Executive summery
One of the most imported fundamentals in the global trade is based on the oil prices, when we look to the oil prices during the first oil crises at the beginning of 2001 has lead to higher transport cost of goods. Transport cost and foreign trade is a direct link between those two, when oil prices are higher the lower in export and transport of goods/ containers.
Do oil prices have a significant influence on European Union import from China and what are the consequences in balance between the EU and China.
The global oil crisis with increasing prices are just and just recovering at the moment we have the economic crisis and this is “helping” decreasing the oil prices. The growing global demand of oil has increased the prices and boosted by emerging countries such as China has lead on July 3rd 2008 to a peak of 143.95 dollar a barrel the highest price ever.
The high prices have an great effect on trade between countries especially China to EU and USA. Because transport cost was that high and the demand decreased also the credit crises has influence on this. The oil prices has dropped on December 26th 2008 to 33,73 dollar a barrel. When we look to the current situation is around 75 dollar.
China has become one of the largest manufacturing country in the world due their comparative advantages therefore European companies have outsourced there production to China. the produced goods need to be shipped back to Europe. The (sky) high oil prices during the crisis have forced shipping lines to adjust their fleet by reducing speed and lesser transportation between EU-China. the increase of this prices were also effecting the prices of consumer products.
The higher oil prices effecting the transport cost and this will effect in less European importing goods. however China has always supported competitive production and stimulate their export that leads to downward pressure on transport cost. And the currency policy of China is keeps Chinese goods artificially cheaper.
Introduction of the assignment
This assignment is the resit of the resit alternative of the course of Asia trade and business economics in term 7.
I have chosen to focus on China because China is the third largest economic in the world. Therefore, it is interesting to research whether trade and related maritime transportation between EU and China would be affected by increasing oil prices. China’s economy is strongly based on the export of mainly low value goods. The issue is will this economic structure remain the same, when transport costs increase due to the rising oil prices and current economic crisis.
The rising oil prices have lead to higher freight rate and oil charges in transport costs, which become a larger component of transaction costs. This can affect the EU-China trade. However transport costs are also determined by factors, like trade volumes, geography, administrative processes and infrastructure. higher oil price could affect globalization process and that can change global trade.
Every time I drive my car towards a petrol station I’m interesting to see what the current price of petrol is. When I know that the oil prices will drop than I wait (when possible) to fill up my car. This is off course a small effect and now I’m studying the great effect of trade between china and EU of the oil prices and transport cost. what is happening on larger scale?
This report will give an view of my findings. Out of personal interest I watch the movie “The Tank Man” this documentary is all about the protest at Tiananmen Square in 1989 and about the politics situation of China. Also I would like to thank Chris Beem to help me with the outline of this report.
Information about China
To give a better overview of assignment is important to understand the basis facts of China, in line of the subject of Asia trade en business economics I give hereby a general overview of China:
Summary
China is for centuries known as a leading civilization, their art and sciences was far ahead in developing than other countries like Great Britain, USA and Europe their invention of paper and printing and also the compass was at least 100 years before the others discovered . China is also the third largest country in world after Canada and Russia. China has a population around 1.34 billion people.
After the loss of China of the Opium War to British in 1884 and later the Japanese invasion. the country was beset by civil unrest, major famines, military defeats, and foreign occupation. After World War II, on October 1, 1949 the People’s Republic of China was established by the Communists under MAO Zedong.
In late 1970 China have started the economic reform, this resulted to a rapid economic growth with continuous experimentation and the multi staged market reform. China is today still the most wealthy country in the world, Chinese believe that their economic will be booming and continue to be .
Independence & Demographics
Chinese Premier Deng Xiaoping has declared a quarter century ago “to get rich is glorious.” due to the large population of workers has China a great advantage and is cashing in now.
China has been for centuries the most populous country of the world. In 1953 China had a population of 582 million Chinese people to over 1.3 billion today. one in five people worldwide is Chinese.Demographic p of China’s profile is ideally suited to economic expansion. The employment in china is now over 800 million people this is double of the United States and the European Union combined. In 2009. China is forecasting to overtake the United states as the current largest manufacturer of the world.
The population of china will continue to growing for another at least twenty years, and will have peak at about 1.5 billion around the year 2035. With fertility rates of 1.7 children per woman, China is now below the replacement level of 2.1 children.
The United Nations has estimate that China large workforce will be shrinking from the year 2015. The slowdown will be felt later is the opinion of others, because of the millions of migrants are still moving to the cities. The result of having fewer labor workers. Some hope, that there will be offset of better educated workers However the United Nations has estimate that by 2050 a third of the population of China will be over 60, that is three times the current population, this will result is enormous pressure on the economy.
The challenge for China will be to make a good balance between growth in population, education and economy.
Economy
For the past 30 years China economy have been changed rapidly from a centrally planned system that has been in that past closed for international trade to a modern new market-oriented economy that allow a fast growing private sector and therefore there are now a major player in the global economy.
