Until 1993 China had been effectively self-sufficient in oil. This could not continue. Despite efforts to boost domestic production (in 2005 China was the world's sixth largest crude oil producer), the sheer pace of economic growth in the world's most populous country pushed demand way ahead of supply.
Since the late 1970s China's leadership had been implementing a series of market-oriented reforms, opening up the economy to the world. In fact, in the ten years that followed China's emergence as a net oil importer - the decade to 2003 - domestic economic growth averaged a breakneck 9.5% per annum. And there is more where that came from. Most analysts expect the pace of GDP expansion to continue at close to the 10% mark.
Rapid growth and sheer size make for a powerful combination. By the end of this year China is expected to have overtaken Germany as the world's third largest economy in dollar terms, behind the United States and Japan. Economists forecast that China will surge onwards to become the world's number one economy within 10 to 20 years. In a report published earlier this year, the Paris-based International Energy Agency (IEA) notes that energy demand in the country has taken off, based on industrialisation and rising living standards.
Transport infrastructure linking the main domestic oil fields (many of which are in relatively remote areas such as Daqing) and the urban consumption centres is still lacking, increasing the new reliance on imports.
"Continued dependence on imports is now irreversible unless new, economically exploitable reserves of domestic oil can be found," the report said.
Many analysts argue that higher international oil prices are not just a typical cyclical upturn, but a reflection of a fundamentally tighter demand-supply equation at the global level, and that the main factor behind this change has been Chinese energy demand. In fact, China's rising appetite for oil accounts for over one third of the growth in global oil demand over the last decade.
In August the IEA raised its estimate for Chinese oil demand this year to 7.6 million barrels per day (bpd), growing further to 8 million bpd in 2008. This represents growth of 5.7% this year and 5.8% in 2008. But import growth is more intense. The IEA also reported that Chinese oil imports rose by 14.8% in the first seven months of this year to reach 3.32 million bpd.
Demand was lifted by heavy industry, petrochemical expansion, a car sales boom and strong rail and air travel. According to the New York based consultancy, China Strategic Advisory, ‘not only was overall economic growth stronger in the first half, but oil-consuming sectors of the economy continued to out pace headline growth'.
The country is now close to overtaking Japan as the world's number two crude oil importer, after the United States. A short-term factor giving import growth further momentum is the Beijing government's decision to build a security stockpile. China has been building and filling a network of storage tanks.
Prices and policy
While the Chinese authorities have deregulated many sectors of the economy, the approach to the oil sector has been cautious; central planning still plays an important role. Three restructured state-owned companies dominate the industry. They are PetroChina (an offshoot of the China National Petroleum Corporation - CNPC), the China Petroleum and Chemical Corporation, Sinopec, and the China National Offshore Oil Corporation (CNOOC).
The restructuring was designed to make them into vertically integrated operations, rather like the international oil companies (IOCs), and Beijing has encouraged them to compete internationally. All three have carried out initial public offerings, floating 15%-25% of their shares, but they remain under government majority control. PetroChina tends to dominate in the north and west of the country, Sinopec in the south, and CNOOC in the offshore regions. PetroChina and Sinopec operate most of the country's refineries and pipelines.
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