zhang3, Xiaohua Xia1
1Renmin
University of China
2Lantou Group
3University of British Columbia
18-21 June 2016
Marina Bay Sands Hotel, Singapore
Why focus on energy security
• The increasing oil import
▫ Oil demand rose beyond domestic production
▫ Concerns about the sudden supply disruption
• A lack of objective and quantitative measurement
▫ Difficult for policy making despite the international engagement
▫ Social welfare aspect is often ignored
Defining and measuring energy security
• Energy affordability
▫ An absolute economic conception
▫ A relative political conception
• Common measurement systems
▫ Diversification of energy sources
▫ Scoring systems with physical energy flows
Defining and measuring energy security
• A comparable cost-benefit framework
▫ Welfare perspective
▫ Economic effects of price shocks
▫ Oil security metrics model (OSMM)
• An extension to the existing literature
▫ Economic factors, i.e., demand, supply, and price are included
▫ Key variables have been examined to test the impacts of
possible price shocks, supply and demand side policies,
technological change, or world-wide marco-economic shifts
Defining welfare loss
• Wealth transfer
▫ Shift of wealth from domestic
consumers to foreign oil
producers as extra economic
profit from oil production
Supply
Demand
P1
Wealth Transfer
P0
SQ
0
SQ
1
DQ
1
DQ
0
Conceptual illustration of China's oil market
Defining welfare loss
• Potential output loss
▫ Reduction in GDP and output caused by the higher-thancompetitive oil price
▫ Losses of producers’ and consumers’ surpluses
• Disruption loss
▫ Economic loss arising from inefficiency caused by sudden price
shocks
▫ Function of price volatility
Data sources
• BP Statistical Review of World Energy 2016
▫ China’s domestic crude oil production (supply) and total
consumption (demand)
▫ Year-average prices of Dubai (for the Middle East), Nigerian
Forcados (for Africa), Brent (for Europe/Russia) and West
Texas Intermediate (WTI) for ROW
• World Bank
▫ GDP and GDP deflator
Spot price for crude oil, 2001–2015 (unit: $/bbl)
WTI
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
25.93
26.16
31.07
41.49
56.59
66.02
72.20
100.06
61.92
79.45
95.04
94.13
97.99
93.28
48.71
% FROM
ROW
43.71
33.47
31.80
29.45
24.45
24.67
21.87
22.61
23.69
25.46
24.31
23.60
22.70
22.23
16.77
BRENT
24.44
25.02
28.83
38.27
54.52
65.14
72.39
97.26
61.67
79.50
111.26
111.67
108.66
98.95
52.39
%
DUBAI
FROM
EUROPE
/RUSSIA
7.25
11.65
10.29
12.23
12.10
12.83
13.16
10.41
10.76
11.75
15.03
17.13
17.09
13.26
13.28
22.81
23.74
26.78
33.64
49.35
61.50
68.19
94.34
61.39
78.06
106.18
109.08
105.47
97.07
51.20
% FROM NIGERIAN
MIDDLE FORCADOS
EAST
38.73
38.75
40.37
37.29
40.38
38.53
38.79
42.24
40.77
40.22
42.01
40.77
42.79
46.06
50.76
24.23
25.04
28.66
38.13
55.69
67.07
74.48
101.43
63.35
81.05
113.65
114.21
111.95
101.35
54.41
%
FROM
AFRICA
10.31
16.14
17.54
21.02
23.07
23.97
26.18
24.74
24.78
22.57
18.65
18.50
17.41
18.45
19.20
PT
24.44
24.91
28.69
37.46
53.21
64.42
71.27
97.69
62.03
79.26
105.63
106.94
105.45
97.26
51.56
Results and discussion
• Oil security cost
▫
▫
▫
▫
▫
▫
Wealth transfers reached a peak of $86 billion in 2008
Potential output loss rose to a peak of over $11 billion in 2013
Disruption loss showed a similar pattern to wealth transfer
The peak overall cost of importing oil was $168 billion (2012)
Re-categorize the economic costs into transfer and losses
Comparison of China and the USA
Wealth Transfer
Disruption Loss
Potential GDP Loss
180
160
Billions of 2000 $
140
120
100
80
60
40
20
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Welfare loss of China from oil import 2001–2015
Billion of 2000$
Transfer
Losses
Total cost/GDP
180
4.5%
160
4.0%
140
3.5%
120
3.0%
100
2.5%
80
2.0%
60
1.5%
40
1.0%
20
0.5%
0
0.0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Transfer and losses and total cost to GDP ratio 2001–2015
Results and discussion
• Sensitivity analyses and robustness test
▫ Actual market price, to test responses to fluctuations and future
shocks to the price
▫ Domestic oil production, to analyze the effects of possible supply
side policies
▫ Domestic oil consumption, to analyze the effect of demand side
policies and improved efficiency
▫ Hypothetical competitive market equilibrium price, to analyze the
effects of future technological change or world-wide marcoeconomic shifts.
