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

Section 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 by each country’s manufacturing value added. The sample covers 50 economies, accounting for about 92.5% of global manufacturing value added.

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

By economy, China: in 2024, oil and gas imports corresponding to unit manufacturing value added are 8.6%. There are 25 economies with oil and gas import dependence 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; 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 world total.

Section II: Historical Experience — Analyzing the Impact of the Oil Crises on Midstream Manufacturing

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

The first oil crisis, judging from oil prices and crude oil consumption, mainly affected 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 was $2.08 per barrel in January 1973, rising to $4.1 per barrel in December 1973. In January 1974 it further rose to $13 per barrel, slightly falling to $10.6 per barrel in April 1974. After that, through December 1976, it remained volatile in the $10–$12 per barrel range.

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

From 1973–1975, in terms of exports of global midstream manufacturing (SITC, Category Seven), based on sample data from 68 economies (the sample economies account for about 82.4% of the world’s total exports). Exports of midstream goods in 1973–1975 maintained high growth, with an average annual growth rate of 25.5%, better than 19.7% in 1972, as well as the data for 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), midstream manufacturing in both countries benefited. However, the U.S. midstream manufacturing 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%, an increase of 0.8%. For Germany, the midstream share was 19.5% in 1972, and the average in 1973–1975 reached 19.8%, an increase of 0.3%. From the perspective of crude oil consumption, Germany was hit more severely: in the years 1974–1975 when global crude oil consumption growth was negative, Germany’s average crude oil consumption growth rate was lower than the U.S. by 2.62 percentage points.

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

For the second oil crisis, judging from oil prices and crude oil consumption, the main impact was in 1979–1983. But considering that U.S. monetary policy tightened significantly in 1980–1982, the later impact on crude oil consumption may also have come from the U.S. monetary tightening. We mainly focus on the first three years: 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 was $14.5 per barrel in December 1978, rising to $39.75 per barrel in December 1979. In December 1980 it remained at the high level of $39.75 per barrel, and after 1981 it began to decline.

Global crude oil consumption growth slowed in 1980–1983. According to BP (British Petroleum) statistics, the growth rate of global crude oil consumption in 1979 was 1.26%. In 1980–1983, the growth rates were -4.33%, -3.67%, -3.08%, and -0.55%, respectively. For four consecutive years, the growth rate of global crude oil consumption was negative.

From 1979–1981, in terms of exports of global midstream manufacturing (SITC, Category Seven), based on sample data from 68 economies (the sample economies account for about 82.4% of the world’s total exports). In 1979–1981, the global midstream export growth rate declined somewhat, with an average growth rate of 11.7%, slightly lower than the level of 1977–1978. The main reason is that starting in 1981, the growth rate of global midstream exports slowed markedly to 3.1%, while in 1980 it was 16.4%.

For the manufacturing powerhouses at the 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%, an increase of 1.4%. For Germany, the midstream share was 19.2% in 1978, and the average in 1979–1981 reached 17.9%, falling. From the perspective of 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 lower than the U.S. by 1.75 percentage points.

Section III: Future Outlook — Reasoning Through Ways High Oil Prices Can Lift China’s Midstream Share

(I) Path One: Reshaping the Supply Chain, Shifting Orders to China

Drawing on the experience of 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 year since 2016. But China’s exports of machinery and transportation equipment grew by 5.2%. Reflected in market share, China’s share of machinery and transportation equipment rose from 17.7% in 2019 to 19.6% in 2020. After the pandemic ended, although the share fluctuated, it stayed in the 19%–21% range, far higher than 17.7% in 2019.

In this round, high oil prices and military conflicts may bring a large supply shock to economies whose energy security capacity is insufficient. China may benefit from its stronger energy security capacity, and China’s export share is expected to rise further.

(II) Path Two: Additional Demand Increases, China May Benefit

Reference the pandemic: the added demand mainly came in the area of epidemic prevention, with typical examples including textile goods (such as face masks) and pharmaceutical supplies (such as fever-reducing medicine). Even though global total exports’ growth rate in 2020 was -7.2%, the global export growth rate for textiles-related supplies was 7.2%, and for pharma-related products it was 9.7%.

China benefited from the increase in global demand. For textiles, in 2020 China’s export growth rate was 28.9%; its global share rose from 38.4% in 2019 to 46.1% in 2020. For pharmaceutical supplies, China’s export growth rates in 2020–2021 were 28% and 120.6%, respectively. Its global share rose from 2.7% in 2019 to 5.8% in 2021.

In this round, high oil prices and military conflicts may bring added demand in areas such as energy security, defense security, and supply chain security. Typical products may be in fields such as new energy, new-energy vehicles, power grid equipment, ships, and military-related goods.

(III) Path Three: Increased Cost Advantages Help Boost Share

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

Since 2000**, using oil price data and China’s midstream manufacturing share data, a comparison shows 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 within the same year).** A typical year is 2022: according to the World Bank’s framework, the oil price benchmark rose 40.6% over the year, while China’s midstream export share continued to rise by 0.1%. Considering that midstream export shares had already been lifted significantly due to the pandemic in 2020–2021, it is relatively difficult for 2022 to keep lifting. Other years when the oil price benchmark rose more than 30% over the year also include 2021, 2011, 2008, 2005, 2004, and 2000. In all of these years, China’s global export share of midstream manufacturing moved upward.

In addition, considering that overseas gross profit margins of midstream manufacturing enterprises are much higher than those in China, and on top of that, midstream manufacturing enterprises have even greater cost advantages overseas compared with overseas production costs (as oil prices rise), share increases may be even smoother (there is both the motivation to export proactively and cost advantages for developing markets).

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