Business / Economy

Oil price drop a stimulus for Chinese economy

By Cecily Liu ( Updated: 2015-03-28 00:31

The global crude oil price drop could be a stimulus to create further growth in the Chinese economy, said Robin Matthews, managing director of Europe and Asia at Deloitte Upstream Oil and Gas Advisory.

"Energy is now cheaper, so it's a benefit for China. On top of the government steps to stimulate the economy, this is now a macro effect," Matthews said.

Matthews was giving a talk at the UK office of China Petroleum & Chemical Corporation in London. The talk was attended by representatives from various Chinese companies in London.

Matthews shared his team's views about trends relating to global crude oil prices, forecasting it to stay at around $50 per barrel for the next few years.

The price of global crude oil fell from above $110 per barrel in early July of last year to below $50 by the beginning of 2015.

Matthews said the drop in price is largely due to the US stepping in as a new swing producer of crude oil, which is enabled by its shale production technology.

As a result, Matthews' team forecasts oil prices to stay around $50 per barrel, because increases in prices will be rather easily met by more supply by US companies.

He said the current oil price drop benefits many oil-intensive industries in China, especially in airlines, pharmaceutical and manufacturing industries.

Meanwhile, Chinese oil companies are required to operate much more efficiently because of the pressure to make profit in the changed environment.

"It will force them to be more efficient in what they do, they can't count on $100 per barrel prices to make projects profitable easily. They have to make sure the way they spend the money will generate good return," Matthews said.

"You can look at your supply chain, getting the costs out of the system, and really understanding what you are good at and focus on your strength," he said, adding that Chinese oil companies' overseas expansion is a good way for them to learn from the best industry practices to improve their efficiency at home.

He said cost reduction adjustments are carried out by big oil companies globally, and an example is BP, whose CEO Bob Dudley said earlier this year that the company needs to "rebase" to make sure projects are profitable at the new oil price, achieved partly by cutting capital spending.

And for Chinese companies, such increase in efficiency will generate long term benefits because when global oil prices increase again they will be able to make more profits by maintaining efficiency, he said. Meanwhile, the continual growth of China's real economy is having an upward impact on the price of oil, due to the high demand for oil, and its impact on other economies through trade and investment.

"The weakness of Europe's growth is a bit of a disappoint, but people count on China. Things exported out of Europe into the Chinese market also stimulate the European economy. I think the world will be very much watching china to continue to do good things," he said.

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