Huachuang Zhang Yu: High oil prices lead to "clearing," and China's midstream share may "rise"

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Source: “In the one-within-yu” 文: Zhang Yu, Chief Economist at Huachuang Securities

【Strategic Bullish View: the Midstream Industry Series】

Series One: The advance of the “midstream industry,” a call from the supply side—20260303

Series Two: The top ten sectors—order growth—20260309

Series Three: How to visualize and track midstream manufacturing prices?—20260318

Preface

This report explores the possible increase in China’s midstream manufacturing share under a prolonged state of high oil prices. The main reasoning is based on four logics: First, judging from global manufacturing’s dependence on imported oil and gas, China is in a moderate position—China has more manufacturing, and its dependence on imported oil and gas is higher than that of China. Second, based on experience from the COVID-19 outbreak in 2020, external shocks often bring about a reshaping of supply chains and an increase in new demand. Looking at new demand, the current round of high oil prices may bring additional demand that is concentrated in the energy substitution sector, where China is expected to benefit. Third, considering the two oil crises in the 1970s and 1980s, manufacturing powers with relatively low oil-and-gas import dependence (the United States) saw a clear rise in the midstream sector’s share during the oil crisis. Taking into account that at that time the United States implemented a relatively tight monetary policy to curb high inflation, and that China’s inflation level today does not require implementing a tight monetary policy, the resistance to an increase in China’s midstream share may be smaller. Fourth, based on experience since 2000, every time oil prices rise sharply, China’s midstream manufacturing export share has increased to some extent; this may be related to the fact that China’s energy costs (such as industrial electricity) are less affected by oil prices.

Report Summary

I. Current situation: Global manufacturing depends on imported oil and gas

Using 2024 data, we calculate the net import value of oil and gas required by each country’s manufacturing value added to observe each country’s dependence on imported oil and gas. The sample covers 50 economies, accounting for 92.5% of global manufacturing value added. Economies accounting for 23.9% of global manufacturing value added have oil and gas net exports, meaning they do not require oil and gas imports. However, economies accounting for 68.6% of global manufacturing value added have oil and gas net imports.

Looking at the economies, for China, the oil and gas imports corresponding to one unit of manufacturing value added in 2024 are 8.6%. There are 25 economies with dependence on oil and gas imports higher than China. The combined manufacturing value added of these economies, as a share of the global total, is 30.1%, and their total manufacturing scale exceeds China’s.

II. Historical experience: Analysis of how oil crises affect midstream manufacturing

After reviewing the two oil crises, the main observations are as follows: First, the oil crisis is primarily characterized by the rapid rise in oil prices, followed by a reduction in crude oil consumption. Second, during the period when global crude oil consumption declined, the degree of reduction varied across different countries. Third, during the two oil crises, the top two in global export share rankings were the United States and Germany (both above 10%, with a small gap). But during both of the U.S. crises, the global share of midstream manufacturing did increase. Germany saw a decline in its midstream share during the second oil crisis. Considering that Germany’s decline in crude oil consumption was larger than the United States’, this may be related to Germany being more dependent on crude oil imports.

The main data are: in 1972 (pre-crisis), the U.S. midstream share was 19.0%; in 1973–1975, the U.S. midstream share averaged 19.8%, an increase of 0.8%. In 1978 (pre-crisis), the U.S. midstream share was 17.4%; in 1979–1981, the U.S. midstream share averaged 18.8%, an increase of 1.4%.

III. Future outlook: Tracing the pathways by which high oil prices could raise China’s midstream share

1. Pathway One: Supply chain reshaping—orders shift to China. Referencing the COVID-19 outbreak, the pandemic had a significant impact on the global supply pattern. Taking machinery and transportation equipment as an example: in 2020, global total demand decreased, with a growth rate of -4.8%, the lowest growth rate year 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 increased from 17.7% in 2019 to 19.6% in 2020. After the pandemic ended, although the share fluctuated, it stayed within the 19%–21% range throughout, far higher than 17.7% in 2019. The current round of high oil prices and military conflicts may bring significant supply-side shocks to economies that lack sufficient energy security capability; China may benefit from its strong energy security capability, and its export share is expected to rise further.