Chine need to search and develop energy production capacity from sources other than coal and oil alone, there need to focus on nuclear energy development. in 2009 started the downturn of the global economic it reduced foreign demand for exports for the first time in many years. The government vowed to continue reforming the economy and emphasized the need to increase domestic consumption in order to make China less dependent on foreign exports for GDP growth in the future.
China GDP Growth Rate
The annual Gross Domestic Product in China was in the last quarter 10.701%. According to the world bank the Gross Domestic Product of China is 4326 billion dollars or 6.989% of the total world economy. China’s economy is since 2008 the second largest economy in the world after United States. This success has become the numerous changes the past 30 years, the economy has changed from a central planned system that does not allow much to non international trade to a modern market oriented economy, this allow a more rapidly growth of the private sector.
China Industrial Production
During the last several months the Industrial Production in China expanded to 18.514%. the Industrial production measures the changes in output from the industrial sector in compared to the economy, this includes utilities and manufacturing of products. For economic forecasting is the Industrial Production an important indicator. This also be used to measure inflation pressures of the top levels of industrials production and sometimes used to change prices to balance the economy.
China Gross Domestic Product (GDP)
By the figures of the World Bank is China Gross Domestic Product worth 6.987% of the world economy. China Gross Domestic Product (GDP) expanded at an annual rate of 10.701 percent over the last quarter. China’s economy is since 2008 the second largest in the world after the United States and Russia. In the last 30 years the economy in China has rapidly changed from a centrally planned system that was nearly closed to international trade to a more market oriented that allow a rapidly growing of the private sector. A major component supporting China’s rapid economic growth has been exports growth.
Politics
On October 1, 1949 Mao Zedong claimed the founding of the People’s Republic of China. with his new government the take control of the country and people that have suffered by two generations of war and social conflict and also the high inflation of the economy. Change for a new politics and economic was in order to change China. Mao Zedong party established quickly a new government based on Soviet union.
Moa broke with the Soviet model in 1958 and he announced that the government needed to focus on a new economy program called the Great Leap Forward was designed to focus more on industrial and agricultural production. Small backyard factories developed quite rapidly in to large production factories by over production became products unsalable the poor planning of the overall Great Leap Forward to get the economy in balance has resulted later in a more stable economy and production but this was more in the years 1960/ 1961.
When Moa has announced in 1958 that they are braking with the Soviet model, the relationship between them deteriorated sharply. The Soviet union began in August 1960 to withdraw all their personal from China. Also Soviet restrict sharing their information about science and technologies development.
In 1989 there have been a high inflation and the economic growth stayed out. After the death of Hu Yaobang on 15 April 1989, the leak of improvement was resulted in large scale protest started by the (high educated) students followed rapidly by other parts of the populations soon after the students started their protest intellectuals, medical personal and journalist join the protest. In Beijing the students and other citizens became all the Tiananmen square first off all the mourn of Hu Yaobang death and also to protest against all who would like a slow reform. The government was not pleased whit this situation there efforts to end/ contain them failed and the protest grow not only in Beijing also in other cities like Shanghai and Guangzhou. On 20 may 1989 Martial law was declared this did not had any effect until begin of July, the government had ordered military force the stop the protest and the military force unit started late 3rd July and the early morning of 4th of July to clear the square and clear all the students from the streets of Beijing.
After the protest the gap between the people of China and the government was huge. The government realized that there was need for changes, despite the slow reform a new plan was issued by Deng Xiaoping’s after his dramatic visit in 1992 to the southern of China. After that visit the started to renew politics to push for an more open market orientated economy, Deng realized to give something back after the protest to the citizens is wealth something that the communist party always have banned to control the country strict. Later in the year at the 14th party congress the leaders official sanction this new market oriented economy.
In the party Deng and his supporters argued that the economy needed to change to increase living standards this should for them be the only focus China need to undergo, China needed to change after the protest and the best way is give something back. Even capitalist measures were adopted and that is for China radical because their always have been very protected by the government.
After the government finally committed to reform the economy and allow and open market and do foreign business, China wanted to reform their state industry was the main government priority, the main goal was been to achieving a large scale privatization of the non profitable state owned companies. Also the new leadership has limited the government influence and bureaucracy. After the open market the international business really grow to a the second largest economy today.
Oil crisis and economic issues
Summary
In a national and global economy is crude oil one of the most important fundamental component to measure the economy. Because it one of the most imported energy source we know. Oil can be used to generate electricity also it is a raw material for numerous products like plastic. When crude oil is refined to a more synthetic one you can also use it for petrol of a car, plane or boat. Because the (crude) oil is a imported factor to many products we use has it a fundamental function in our economy. The oil price has an direct impact to the manufacturing sector and transport sector because production and transport costs have a indirectly influences on product prices. The oil price have an effect on inflation and have a big impact on stock prices , car sales, exchange rates and many more. Rising oil prices and economic growth have a correlation effect, but in reality the adjustment of economic growth has some time lag after an oil price change.
