ARTICLE IN PRESS

Energy Policy 38 (2010) 2110–2115

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Energy Policy
journal homepage: www.elsevier.com/locate/enpol

Petroleum refining industry in China

W.D. Walls
Department of Economics, University of Calgary, Calgary, Alberta, Canada T2N 1N4

a r t i c l e in f o a b s t r a c t

Article history: The oil refining industry in China has faced rapid growth in oil imports of increasingly sour grades of
Received 21 May 2009 crude with which to satisfy growing domestic demand for a slate of lighter and cleaner finished
Accepted 1 June 2009 products sold at subsidized prices. At the same time, the world petroleum refining industry has been
Available online 9 July 2009
moving from one that serves primarily local and regional markets to one that serves global markets for
Keywords: finished products, as world refining capacity utilization has increased. Globally, refined product markets
China are likely to experience continued globalization until refining investments significantly expand capacity
Petroleum refining in key demand regions. We survey the oil refining industry in China in the context of the world market
for heterogeneous crude oils and growing world trade in refined petroleum products.
& 2009 Elsevier Ltd. All rights reserved.

1. Introduction 2. Petroleum refining basics

Having experienced a quarter century of economic growth at
an annual rate of nearly 10% and comprising about one sixth of the
world’s population, the only real surprise is that China’s appetite
for energy was not even more voracious sooner.1 Only in the past
fifteen years has China been a net importer of crude oil and only in
the past five years has it become the second-largest importer of
crude oil. China’s growth in demand for oil is apparently not
terribly price-sensitive (Zhao and Wu, 2007), and when one
accounts for urban migration and the concomitant rise in
transport demand, it becomes apparent that there will be
continued growth in Chinese oil demand (Skeer and Wang,
2007).2 Major expansions in petroleum refining will be required
to meet worldwide demand for finished products, and most of the
capacity is expected to be built in Asia, particularly in India and
China (Izunda, 2007). This article surveys the Chinese petroleum
refining industry in the context of the world market for crude oil
and refined petroleum products, in a way that presupposes no
particular knowledge of petroleum economics or of Chinese
economy.3
E-mail address: wdwalls@ucalgary.ca
1
See, for example, an explanation of this provided by Zhang (2003).
2
Moreover, under a variety of plausible scenarios, it is likely that road
transportation will in time become the largest single source of oil consumption in
China (He et al., 2005). Further to this research, Adams and Schachmurove (2008)
develop a model of China’s energy economy and conclude that motorization, not
general economic growth, is the main factor driving growth in Chinese oil demand.
3
A painfully thorough description of the Chinese oil industry with much
tabular material for the 1980s through the mid-1990s is contained in Wang (1995).
Horsnell (1997) provides a brief, masterfully written overview of the oil industry in
China. See Kambara (1974) and Bartke (1977) for a survey of the Chinese oil
industry prior to the introduction of market-based reforms.
When processed, crude oil produces petroleum products such
as gasoline, diesel, and jet fuel, which have been instrumental in
providing low-cost fuel for automobiles, trucks, airplanes and
other forms of transportation, as well as equipment used in
agriculture, construction, and manufacturing. The petroleum
industry consists of three main segments: the exploration and
production segment (upstream); the refining and marketing
segment (down-stream); and a third segment typically referred
to as the midstream, which consists of the infrastructure used to
transport crude oil and petroleum products. We will be concerned
primarily with certain aspects of the downstream and midstream
segments, namely refining and the supply infrastructure.
Refineries transform crude oil into petroleum products
primarily through a distillation process that separates the crude
oil into different fractions based on boiling point ranges. One
barrel of crude oil can produce a varying amount of gasoline,
diesel, jet fuel and other petroleum products depending on the
configuration of the refinery and the type of crude oil that is being
refined. Through the addition of specialized equipment, refineries
can be optimized to produce greater proportions of specific types
of products or to use different grades of crude oil. In oil industry
parlance this is referred to as ‘‘upgrading’’ capacity. For example,
hydrocracking units enable refiners to increase the production of
lighter fuels, including gasoline, diesel, and jet fuel; catalytic
cracking units increase the production of gasoline; and hydro-
treating units enable refiners to produce lower sulfur fuels
required by the European Union, United States, and many other
countries with increasingly stringent environmental quality
regulations.
Changes in product specifications, shifts in demand, and
environmental regulations all have important implications for

