Is China driving up the price of oil?

by on June 6, 2007 at 6:11 am in Economics | Permalink

Not as much as you think:

China’s oil imports have increased dramatically during the past five
years; the country now imports 3.5 million barrels a day, compared with
U.S. daily imports of 12.2 million barrels. But it’s far less obvious
that Americans are really paying a price for this.

If you’ve been
to the mall lately, you’ve probably noticed that China is making scads
of plastic. As the world’s second-largest plastic producer, it is
furiously turning oil and petrochemicals into everything from lobster
souvenirs to sneaker soles. By embedding oil in products, China is, in
effect, importing oil on behalf of U.S. consumers — as much as 1
million barrels per day.

While China’s demand for energy is
driving up oil prices worldwide, its cheap goods are having the
opposite effect on the cost of living in the United States. A recent
analysis by the U.N. World Economic and Social Survey suggests that
Chinese pressure on oil imports may have raised U.S. inflation by 0.23
percent from 2001 to 2005, but cheap imports of Chinese goods decreased U.S. inflation over that same period by 0.28 percent. For the moment, the net winners are U.S. consumers.

I wouldn’t put too much stock in those exact numbers but the general point still holds.  Here is my earlier post on this topic.

1 Mr. Noah June 6, 2007 at 10:25 am

Wait a second. Cheap Chinese goods (made from oil) may lower overall inflation, but that certainly doesn’t mean that oil prices themselves are lower!

Wait til after I’ve taken my prelims to try and pull the wool over my eyes. By then I’ll have forgotten general equilibrium, and you’ll be able to convice me that lower plastic prices mean lower oil prices. 😉

2 Ravenor June 6, 2007 at 10:57 am

This is an excellent and unexpected insight. One point that I would add is that if production of plastic-based products had not been outsourced to China,
the store price of these products would be at some higher level and therefore the demand somewhat less, leading to some reduced level of net oil consumption.
However, I believe that some significant part of today’s crude oil prices is due to political/production fear factors and not due to the actual supply levels. I have
been tracking US crude oil inventories as reported by the US EIA’s This Week in Petroleum website at my blog Wasatch Economics and those inventories have
been at the top of their historical ranges for at least a year. One would expect that imports would decrease to at least bring inventories down to the middle range
as refiners are maxed out on refining capacity and therefore wouldn’t need to import crude until their crude inventories dropped quite a bit.

3 China Law Blog June 6, 2007 at 11:11 pm

One can certainly make a similar argument regarding the value of the Yuan.

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