market price
domestic supply
domestic consumption
hypothetical competitive price
-60.00
-40.00
-20.00
0.00
20.00
40.00
60.00
Change in economic cost from base case (billion $)
-10%
-30%
10%
30%
A tornado plot summarizing the sensitivity results for +/-10% and +/-30% shifts in
each of the underlying assumptions
Welfare loss corresponding to different international oil price for China 2015
INTERNATION
AL OIL PRICE
($/BBL)
25.78
30.93
36.09
41.24
46.40
48.98
51.04
51.56
52.07
54.13
56.71
61.87
67.02
72.18
77.33
CHANGE
RATE (%)
-50
-40
-30
-20
-10
-5
-1
0
1
5
10
20
30
40
50
WEALTH
TRANSFER
(BILLION $)
5.97
14.78
23.59
32.40
41.22
45.62
49.15
50.03
50.91
54.43
58.84
67.65
76.46
85.27
94.09
POTENTIAL
OUTPUT LOSS
(BILLION $)
11.50
11.52
11.58
11.65
11.74
11.79
11.84
11.85
11.86
11.90
11.96
12.07
12.19
12.32
12.44
DISRUPTION
LOSS
(BILLION $)
52.85
52.85
51.48
48.99
45.58
43.58
41.85
41.40
40.94
39.05
36.55
31.12
25.20
18.84
12.09
TOTAL
COST
(BILLION $)
70.33
79.15
86.64
93.05
98.55
101.00
102.83
103.27
103.71
105.39
107.35
110.85
113.86
116.43
118.62
CHANGE
FROM BASE
CASE (%)
-31.90
-23.36
-16.10
-9.90
-4.58
-2.20
-0.43
0.00
0.42
2.04
3.94
7.33
10.25
12.74
14.86
Welfare loss corresponding to different domestic oil production for China 2015
DOMESTIC
CHANGE
WEALTH
POTENTIAL
DISRUPTION
TOTAL COST CHANGE
PRODUCTIO RATE (%)
TRANSFER
OUTPUT LOSS LOSS
(BILLION $)
FROM BASE
N (MILLION
(BILLION $)
(BILLION $)
(BILLION $)
CASE (%)
BBL PER
YEAR)
786.36
-50
63.46
11.69
13.21
88.36
17.68
943.63
-40
60.77
11.72
13.21
85.70
14.14
1100.91
-30
58.08
11.75
13.21
83.05
10.61
1258.18
-20
55.40
11.78
13.21
80.39
7.07
1415.45
-10
52.71
11.82
13.21
77.74
3.54
1494.09
-5
51.37
11.83
13.21
76.41
1.77
1557.00
-1
50.30
11.84
13.21
75.35
0.35
1572.72
0
50.03
11.85
13.21
75.09
0.00
1588.45
1
49.76
11.85
13.21
74.82
-0.35
1651.36
5
48.69
11.86
13.21
73.76
-1.77
1730.00
10
47.34
11.88
13.21
72.43
-3.54
1887.27
20
44.66
11.91
13.21
69.78
-7.07
2044.54
30
41.97
11.94
13.21
67.12
-10.61
2201.81
40
39.29
11.97
13.21
64.47
-14.14
2359.09
50
36.60
12.00
13.21
61.81
-17.68
Welfare loss corresponding to different domestic oil consumption for China 2015
DOMESTIC
CHANGE
WEALTH
POTENTIAL
DISRUPTION LOSS TOTAL COST
CONSUMPTI RATE (%)
TRANSFER
OUTPUT LOSS (BILLION $)
(BILLION $)
ON
(BILLION $)
(BILLION $)
(MILLION
