High oil prices lead to "clearing," and China's midstream share may "rise"—Strategic Bullish Midstream Manufacturing Series Four

I. Current Situation: Global Manufacturing Depends on Oil and Gas Imports

Global manufacturing generally relies on oil and gas imports. Using 2024 data, we calculate the net oil and gas import amount required for each country’s manufacturing value added. The sample includes 50 economies, accounting for 92.5% of global manufacturing value added.

We find that economies accounting for 23.9% of global manufacturing value added have oil and gas as net exports and do not require oil and gas imports. However, economies accounting for 68.6% of global manufacturing value added have oil and gas as net imports.

By economy, China’s oil and gas imports corresponding to 2024 manufacturing value added per unit are 8.6%. There are 25 economies with import dependence on oil and gas higher than China, including Japan in East Asia (14.7%), South Korea (18.6%); Vietnam (12.2%), Thailand (29.3%), Singapore (14.9%), the Philippines (22.8%) in Southeast Asia; India (20.8%) and Pakistan (33.6%) in South Asia; Germany, France, the United Kingdom, Italy, Spain, Portugal, Belgium, Finland, Romania, Austria, the Czech Republic, Poland, and Hungary in Europe; and South Africa, Egypt in Africa, as well as Chile and Peru in South America. These economies’ combined manufacturing value added accounts for 30.1% of the global total.

II. Historical Lessons: Analysis of the Impact of Oil Crises on Midstream Manufacturing

(A) Review of the First Oil Crisis: 1973-1975

For the first oil crisis, judging from oil prices and crude oil consumption, the main impact occurred in 1973-1975. Among them, in the first quarter of 1973-1974, oil prices rose sharply. According to the World Bank’s statistics on the global monthly average crude oil price, the crude oil price in January 1973 was 2.08 USD per barrel, rising to 4.1 USD per barrel in December 1973. It further increased to 13 USD per barrel in January 1974, fell slightly to 10.6 USD per barrel in April 1974, and thereafter, by December 1976, remained volatile in the 10-12 USD per barrel range.

Global crude oil consumption fell sharply in 1974-1975. According to BP (British Petroleum) statistics, global crude oil consumption growth was 7.92% in 1973. In 1974 and 1975 it fell to -1.54% and -0.85%, respectively. In 1976, crude oil consumption returned to normal, with growth reaching 6.46%.

Judging from the exports of global midstream manufacturing (SITC, Class 7) in 1973-1975, based on sample data from 68 economies (with sample economies accounting for around 82.4% of global export totals). Midstream exports maintained high growth in 1973-1975, with an average annual growth rate of 25.5%, which is better than the 19.7% in 1972 and the data in 1976-1977.

For the manufacturing powerhouses at the time (the United States and Germany, the top two in global export shares with a small gap), both countries’ midstream manufacturing benefited, but the United States benefited more than Germany. In 1972 (before the crisis), the United States’ midstream share was 19.0%. In 1973-1975, the United States’ midstream share averaged 19.8%, an increase of 0.8%. For Germany, its midstream share in 1972 was 19.5%, and the average in 1973-1975 reached 19.8%, an increase of 0.3%. Judging from crude oil consumption, Germany was hit harder: in the years 1974-1975 when global crude oil consumption growth was negative, Germany’s average crude oil consumption growth rate was 2.62 percentage points lower than that of the United States.

(B) Review of the Second Oil Crisis: 1979-1981

For the second oil crisis, judging from oil prices and crude oil consumption, the main impact occurred in 1979-1983. But considering that the United States’ monetary policy tightened significantly in 1980-1982, the impact of crude oil consumption in the later period may have come from the United States’ monetary tightening. We mainly focus on the first three years, that is, 1979-1981.

Among them, oil prices surged in 1979. According to the World Bank’s statistics on the global monthly average crude oil price, the crude oil price in December 1978 was 14.5 USD per barrel. By December 1979 it rose to 39.75 USD per barrel, and in December 1980 it stayed at the high level of 39.75 USD per barrel. After 1981, it began to decline. Global crude oil consumption growth rates fell in 1980-1983. According to BP (British Petroleum) statistics, global crude oil consumption growth was 1.26% in 1979. In 1980-1983, the growth rates were -4.33%, -3.67%, -3.08%, and -0.55%, respectively. Global crude oil consumption growth was negative for four consecutive years.