2. Pathway Two: Increase in new demand—China is expected to benefit. Referencing the COVID-19 outbreak, new demand was mainly in the field of epidemic prevention, with typical examples including textiles and medical supplies. Although global total exports in 2020 had a growth rate of -7.2%, global exports growth for textile-related products was 7.2%, and global exports growth for medical-related products was 9.7%. China benefited from increased global demand. For textiles: China’s export growth rate in 2020 was 28.9%; for medical supplies: China’s export growth rates in 2020–2021 were 28% and 120.6%, respectively. In this round, the additional demand brought by high oil prices and military conflicts may be concentrated in areas such as energy security, national defense security, and supply chain security. Typical categories may include new energy, new energy vehicles, power grid equipment, ships, and defense-industry products.

3. Pathway Three: Increased cost advantages—helping raise share

The third pathway may be related to costs. China benefits because coal and non-fossil energy account for a relatively higher proportion in its energy mix; when oil prices fluctuate greatly, electricity price effects are smaller. But electricity prices in Europe and the United States are affected much more by fluctuations in crude oil prices. For example, in 2022, due to the Russia-Ukraine conflict, the oil price core rose sharply over the full year. Europe’s electricity prices (PPI basis, representing industrial electricity, the same below) increased by 61% over the full year, while the United States’ electricity prices increased by 90.5% over the full year. China’s electricity prices increased by only 5.1% over the full year. Since 2000, using oil price data and data on China’s share of midstream manufacturing, we find that in years when oil prices rise sharply (for example, exceeding 30%), China’s midstream manufacturing share continues to move upward (compared with the previous year).

Risk Disclosure: High oil prices persisting for a longer period could create a larger shock to global demand; global monetary policies tighten significantly.

Table of Contents

Body of the Report

I. Current situation: Global manufacturing depends on imported oil and gas

Global manufacturing generally depends on imported oil and gas. We use 2024 data to calculate the net import value of oil and gas needed for each country’s manufacturing value added; the sample covers 50 economies, accounting for 92.5% of global manufacturing value added.

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

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

II. Historical experience: Analysis of how oil crises affect midstream manufacturing

(1) Review of the First Oil Crisis: 1973–1975

In the first oil crisis, judging from oil prices and crude oil consumption, the main impacts were in 1973–1975. Among them, oil prices rose sharply in the first quarter of 1973–1974. According to the World Bank’s statistics on global crude oil monthly average prices, in January 1973 the crude oil price was 2.08 USD per barrel; by December 1973 it rose to 4.1 USD per barrel. In January 1974 it further rose to 13 USD per barrel. In April 1974 it fell slightly to 10.6 USD per barrel; afterward, through December 1976, it remained volatile in the 10–12 USD per barrel range.

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

From 1973 to 1975, looking at global exports of midstream manufacturing (SITC, category seven), using sample data from 68 economies (with sample economies accounting for about 82.4% of global export total). In 1973–1975, midstream exports maintained high growth, with an average annual growth rate of 25.5%, better than the 19.7% in 1972 and the data from 1976–1977.

For the manufacturing powerhouses at that time (the United States and Germany, the top two in global export share with a small difference), both countries’ midstream manufacturing benefited, but the U.S. benefited more than Germany. In 1972 (pre-crisis), the U.S. midstream share was 19.0%; in 1973–1975, the U.S. midstream share averaged 19.8%, representing an increase of 0.8%. For Germany, the midstream share in 1972 was 19.5%; in 1973–1975 the average reached 19.8%, an increase of 0.3%. Looking at crude oil consumption, Germany was hit more severely: during the years 1974–1975 when global crude oil consumption growth was negative, the average growth rate of Germany’s crude oil consumption was 2.62 percentage points lower than that of the United States.

(2) Review of the Second Oil Crisis: 1979–1981

For the second oil crisis, judging from oil prices and crude oil consumption, the main impacts were in 1979–1983. However, considering that the U.S. monetary policy tightened substantially in 1980–1982, the effects on crude oil consumption in the later period may have come from the U.S.’s monetary tightening. We mainly focus on the first three years: 1979–1981.

