The Peak Oil Crisis: Revolt Of The Teapots

In China, small privately or locally owned oil refineries are called “teapots.” Unlike the giant ones that refine hundreds of thousands of barrels each day, these little fellows typically process about 10,000, but taken together, they produce some 10-15 percent of China’s refined products. Reduce the teapots’ production and you have a problem.

In the last 25 years, China has come a long ways from its old soviet-style command economy to a rather bizarre mixture of traditional Communist centralism and free-wheeling capitalism. This bifurcated system has brought China undreamed of economic success in recent decades, but from time to time, problems turn up. Someday, the unprecedented environmental mess they are busily creating will do them in, but currently Beijing’s major concern is a nationwide fuel shortage. In other times, Chinese waiting in gas lines would be of minimal concern to most Americans so long as enough stuff was still getting through to the WalMart.
These are not “other times,” however, and shortages in China may be only weeks or months away from becoming shortages in other places— perhaps even at your favorite gas station. Thus it may be more important than you realize to keep track of gas lines in China for we are living in a globalized world.

The problem starts with China’s soaring economic growth, recently on the order of 11 percent a year. This, of course, leads to a large increase in the demand for petroleum and since China’s oilfields will no longer provide large increases in output, steadily increasing imports.

In recent months China’s impressive economic growth has been accompanied by some impressive inflation which reached an 11-year high of 6.5 percent in August and again in October. Beijing, which apparently has not yet discovered “core inflation,” allowing it to remove food and fuel from the index, is becoming worried. Not worried enough to clamp down on growth, which most in China seem to agree is the overriding national priority, but worried enough to put a ceiling on gasoline prices. That is where the current trouble started. As the world price of crude oil rose and rose, independent Chinese refiners, the teapots, lost more and more money.

For the teapots, the solution was to switch their production mix away from price-capped gasoline and diesel to non-regulated products such as petroleum coke or simply to suspend refining until the situation changed. They didn’t have to wait long to bring the mighty Chinese economy to its knees.

Prior to the shortages, it seems to have been Beijing’s policy to deny crude to the small refiners in order to force them out of business. To keep going, the teapots were importing crude oil from as far away as Venezuela and were using heavy fuel oil as the feedstock for their refineries in place of crude.

As world crude prices went higher and higher, production started to slip so that by October the situation was critical. Spot shortages broke out along the coast and imports of fuel oil for the teapot refiners dropped 29 percent. Total Chinese oil demand in October was only 2.4 percent higher than a year earlier – not much of an increase by Chinese standards. Of most concern to Beijing was the inability of all those trucks hauling exports to the coast to keep rolling.

Falls Church News Press