Comparison of China’s oil import risk: Results based on portfolio theory and
a diversification index approach
Gang Wu
a,b
, Lan-Cui Liu
c
, Yi-Ming Wei
a,d,
Ã
a
Center for Energy and Environmental Policy Research, Beijing Institute of Technology, Beijing 100081, China
b
Center for Energy and Environmental Policy Research, Institute of Policy and Management, Chinese Academy of Science, Beijing 100190, China
c
Chinese Academy of Environmental Planning, Ministry of Environmental Protection, Beijing 100012, China
d
School of Management and Economics, Beijing Institute of Technology (BIT), 5 South Zhongguancun Street, Haidian District, Beijing 100081, China
article info
Article history:
Received 4 February 2009
Accepted 7 April 2009
Available online 21 May 2009
Keywords:
Oil import risk
Oil import diversification
Portfolio theory
abstract
In recent years, the international oil price has fluctuated violently, bringing about huge risk for the
international oil trade. In fact, the risk of crude oil and petroleum product imports is different because of
the different import origins and prices. Which import risk is lower for China? From the perspective of oil
supply security, how should China portfolio crude oil and petroleum product imports to minimize its oil
import risk? Using portfolio theory and a diversification index approach, this paper compares and
analyzes the supply, price and transport risks of crude oil and petroleum product imports. Our results
show that the following: (1) Specific risk (diversification risk) and marine transport risk of China’s
petroleum product imports are lower than that of crude oil imports. (2) The average rate of return of
China’s petroleum product imports is higher than that of crude oil imports. Moreover, the average
import price variance of petroleum product imports is lower than that of crude oil imports. Thus, the
systematic risk (price risk) of petroleum products is lower too. Therefore, from the perspective of oil
supply security, China should increase petroleum product imports to decrease its oil import risk.
& 2009 Elsevier Ltd. All rights reserved.
1. Introduction
With its ever growing industrialization and urbanization,
China’s oil demand has been increasing rapidly. In terms of the
customs statistics of crude oil trade, China was in balance over the
period 1993–1996, but became a crude oil net importer in 1996.
Since then, China’s crude oil imports have increased rapidly,
increasing to 163.19 million tons (Mton) in 2007, an increase of
621.76% compared with that in 1996. China’s crude oil exports
decreased rapidly since 1996, being only 3.89 million tons in 2007,
a reduction of 422.37% compared with that in 1996 (State
Statistical Bureau, 2005, 2008). China’s petroleum product im-
ports increased slowly over 1993–2007, an increase of only
95.49%. However, petroleum product exports increased rapidly,
increasing by 223.59% because the price of petroleum products
was set by the Chinese government to be lower than the
international price (as shown in Figs. 1 and 2). Thus, China’s risk
of oil trade has increased, putting great pressure on its oil supply
security.
China’s crude oil imports follow the practice of ‘‘buying when
the price is rising and not buying when the price is declining’’. The
Chinese customs statistical data show that China imported 2.98
million tons oil in the first two months of 1999, when the relative
price of oil was low, a decrease of 40% compared with that in 1998.
With the increase in oil prices, China’s oil imports also increased
rapidly. Crude oil imports reached 4.33 million tons in March
1999, an increase of 166% compared with that in February 1999,
which was the highest since January 1998. On the other hand,
when the oil price hit $US31.0/bbl, the highest point since 1995,
China imported 6.49 million tons of crude oil in November 2000,
an increase of 10% compared with the previous month. However,
when the international crude oil price declined from December
2000, China’s oil imports decreased too, China imported only 3.7
million tons when the price was $US25.62/bbl in January 2001, a
decrease of 2.79 million tons (as shown in Fig. 3).
Moreover, China’s crude oil and petroleum product imports
transportation risks are different due to different transportation
routes. China’s crude oil imports mainly depend on the volatile
Middle East, Africa and South America, making up 83.71% of total
imports in 2007. The International Maritime Bureau statistical
data show that global piracy attacks were focused almost
exclusively in the Malacca Straits, Somalia’s waters, Gulf of Aden,
Persian Gulf, Gulf of Guinea and Caribbean Sea in 2007 (as shown
in Fig. 4), where lie the vital ship routes for China’s crude oil
imports. China’s petroleum products have mainly depended on
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Energy Policy
0301-4215/$ - see front matter & 2009 Elsevier Ltd. All rights reserved.
doi:10.1016/j.enpol.2009.04.031
Ã
Corresponding author at: School of Management and Economics, Beijing
Institute of Technology (BIT), 5 South Zhongguancun Street, Haidian District,
Beijing 100081, China. Tel./fax: +86 10 68911706.
E-mail addresses: ymwei@deas.harvard.edu, ymwei@263.net (Y.-M. Wei).
Energy Policy 37 (2009) 3557–3565