Image: Zhang Kaiyv via Unsplash
China may become the world leader in oil refining capacity as early as next year, as processing clout moves to the Asian nation.
The relatively quick recovery of China’s economy after the pandemic has only expedited this trend. Meanwhile, the United States and European Union continue to labour through shutdowns, curfews and work stoppages, which hit demand for oil products.
And over the long term, Western energy markets appear poised to move in a different direction. Low-carbon policies in Western nations – including the EU’s pledge to reach carbon neutrality by 2050 – signal a shift towards increased use of wind, solar, and other renewable energy sources.
Yet China continues to bank on oil. According to the International Energy Agency, Chinese refining capacity may even overtake that of the US as early as next year. By comparison, in 1967, the US had 35 times the refining capacity of China.
As the Asian nation seeks to be the leader in installing current refining capacity, the shift makes sense as older plants are phased out. It can then process crude internally for various uses specific to regional demand.
Overall, oil demand may take years to recover fully, and this may push a few million barrels a day more of refining capacity out of business. About 1.7 million barrels a day of capacity have been halted this year, and more than half of the stoppages have occurred in the US.
Crude prices rallied in November on positive developments in coronavirus vaccine tests. But this temporary spike is unlikely to reflect the downward dynamic across the markets.
According to the International Energy Agency, third-quarter data indicates that inventories fell by barely a third of the expected amount, declining by 800,000 barrels a day as the pandemic turned the tap off demand.
Global oil consumption is on track to slump by an unprecedented 8.8 million barrels a day this year, to an average of 91.3 million a day. Next year, demand is set to rebound by 5.8 million barrels on average, but this doesn’t appear to be enough to return to pre-pandemic levels.
Meanwhile, China continues to build new oil refining and petrochemical plants. It currently has at least four refining projects underway, totalling 1.2 million barrels a day of crude-processing capacity – equivalent to the UK’s entire fleet.
The increase in processing capacity means China will overtake Western nations in clout in the crude oil market. This process is underscored by the fact that the US and EU are increasingly turning away from oil. The EU looks to create a more significant role for electricity and utilities, and the US seeks the same while being less dependent on oil imports due to shale output.
In the nearest future, China will reap the profits from processing at home. It will have more clout as a powerful and influential buyer of barrels on international markets. However, it will also accept the risks of relying on external suppliers. That might push it to seek leverage in foreign policy issues across key oil-producing regions – including the Middle East and Russia – as a safeguard.