0301-4215/$ - see front matter & 2009 Elsevier Ltd. All rights reserved.
doi:10.1016/j.enpol.2009.06.002
 ARTICLE IN PRESS
W.D. Walls / Energy Policy 38 (2010) 2110–2115
the petroleum refining industry. For example, the regulated shift
to unleaded gasoline that began in the 1970s in the developed
economies caused refineries to install equipment to produce high-
octane components to replace the octane-boosting lead that was
no longer permitted. Similarly, environmental regulations such as
limits on the emissions of certain air pollutants require refineries
to invest in equipment and processes to control such emissions.4
The proliferation of special gasoline blends or ‘‘boutique fuels’’ has
made it more complicated to supply gasoline and raised costs,
significantly affecting operations at refineries. Lastly, to the extent
that varying amounts of biofuels blended with gasoline and diesel
require changes to the gasoline and fuel blendstocks, further
refinery changes may be required to accommodate these blends.
Shifting demand for petroleum products, such as Europe’s
declining demand for gasoline and growing consumption of
diesel, can also cause refiners to invest in different processes to
produce the mix of products desired by the market.
Refinery configurations have historically differed across loca-
tions, because they have served primarily local and regional
markets for finished products, with a particular composition of
input crude oils. For example, the United States – the largest single
consuming country of petroleum – has among the most
sophisticated refineries in the world; these refineries have been
optimized to produce large proportions of cleaner-burning gaso-
line to meet the huge American transportation demand. In
contrast, refineries in China have historically been configured to
refine a slate of products consisting of a lower proportion of light
products from domestic Chinese crude oil which was mostly
heavy and of low to medium sulfur content. Refining capacity
internationally has broadly grown and fallen in response to shifts
in demand for petroleum products. This is illustrated clearly if one
considers that refining capacity internationally fell sharply during
the early 1980s in response to falling demand for petroleum
products, caused in part by high prices of these products and
worldwide recession; by 1983, demand had fallen so much that
much refinery capacity was not being used at all. Many refineries
were shut down or idled and refining capacity thus fell.
Inventories of petroleum products and crude oil are main-
tained by refiners, distributors, marketers, and others to mitigate
the effects of disruptions, and to ensure a continuity of supply to
their customers. Companies build inventories in preparation for
planned maintenance and production. The primary inventory
system comprises the crude oil or petroleum products held at
production sites, refineries, storage sites, and in pipelines, tankers,
barges, and other transportation centers. Secondary inventories
exist between the primary distribution system and the end user,
and consist of retail outlets and small tank farms. Tertiary
inventories are held by consumers; for example, in truck and
automobile fuel tanks.
The supply infrastructure is comprised of a petroleum product
and crude oil pipelines, barges, vessels, marine terminals, and
storage tanks. Trucks and rail also distribute a small fraction of the
products, but are being increasingly utilized with the rise of
biofuels, such as ethanol, which existing pipelines cannot
currently accommodate.5 Pipelines are generally the least ex-
pensive mode for transporting oil and most petroleum products.
While crude oil and petroleum products generally do not travel on
the same pipelines, numerous different petroleum products are
4
The required investment to upgrade refineries is nontrivial to refiners and
can have substantial impacts on firm survival. In the US this has resulted in higher
costs, higher prices, and a corresponding increase in measured productivity of
surviving refineries (Berman and Bui, 2001; Taylor and Fischer, 2003).
5