Judging from exports of global midstream manufacturing (SITC, Class 7) in 1979-1981, based on sample data from 68 economies (with sample economies accounting for around 82.4% of global export totals). Growth in global midstream exports in 1979-1981 slowed somewhat, with an average growth rate of 11.7%, slightly below the level in 1977-1978 prior to that. The main reason is that starting in 1981, global midstream export growth slowed sharply to 3.1%, while in 1980 it was 16.4%.

For the manufacturing powerhouses at the time, the United States’ midstream manufacturing share increased, while Germany was harmed. In 1978 (before the crisis), the United States’ midstream share was 17.4%. In 1979-1981, the United States’ midstream share averaged 18.8%, an increase of 1.4%. For Germany, its midstream share in 1978 was 19.2%, and the average in 1979-1981 reached 17.9%, a decline. Judging from crude oil consumption, in the years 1979-1980 when global crude oil consumption growth was negative, Germany’s average crude oil consumption growth rate was 1.75 percentage points lower than that of the United States.

III. Future Outlook: Scenarios for How High Oil Prices Could Raise China’s Midstream Share

(A) Path One: Reshaping supply chains, shifting orders to China

Referencing the pandemic, the pandemic had a major impact on the global supply landscape. Taking machinery and transportation equipment as an example, in 2020 global total demand decreased, with a growth rate of -4.8%, the lowest since 2016. However, China’s exports of machinery and transportation equipment grew at 5.2%. In terms of share, China’s share of machinery and transportation equipment rose from 17.7% in 2019 to 19.6% in 2020. After the pandemic ended, even though the share fluctuated, it remained within the 19%-21% range, far higher than the 17.7% in 2019.

Under this round of high oil prices and military conflicts, for economies with insufficient energy保障能力, China may benefit from its relatively stronger energy保障能力, and its export share is expected to increase further.

(B) Path Two: Increased new demand—China could benefit

Referencing the pandemic: the new demand generated mainly in the pandemic-prevention field, with typical examples including textile products (such as masks) and pharmaceutical products (such as antipyretics). Although global total export growth in 2020 was -7.2%, global export growth for textile-related products was 7.2%, and global export growth for pharmaceutical-related products was 9.7%.

China benefits from the increase in global demand. For textile products, China’s export growth rate in 2020 was 28.9%, and the global share increased from 38.4% in 2019 to 46.1% in 2020. For pharmaceutical products, China’s export growth rate was 28% and 120.6% in 2020-2021, respectively. The global share rose from 2.7% in 2019 to 5.8% in 2021.

Under this round of high oil prices and military conflicts, the new demand that may be brought about is likely to be in areas such as energy security, defense security, and supply chain security. Typical categories may be in areas such as new energy, new energy vehicles, power grid equipment, ships, and defense/military-related products.

© Path Three: Cost advantages increase, helping boost shares

The third path may be related to costs. China benefits because in its energy mix, the proportion of coal and non-fossil energy is higher; when oil prices fluctuate, the impact on electricity prices is smaller. But electricity prices in Europe and the United States are affected much more by fluctuations in crude oil prices. For example, in 2022, affected by the Russia-Ukraine conflict, the oil price benchmark rose sharply throughout the year. European electricity prices (PPI basis, representing industrial electricity, the same applies below) increased by 61% for the full year, while U.S. electricity prices increased by 90.5% for the full year. China’s electricity prices increased by only 5.1% for the full year.

Since 2000, using oil price data and China’s midstream manufacturing share data, a comparison finds that in years when oil prices rise sharply (for example, exceeding 30%), China’s midstream manufacturing share continues to move upward (relative to the current year versus the previous year). A typical year is 2022. Measured by the World Bank’s definition for the full year, the oil price benchmark rose by 40.6%. China’s midstream export share continued to rise by 0.1%. Considering that the midstream export share had already risen significantly in 2020-2021 due to the pandemic, it would be more difficult for 2022 to maintain such an upward increase. Other years when the oil price benchmark rose by more than 30% during the full year also include 2021, 2011, 2008, 2005, 2004, and 2000. In all those years, China’s global export share for midstream manufacturing increased.

In addition, considering that the overseas gross margin rates of midstream manufacturing enterprises are significantly higher than those in China, and that midstream manufacturing enterprises have even greater cost advantages overseas compared with overseas production capacity costs (with oil prices moving upward), share gains may be even smoother (there is both the motivation for proactive exports and cost advantages for market expansion).

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