The oil crisis of 2008
In previous century there have been two oil crises that effected to high oil prices deteriorated the global economy. The first oil crisis in 1973 was the first that influenced the whole global economy. Arabic oil exporting countries cut oil supply as a politic action against western countries. Oil prices increased with 70%, while oil production reduced with 5% every month. After a half year oil prices increased. Increasing oil prices had a big impact on the global economy, which ultimately lead to stagflation. The second oil crisis was in 1979, where crude oil price increased exponentially due to the conflict between Iran and Iraq. between November 1978 and June 1979 Iran limited the oil export with only 2 to 2,5 million barrels per day. The production in 1980 of the global oil production was even 10% lower than in 1979. These events course higher oil price from $14 in 1978 to $35 in 1981. After 26 years, Iran production is still only two-third of former level. Iraq oil production remains about 1,5 million. barrels under its peak before the Iraq – Iran war. The cause of both oil crises is the result of political, bureaucratic and business that gains from the government limitations on oil market.
The current oil crisis is differs from the previous two oil crises from the 20th century. The origin of the oil crisis in 2008/9 is not just caused by political confrontation in Middle East, but from a broader economical global context where emerging countries also play an important role. Moreover, EU import of cheap Chinese goods limited inflation pressure.
Recently, there are many bleak empirical reports about the Peak oil in the future. The combination of expected oil exhaustion and larger global demand by emerging countries resulted in higher oil prices during the recent ‘oil crisis’ in 2008. Between the beginning of 2003 and mid 2008, oil prices increased by 320% in dollars. Beginning 2008 oil value measured by the exchange rate passed the 100 dollar this was because the low supply growth combined with a tight spare capacity. Interesting to compare it to just 11 dollar in 1998. Unit 2008 the record oil price was in April 1980 102,81 dollar adjusted by inflation. The reverse and peaked at the record high of 143,95 dollar on July 3rd 2008.
Oil price increase
Many factors caused the increase of the oil prices the 2008 changed the prices suddenly to a new oil crisis period.
The main driver is the fastest growth of world economy and trade in decades. This economic expansion leads to a substantial increase in oil demand. The economic prosperity is proportional with energy consumption. Higher traffic volumes and particularly road traffic volumes are strongly coupled to GDP. Global oil demand by emerging countries. Dynamic economic growth of emerging countries pushed their appetite for oil, which resulted in larger global oil demand. A higher oil demand increase is related to China by 1/4 in 1995-2004 and even 1/3 in 2004 China expected share in world oil demand increased from 7% in 2005 to 12% in 2025.
The high demand oil is according to a few analysts mainly the result of speculative investors who used crude oil as an investment for the weaker dollar. when banks and hedge funds treat oil as assets. Moreover, speculators gamble on oil exhaustion combined with larger global demand in the near future.
The consequences of high oil prices have deep impact on the global economy The higher fuel price generate a large problem for the whole transport sector the most direct effect is on the aviation sector who suffers one of the most under the high kerosene prices to run their fleet, everyone is aware of the effect on plane ticket prices has increased as never before. also higher bunker price in the maritime transport leads to higher freight rate. Higher transport costs eventually passed to the end consumers. However, increasing transport costs forced transport companies to higher efficiency.
High oil costs have forced users to change their usual oil consumption. Governments and manufacturers have more financial incentives to invest in alternative energy sources to reduce oil dependency. Investments in sustainable energy or energy efficient technology are more profitable.
Oil price decrease
Many studies are forecasting the future oil prices will increase to over200 dollar only those studies did not include the decline of the oil price in late 2008. The main reason for the decrease of the oil prices was the current credit crisis, which started with the financial crisis in the USA. The collapse of Lehmann Brothers on 15th September 2008 caused a domino effect on the rest of the financial world.
The forecast of the world economic growth for 2009 by the World Bank was very poor figures. The global GDP growth has dropped from 2.5% in 2008 to 0.9% in 2009. however world trade will contract by 2.1% in 2009 which imply the first reduction since 1982. All countries expect lower exports, which resulted in rapid slowdown of global demand. These forecasts caused the big decline in demand for oil, which resulted in the plunging oil prices with 76,6%. The falling oil prices and (food prices) imply the end of the most significant commodity price boom in decades.
The oil price has reached its peak on 3 July 2008 at 143,95 dollar see figure below. Just after the bankruptcy of Lehmann Brothers oil price was 102,51 dollar. When global credit crisis started the oil prices dropped to the lowest point of 33,73 dollar on 26 December 2008. Oil exporting countries did cut their oil production to avoid oversupply the international market. However the attempt of OPEC and Russia cutting the oil supply to prevent falling oil prices, it further declined.
While developed economies like Europe and USA still suffer from the credit crises, Asian emerging economies already generate positive GDP growth rates. China’s expected domestic demand growth of 8,43% in 2010, has positive influence on other countries, which supply products and raw materials to China. The economy of China has a better than expected global economic growth. That has driven the oil price gradually from the lowest point of 33,73 dollar last year to around 75 dollar begin November 2009. The weak dollar keeps the oil price high despite a slump in American consumption and constructs cheaper oil for investors holding the stronger euro. It looks as though the whole oil crisis cycle tend to resume, where higher demand from China partly boost the oil price.
References
http://www.tradingeconomics.com
https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html
http://knowledge.allianz.com/