Ethanol, of course, attracts moisture which corrodes pipelines. Ethanol is
typically blended into gasoline at terminals before it is sent by truck to retail
gasoline stations.
2111
shipped back-to-back in batches through the same pipelines.
During this process, some blending of any two adjacent batches of
petroleum products occurs where the two batches interface. This
blended material may be simply mixed with the lower valued
product—for example, the mix of high- and low-octane gasoline
at the interface between batches of these commodities would be
downgraded, or mixed with the low octane fuel; however, if the
blended material is incompatible with either of the two
petroleum products that interfaced, both batches are contami-
nated and must be removed and reprocessed.
The marine transport system consists primarily of waterways,
ports, and vessels, including crude oil tankers, product tankers
and tank barges. Built to accommodate smaller vessels, many of
the major ports have had to expand in response to increasing
marine transport and trade and to accommodate larger tanker
vessels.
3. Petroleum refining in China
Three companies dominate the oil business in China: Petro-
China, China Petroleum and Chemical Corporation (Sinopec), and
China National Off-shore Oil Corporation (CNOOC). PetroChina is
the publicly held company under China National Petroleum
Company, while Sinopec is the publicly held company under
China Petrochemical Corporation.6 PetroChina is engaged in
onshore production of oil as well as petroleum refining; Sinopec
primarily refines petroleum products, while CNOOC is mainly an
offshore oil production company. Our discussion will focus
primarily on PetroChina and Sinopec, as these companies together
compose the bulk of China’s more than 6.3 million barrels per
calendar-day refining capacity (Oil & Gas Journal, 2006).7
PetroChina had an annual crude oil output of 838.8 million
barrels in 2007, representing a 1.0% increase over 2006. The
company processed 823.6 million barrels of crude in 2007,
representing an increase over 2006 of 4.9% gasoline, kerosene,
and diesel output was 71.381 million tonnes, a 4.5% increase over
2007 (PetroChina Company Limited, 2008). Sinopec processed 156
million tonnes of crude oil in 2007, up by 6.3% over 2006; crude
oil production in 2007 was 291.67 million barrels, a 2.3% increase
over 2006. Gasoline, diesel, and kerosene production was 93.09
million tonnes, a 6.7% increase over 2006 production. (China
Petroleum and Chemical Corporation, 2008.)
China’s estimated 2007 crude oil production of about 3.75
million barrels per day accounts for more than half of all
production in the Asia-Pacific region and a little more than 5%
of world oil production. China has reserves of about 16 billion
barrels accounting for nearly 47% of reserves in the Asia-Pacific
region or about 1.2% of world reserves (Oil & Gas Journal, 2007a,
b). If the rate of economic growth in China continues at rates
similar to those observed over the past decade, China will need to
import either additional refined finished products or crude oil.
Although China has obtained interests in equity crude oil from
other countries, those supplies are projected to be insufficient to
meet future growth in Chinese oil demand (Downs, 2000).
6
CNPC holds an 86.29% controlling interest in PetroChina, while China
Petrochemical Corporation holds a 75.84% controlling interest in Sinopec (Petro-
China Company Limited, 2008; China Petroleum and Chemical Corporation, 2008).
7
Aside from the processing plants belonging to PetroChina and Sinopec,
China’s refining sector does have numerous processing plants that belong to
separate localities or to other industries. However, these processing facilities are
not significant in China’s refining sector for several reasons: First, they are
collectively less than 10% of aggregate refining capacity; second, they are
individually of small scale in comparison to industry averages; third, they are
very small in comparison to the capacities of upgraded or newly built facilities
(Sinton and Fridley, 2002).
 ARTICLE IN PRESS
2112 W.D. Walls / Energy Policy 38 (2010) 2110–2115

