Unraveling the Chinese Oil Puzzle

As oil prices rose in 2004, a large part of the blame was laid at the feet of the emerging colossus of the East. Newspaper stories wrote of the, “surging,” and, “insatiable demand,” coming from China, describing it as the, “engine of oil demand growth,”1 and explaining the change, "More than a billion Chinese are joining the oil market…. How can prices go down?”2 There were moderately dissenting voices, e.g., from a professional at the International Energy Agency, "It is neither fair nor accurate to blame China for most of the rise in oil prices.3 The measured increases in China’s international oil imports are based on international data and are quite real and not related to the probable overestimates of China’s overall rate of economic expansion. The very high growth rates of Chinese oil imports in 2004 and previous years are shown in Table 1. The implied growth rates are so high as to be almost unbelievable. From the fourth quarter of 2003 to the third quarter of 2004, there was a 30 per cent increase in crude oil imports. Such a high growth rate is not the way economies, in general, actually behave or, in particular, the manner in which the Chinese economy has functioned in the past, even in the course of its remarkable expansion. Yet the growth is real, so how can it be explained? That is the puzzle!