An economic analysis of China’s domestic crude oil supply policies

Abstract

China's domestic oil production has lagged the growth in domestic oil consumption since the beginning of the 21st century, leading to a growing reliance on imports. In response, the Chinese government has introduced a number of policies, including import license constraints, to support domestic suppliers. In an effort to measure the economic impact of these policies we develop a short-run equilibrium model of China's wholesale oil and gas market at the provincial scale. We construct counterfactual scenarios that suggest that relaxing policies that prioritize domestic production in 2016, when the average price of Chinese oil imports was US$42 per barrel (bbl), could have increased China's import demand by 0.29 million barrels per day (MMbbl/d). This results in a substitution of 9% of China's domestic production in 2016, and a reduction of US $2.8 billion in crude supply costs including transportation as the imported oil has more direct access to the country's pipeline network, compared to the displaced domestic production. In addition, rising import prices since mid-2017 may provide a window of opportunity for Chinese policymakers to proceed with further deregulation of the domestic oil sector, as the short-term impact on domestic producers is reduced.

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