Domestic Chinese oil production has historically come from

15,000
fields with oil that is relatively low in sulfur. Domestic refineries,
of course, were configured for such an input of oil and a slate of

Millions of Dollars
output products that did not emphasize the low-emissions
transportation fuels increasingly in demand today. PetroChina 10,000
has historically been the largest Chinese oil production company
and its owned and affiliated refineries were configured to refine
the low-sulfur crude oil that it has produced in its northwestern 5,000
and northeastern production fields. Historically, domestically
produced crude oils, such as Daqing crude, are low-sulfur heavy
crudes that contain much heavy distillate and little naphtha; thus
0
refineries in China were historically configured with a high ratio of CNOOC CNPC SINOPEC
fluid catalytic cracking capacity and a low ratio of catalytic
reforming capacity. Some Sinopec refineries are also configured
Africa Asia
mainly for the low-sulfur crude that is of the type domestically Middle East North & South
produced; however, many of Sinopec’s refineries are configured to North Africa America
Russia & Central Asia
accept a slate of medium-sulfur crude oils from other domestic oil
production fields, as well as medium-sulfur crude oils imported Fig. 1. Chinese NOC investment in crude production abroad. Note: adapted from
from other countries.8 data reported in Table 1g of Paik et al. (2007).
Growth in China’s oil demand from the mid-1980s has
outstripped growth in domestic crude oil production.9 Growth
in demand for crude oil and refined products was far greater than 800000
China’s potential for increased oil production.10 By the early
1990s, demand exceeded domestic oil production and China
Barrels per Day 600000
became a net oil importer. Crude oil imports began in 1988, with
domestic refiners inclined toward the heavy and low-sulfur crudes
that were similar to the domestic grades, because these were 400000
compatible with China’s existing refinery configuration. China
became a net crude importer and this, combined with the 200000
importation of low-sulfur crudes, led to a large amount of
expenditure on these relatively expensive crudes. China began
taking steps to modernize its refineries to accept a wider variety of 0
crudes, expand production capacity for a variety of petroleum CNOOC CNPC Sinopec
products, and generally to adopt technological advances made by
Africa Asia
the international oil companies.
Middle East North &
China’s growing energy demand is the source of turbulence in North Africa South
Russia & Central Asia America
international relations as well as energy supply difficulties (Zha,
2006; Cornelius and Story, 2007; Yu, 2008). In addition to Fig. 2. Chinese NOC estimated equity crude, 2013–15. Note: adapted from data
importing oil, China’s national oil companies have been investing reported in Table 1h of Paik et al. (2007).
abroad to obtain oil. The investment from 1995–2006 disaggre-
gated by company and the region is shown in Fig. 1. consumption exceeding seven million barrels per day and imports
PetroChina and Sinopec have directed most of investment exceeding three million barrels per day.
capital toward Central Asia, Russia, and Africa as shown in Fig. 2.11 While refining capacity in Asia-Pacific region decreased by
Inspection of Figs. 1 and 2 may seem inconsistent in that 96,000 barrels per calendar-day in 2007, most of some 13 million
investment in Russia and Central Asia is substantially greater barrels per day of new refinery capacity expected to be built
than the investment in Africa, but that projected 2013 production between 2008 and 2012 will be in Asia, and most grassroots
from the current assets is estimated to be higher in Africa than in projects will be in China and India (Nakamura, 2007; Izundu,
Russia and Central Asia. As Paik et al. (2007) observed, the assets 2007). Rapidly rising costs and biofuels legislation are obstacles to
in Russia and Central Asia were already in production when refinery proposals in the Middle East and Europe. National oil
purchased – as compared to the African assets which were not companies dominate plans for refinery expansion, with the major
fully developed – which explains the higher acquisition costs of international oil companies planning only limited incremental
the former assets relative to the latter. While Chinese investments investments in refinery expansion.
abroad have generated an inflow to the motherland in the PetroChina and Sinopec have both been expanding oil refining
hundreds of thousands of barrels per day – a non-trivial amount capacity that is configured to handle the increasingly heavy and
of oil – it is merely a drop in the bucket in comparison to domestic high-sulfur crude oils that are being imported to produce a slate of
lighter and cleaner transportation fuels.12 As detailed by Guo
(2005), oil refineries operated by the major refiners in China are of
8
three main types: those that process low, medium, and high-
Initial imports of oil to meet increasing domestic demand were from
Indonesia and elsewhere with low-sulfur heavy crudes similar to domestic sulfur crude oils. Many of PetroChina’s oil refineries and some of
varieties, so that existing refinery configurations could be utilized. Sinopec’s are of the type that process low-sulfur content crude,
9
See Chow (1991) for an analysis of Chinese crude oil production through the such as Daqing, produced in the interior areas. The refineries that
late 1980s. process medium sulfur crude are mostly operated by Sinopec and
10
China will import some 163 million tons of crude oil and about 37 million
tons of refined oil product in 2007. Imports are approaching 50% of China’s
petroleum consumption.
11 12
Paik et al. (2007) estimated the equity production as the Chinese national See Yamaguchi et al. (2002) and Liu et al. (2007) for a discussion of refining
oil companies prorated share of current and future production. processes and technological challenges facing the Chinese refining industry.
 ARTICLE IN PRESS
W.D. Walls / Energy Policy 38 (2010) 2110–2115 2113

Table 1 Table 3
Sinopec transport fuel production and light product yields. Ranking of largest refinery companies in Asia.

