Economics Essay: Oil Price Volatility and Its Effects on China

This essay examines the implications of oil price volatility on China's economy, focusing on the country's reliance on oil imports and the impact on its industrial and transport sectors. It analyzes the Chinese government's policy framework, including increasing domestic oil production, developing alternative energy sources, and investing in overseas oil fields. The essay also highlights the challenges faced by traditional oil-producing regions in China and recommends maintaining adequate oil reserves and further developing alternative energy sources for long-term economic sustainability. The document is available on Desklib, a platform offering a wide range of study resources for students.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction......................................................................................................................................2
Implications of Oil Price Volatility on China..................................................................................2
Government policy framework........................................................................................................5
Recommendations and Conclusion..................................................................................................6
References........................................................................................................................................8

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Introduction
In the contemporary period, one of the recent issues having noticeable impacts on almost
all the global economies of the world is the concerning issue of oil price volatility in the global
scenario. Oil being one of the most important raw materials for any industry across any corner of
the world, much of the dynamics in the industrial sector as well as in the overall economic
situations of the countries depends on the oil price fluctuations and volatility (Allen 2016). The
report tries to analyze the impacts of oil price fluctuations on one of the most prominent
contemporary economies, China, critically analyzing the policy and strategy frameworks present
in the country to combat the concerned issue.
Implications of Oil Price Volatility on China
The most common and widely used convention for the purpose of measuring the
dynamics in the international oil price across time is the West Texas Intermediate, which is
globally used for the purpose of measuring and reporting the changes in the oil prices across the
globe (Chen and Hsu 2012).

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Figure 1: Oil Price Volatility (WTI Measured) over the years
(Source: Oil-price.net, 2017)
The above figure shows the dynamics in the oil market and the changes in the oil prices
over time. As can be seen from the above figure, there has been significant changes in the prices
of oil globally and there are presence of significant numbers of peaks and troughs in the
international oil prices, especially in the recent period. This thereby makes the oil price volatility
one of the major issues of concern in the contemporary period as it is expected to have both
negative as well positive implications on the global economic scenario.
China, over the years has developed significantly in terms of economic aspects,
succeeding tremendously in economic growth and productivity grounds. The country is, in the

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recent periods, one of the fastest growing economies, with growth rates being the highest in the
international framework. Much of this impressive performance of the economy of the country is
attributed to the immense development and productivity of the manufacturing sector of the
country, which makes the industrial sector of the country one of the most powerful ones in the
world (Zhang and Chen 2014).
Being highly active in the manufacturing domain, the country requires huge amount of
raw materials to sustain their economic development, oil being one of the primary ones. Though
China itself has several source of oil, it is a net importer of oil and related materials, with the
demand consistently increasing with increase in its manufacturing, industrial activities and
expansion of international domain of its commercial activities (Broadstock, Cao and Zhang
2012).
Figure 2: Gap between the production and consumption of oil in China

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(Source: Crudeoilpeak.info, 2017)
As can be seen from the above figure, though the production of oil in the country has
increased over the years and is expected to be increasing in the near future, the consumption of
the same in the country has been increasing at a significantly faster rate with time. This has led to
the creation of a huge gap of excess demand for oil in the country in the recent periods, which
makes China a net importer of this resource.
Given this fact, the recent oil price volatility, consisting of considerable fluctuations, has
huge implications on the economy of the country, as much of the industrial prospects and cost
effectiveness depend on the prices of oil prevailing in the market. China being a net importer of
oil, a fall in the price of the same is expected to have beneficial impacts on the overall industrial
performance of the country, while a sudden increase in the price can lead to stagnation of the
industrial activities of the country to a considerable extent. As can be seen from the empirical
evidences, the worst hit of oil price fluctuations, apart from the industrial sector, is also the
transport sector of the country, which in turn has implications on the industrial as well as import
export sector of the country as well.
Government policy framework
The government of China, in face of increased oil price volatility, has been taking several
measures in order to reduce the negative implications of these fluctuations. One of the primary
strategies of the country is to increase the productivity in the domestic oil production sector,
which has been implemented with the objective of attaining self-sustainability and reducing
external dependence for the supply of the same (Ju
et al. 2014).

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However, though this strategy seems to be a potential one, it will take time for the results
to be acquired by the economy of the country. Apart from increasing the domestic oil extraction,
the country has also started concentrating in development and implementations of alternative
resources of power, mostly renewable. This is also expected to decrease the vulnerability of the
country significantly from the frequent fluctuations of the international oil prices. In the recent
period, China has three main oil producing regions, namely the Daqing, Liaohe and Shengli,
which were highly productive a few decades ago. However, in the recent periods, the level of
production of oil in these zones have been depleting extensively due to the depletion of the
natural resources. In fact, these regions now need additional investment of huge amount in order
to sustain their current level of production. However, the country is fighting this problem of
scarcity in a potentially efficient manner (Brookings.edu, 2017).
China, in the recent years, has resorted to buying of oil wells and oil fields of small and
medium sizes in different parts of the world, which includes Canada, Texas and Peru. The
country has also started investing in the oil related projects of India, Russia, Venezuela and
Papua New Guinea and others, thereby creating strong supply pipelines of oil for the country.
several deals on part of the country, with Kazakhstan and Iraq have proved to be highly
promising in combating the crisis faced by the country due to the fluctuating global oil prices.
Recommendations and Conclusion
Apart from the strategies and correcting policies taken by the governing authorities of the
country to reduce the adverse effects of oil price fluctuations on the economy of the county, the
country, like that of the USA and Japan, can start maintaining adequate oil reserves. This can in
turn help the country to maintain a more or less stable supply of oil, even when the prices are

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high and the global supply is low. China has been recently building new way outs to combat the
sufferings faced by the country due to the high fluctuations in the global oil prices, which affect
the commercial as well as the daily life of the country considerably. Though in several cases
these policies are showing promising potential, the governing authorities of the country needs to
focus more on the creation of oil reserves and alternative source of energy as well as ensure their
proper implementation for long term benefit and sustainability of the economy of the country.

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References
Allen, R.E., 2016.
Financial crises and recession in the global economy. Edward Elgar
Publishing.
Broadstock, D.C., Cao, H. and Zhang, D., 2012. Oil shocks and their impact on energy related
stocks in China.
Energy Economics,
34(6), pp.1888-1895.
Brookings.edu, S. (2017).
China’s Changing Oil Strategy and its Foreign Policy Implications.
[online] Brookings. Available at: https://www.brookings.edu/articles/chinas-changing-oil-
strategy-and-its-foreign-policy-implications/ [Accessed 8 Dec. 2017].
Chen, S.S. and Hsu, K.W., 2012. Reverse globalization: Does high oil price volatility discourage
international trade?.
Energy Economics,
34(5), pp.1634-1643.
Crudeoilpeak.info (2017).
China Peak Oil. [online] Crudeoilpeak.info. Available at:
http://crudeoilpeak.info/global-peak/china-peak [Accessed 3 Dec. 2017].
Ju, K., Zhou, D., Zhou, P. and Wu, J., 2014. Macroeconomic effects of oil price shocks in China:
An empirical study based on Hilbert–Huang transform and event study.
applied Energy,
136,
pp.1053-1066.
Oil-price.net (2017).
How oil price volatility explains these uncertain times. [online] Oil-
price.net. Available at: http://www.oil-price.net/en/articles/how-oil-price-volatility-explains-
uncertain-times.php [Accessed 3 Dec. 2017].
Zhang, C. and Chen, X., 2014. The impact of global oil price shocks on China’s bulk commodity
markets and fundamental industries.
Energy policy,
66, pp.32-41.