In 1979, oil prices rose sharply. According to the World Bank’s statistics on global crude oil monthly average prices, the crude oil price in December 1978 was 14.5 USD per barrel; by December 1979 it rose to 39.75 USD per barrel. 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 slowed down in 1980–1983. According to BP (British Petroleum)’s 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. For four consecutive years, global crude oil consumption growth was negative.

From 1979 to 1981, looking at global exports of midstream manufacturing (SITC, category seven), using sample data from 68 economies (with sample economies accounting for about 82.4% of global export total). In 1979–1981, the growth rate of global midstream exports declined somewhat, with an average growth rate of 11.7%, slightly lower than the level in 1977–1978. The main reason was that starting in 1981, the growth rate of global midstream exports slowed dramatically, to 3.1%, while 1980 was 16.4%.

For the manufacturing powerhouses at that time, the U.S. midstream manufacturing share increased, while Germany was harmed. In 1978 (pre-crisis), the U.S. midstream share was 17.4%; in 1979–1981, the U.S. midstream share averaged 18.8%, representing an increase of 1.4%. For Germany, the midstream share in 1978 was 19.2%; in 1979–1981 the average reached 17.9%, a decline. Looking at crude oil consumption, in the years 1979–1980 when global crude oil consumption growth was negative, Germany’s average crude oil consumption growth was 1.75 percentage points lower than the U.S.

III. Future outlook: Tracing the pathways by which high oil prices could raise China’s midstream share

(1) Pathway One: Supply chain reshaping—orders shift to China

Referencing the COVID-19 outbreak, the pandemic had a significant impact on the global supply pattern. Taking machinery and transportation equipment as an example: in 2020, global total demand fell, with a growth rate of -4.8%, the lowest growth rate year 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 increased from 17.7% in 2019 to 19.6% in 2020. After the pandemic ended, although the share fluctuated, it stayed within the 19%–21% range throughout, far higher than 17.7% in 2019.

In this round, high oil prices and military conflicts may bring significant supply-side shocks to economies with insufficient energy security capacity; China may benefit from its strong energy security capability, and its export share is expected to rise further.

(2) Pathway Two: Increase in new demand—China is expected to benefit

Referencing the COVID-19 outbreak: new demand was mainly in the epidemic prevention field, typical examples being textiles (such as masks, etc.) and medical supplies (such as fever-reducing drugs, etc.). Although global total exports in 2020 had a growth rate of -7.2%, global exports growth for textile-related products was 7.2%, and global exports growth for medical-related products was 9.7%.

China benefits from increased global demand. For textiles: 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 medical supplies: China’s export growth rates in 2020–2021 were 28% and 120.6%, respectively. The global share increased from 2.7% in 2019 to 5.8% in 2021.

In this round, the new demand that high oil prices and military conflicts may bring could be concentrated in areas such as energy security, national defense security, and supply chain security. Typical categories may include new energy, new energy vehicles, power grid equipment, ships, and defense-industry products.

(3) Pathway Three: Increased cost advantages—helping raise share

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

Since 2000, using oil price data and China’s share data for midstream manufacturing, we compare and find that in years when oil prices rise sharply (for example, above 30%), China’s midstream manufacturing share continues to move upward (compared with the previous year). A typical year is 2022: according to the World Bank’s full-year口径, the oil price core rose by 40.6%, and China’s midstream export share continued to rise by 0.1%. Given that during 2020–2021, midstream export share had already risen significantly due to the pandemic, it was less easy for it to keep rising in 2022. Other years when the oil price core rose by more than 30% over the full year also include 2021, 2011, 2008, 2005, 2004, and 2000. In these years, China’s global export share of midstream manufacturing all increased.

In addition, considering that overseas gross margins of midstream manufacturing enterprises are much higher than those domestically, and that in overseas operations midstream manufacturing enterprises have even greater cost advantages compared with overseas production costs (with oil prices rising), the increase in share may be even more smooth (there is both the motivation for proactive exports and cost advantages in expanding markets).

For detailed information, please refer to the report 《【Huachuang Macro】High Oil Prices Bring “Clearing,” China’s Midstream Share May “Move Up”—Strategic Bullish View: Midstream Manufacturing Series Four》 released by the Huachuang Securities Research Institute on March 26.

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