(Bloomberg) – As gasoline prices rise and the United States considers Cold War-era laws to boost production, the other side of the Pacific has a huge reserve of oil refining capacity that doesn’t work.
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About a third of China’s fuel reprocessing capacity is currently out of order as Asia’s largest economy struggles to leave the coronavirus behind. If used, the additional supply of diesel and gasoline can help a lot to cool the hot global fuel markets, but there is little chance that this will happen.
This is because China’s refining sector is designed primarily to serve the vast internal market. The government controls how much fuel can be sent abroad through a quota system that also applies to private companies. And while Beijing has sometimes allowed more shipments over the years, it does not want to become a major exporter of petroleum products, as this would run counter to its goal of gradually decarbonising the economy.
“China’s absence in the export market is strongly felt in the wider regional and even global market,” said Jane Xi, a senior oil analyst at data and analysis firm Kpler. In the last three to five years, there has been a huge expansion of refining capacity in the country, but this no longer leads to increased exports of petroleum products, she said.
The contrast between China and the United States – where refineries in some areas are operating at almost full capacity – reflects tectonic changes in the industry over the past few years. Factories in Europe and North America have closed, a trend that has been accelerated by Covid-19 as most new facilities are built in the developing world, especially in Asia and the Middle East.
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In China, many of the new plants are so-called mega-refineries, which have the flexibility to produce both fuels and petrochemicals. Rapid growth means the country may already be the world’s largest refiner. Its capacity is 17.5 million barrels per day at the end of 2020 and will reach 20 million by 2025, according to the Research Institute of Economics and Technology of China National Petroleum Corp. The United States, by contrast, had a capacity of 18.14 million barrels per day in 2020, according to the latest data from BP Plc.
China’s major state-owned refineries, which make up about three-quarters of the industry, were operating at about 71 percent of their capacity on June 10, according to CITIC Futures Co. Private processors, known as teapots, run at only 64%, it said. Most of these companies, many of which are in Shandong Province, are not allowed to export fuel at all.
Even in relatively normal times, China does not ship much oil abroad. Last year, for example, it supplied about 1.21 million barrels a day of fuel oil, diesel, gasoline and jet fuel, customs data show. This is only about 7% of its total refining capacity at the end of 2020.
And this year, instead of allowing more shipments when local demand falls, it does just the opposite. So far, only 17.5 million tonnes of fuel export quotas have been allocated, compared to 29.5 million tonnes at the same time last year. Diesel supplies fell to a seven-year low in May, government figures show.
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At Singapore’s regional oil hub, profits from converting oil to diesel rose to more than $ 60 a barrel from about $ 10 earlier this year. That means potential contingencies of up to $ 372 per tonne that Chinese refineries miss, according to local industry consultant OilChem.
Beijing’s reluctance to increase fuel production and act as a producer of fluctuations in times of global scarcity is felt by everyone, from American motorists facing pump pain to European factories bidding for meager diesel cargo. But the worst effects are in China’s Asian neighbors, countries such as Sri Lanka and Pakistan, where fuel shortages are crippling their economies.
(Updates with data on diesel exports in paragraph 9. An earlier version of this story corrected the speech reported by a Kpler analyst in paragraph 4.)
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