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Quantifying the risk to crude oil imports in China: An improved portfolio approach

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  • Ge, Fenglong
  • Fan, Ying

Abstract

China's rapid economic development caused a sharp increase in crude oil demand. In 2011, China imported 254million tons of crude oil in total, with its dependence on imported oil reaching 56.5%. This paper carries out a quantitative study on the risk of China's crude oil imports by establishing an assessment model which has two primary characteristics. First, the model not only uses portfolio theory to assess the risk to China's crude oil imports, taking into consideration the effect of the diversified sources of imports, but also introduces a correlation coefficient which considers the risks associated with importing oil from oversea sources. Second, the correlation between import prices and global oil prices is analyzed with respect to each exporting country. The Ease of Doing Business Index grading system is introduced in order to represent the risk weight for each exporting country. Because of these improvements, the model provides operable methods for studying how global oil prices, import volumes, the diversification index, and the political and economic situation of the exporting countries affects China's crude oil import risks as well as offers a method for implementing optimal crude oil import strategies. It is concluded that China's crude oil import risks associated with the Middle East are not as precarious as researchers traditionally reported. Among countries in the Middle East, there exist obvious disparities and differences affecting the kinds and types of risks involved. Therefore, these risks should be treated piecemeal when performing an overall assessment of crude oil import risks in China. It should also be noted that with respect to the Middle East there is still room for China to optimize the mix of source countries in order to reduce risks. China should raise the volume of imports coming from low risk countries as well as add new low risk exporting countries to its importing portfolio.

Suggested Citation

  • Ge, Fenglong & Fan, Ying, 2013. "Quantifying the risk to crude oil imports in China: An improved portfolio approach," Energy Economics, Elsevier, vol. 40(C), pages 72-80.
    • Handle: RePEc:eee:eneeco:v:40:y:2013:i:c:p:72-80
    DOI: 10.1016/j.eneco.2013.06.009
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