BBL PER
YEAR)
2251.25
-50
11.59
10.77
6.60
28.96
2701.50
-40
19.27
10.99
7.92
38.18
3151.75
-30
26.96
11.20
9.24
47.41
3602.00
-20
34.65
11.42
10.56
56.63
4052.25
-10
42.34
11.63
11.89
65.86
4277.37
-5
46.18
11.74
12.55
70.47
4457.47
-1
49.26
11.83
13.08
74.16
4502.50
0
50.03
11.85
13.21
75.09
4547.52
1
50.80
11.87
13.34
76.01
4727.62
5
53.87
11.95
13.87
79.70
4952.75
10
57.72
12.06
14.54
84.31
5403.00
20
65.40
12.28
15.86
93.54
5853.25
30
73.09
12.49
17.19
102.77
6303.50
40
80.78
12.70
18.51
112.00
6753.75
50
88.47
12.92
19.84
121.23
CHANGE
AGAINST
BASE CASE
(%)
-61.43
-49.15
-36.86
-24.57
-12.29
-6.14
-1.23
0.00
1.23
6.14
12.29
24.58
36.87
49.16
61.45
Welfare loss corresponding to different hypothetical competitive price for China 2015
HYPOTHETI CHANGE
WEALTH
POTENTIAL
DISRUPTION
TOTAL COST
CAL
RATE (%)
TRANSFER
OUTPUT LOSS
LOSS
(BILLION $)
COMPETITI
(BILLION $)
(BILLION $)
(BILLION $)
VE PRICE
($/BBL)
-50
6.50
69.07
13.76
13.21
96.04
-40
7.80
65.26
13.38
13.21
91.86
-30
9.10
61.45
13.00
13.21
87.67
-20
10.40
57.65
12.62
13.21
83.48
-10
11.70
53.84
12.24
13.21
79.28
-5
12.35
51.93
12.04
13.21
77.19
-1
12.87
50.41
11.89
13.21
75.51
0
13.00
50.03
11.85
13.21
75.09
1
13.13
49.65
11.81
13.21
74.67
5
13.65
48.12
11.65
13.21
72.99
10
14.30
46.22
11.45
13.21
70.88
20
15.60
42.41
11.06
13.21
66.68
30
16.90
38.60
10.66
13.21
62.47
40
18.20
34.79
10.26
13.21
58.26
50
19.50
30.98
9.85
13.21
54.05
CHANGE
AGAINST
BASE CASE
(%)
27.91
22.34
16.76
11.18
5.59
2.80
0.56
0.00
-0.56
-2.80
-5.60
-11.19
-16.80
-22.41
-28.02
Policy implementations
• Supply side policies
▫ Expansion of domestic production
▫ Acquisition of overseas equity barrels
• Demand side policies
▫ Exploration and development of renewable energy
▫ Energy efficiency and energy conservation
• Market power and positioning
▫ Engagement and cooperation in the international oil markets
Concluding remark
• a) These costs of foreign oil imports are not insignificant
• b) Wealth transfer (71%), disruption loss (22%) and potential
output loss (6%)
• c) International oil price change brings asymmetric impacts
• d) The threshold cost of additional oil production and
conservation can be specified
• e) Three sets of policy relevant insights are provided based on
supply side, demand side, and market power positioning
Thank you!