Quantity 1990 1995 2000 2005 2007 Rank Company name Refineries Processing capacity

Refinery throughput 107.24 135.01 287.07 383.27 426.12 1 Sinopec 26 3,611,000

Gasoline 21.16 28.41 20.15 22.98 24.69 2 China National Petroleum Corp. 24 2,425,000
Kerosene 3.85 5.28 4.90 6.63 8.32 3 Exxonmobil Corp. 10 1,333,132
Diesel 25.37 36.84 37.53 54.92 60.08 4 Royal Dutch Shell PLC 13 1,271,875
Light product yield (%) 54 61 72 74 75 5 Nippon Oil Co. Ltd. 6 1,157,000
6 Pertamina 8 992,745
Note: all production and throughput is reported in millions of tons; throughput 7 SKCorp 1 817,000
was converted at 7.35 barrels per ton. 8 Indian Oil Co. Ltd. 10 787,290
Source: Sinopec annual report, various issues. 9 Chinese Petroleum Corp. 3 770,000
10 Reliance Petroleum Ltd. 1 660,000

Table 2 Note: processing capacity is reported in units of barrels per calendar-day.

Ranking of largest refinery companies worldwide. Source: Oil & Gas Journal (2007a, b).

Rank Company name Processing capacity

1 Exxonmobil Corp. 5,626,000
2 Royal Dutch Shell PLC 4,885,000
3 Sinopec 3,611,000
4 BP PLC 3,420,000
5 Total SA 2,719,000
6 ConocoPhillips 2,696,000
7 Petroleos de Venezuela SA 2,678,000
8 Valero Energy Corp. 2,672,000
9 China National Petroleum Corp. 2,440,000
10 Saudi Aramco 2,433,000
Note: processing capacity is reported in units of barrels per calendar-day.
Source: Oil & Gas Journal (2007a, b).
these include refineries that process domestic non-Daqing oils, as
well as refineries that process imported oils. Nearly all of the
refineries that can process high-sulfur crude oils are operated by
Sinopec. These refineries are able to process the increasingly sour
crude oils being imported from the Middle East and produce a
high proportion of light finished products. Table 1 shows that
yields of light products have raised from 54% of refinery
throughput in 1990 to 75% in 2007.
PetroChina and Sinopec are two of the largest refiners in the
world in terms of barrels per calendar-day of crude capacity. Table
2 displays a listing of ten largest refiners in the world ranked by
daily crude processing capacity. Sinopec is the third-largest
refinery company in the world, while CNPC ranks ninth. In Asia,
Sinopec and CNPC are, respectively, the first and second-largest
refiners. (see Table 3)
The expanding Chinese refining system incorporates techno-
logical improvements including catalytic cracking, hydrocracking,
and coking for use in upgrading heavier oil fractions to the lighter
fractions that are required for transportation fuels. But hydro-
treating and hydrofinishing capacity, required to reduce impu-
rities such as sulfur and improve product quality, have increased
more slowly. This may not be as large a barrier to further
development as it seems. High total acid number crudes, which
require specialized equipment but yield a larger volume of low-
sulfur product, may be desirable for countries such as China that
are adopting more stringent environmental content regulations
on finished product, because these can be blended with domestic
low-sulfur crudes (Oil & Gas Journal, 2008). In general, we expect
new refineries to be configured in a way that lowers the cost of the
crude oil inputs required to produce a slate of lighter and cleaner
finished products. To this end, we expect large discounts across oil
varieties to narrow in response to refinery investments that
exploit the large discount of certain crude oils.13 Refinery
13
See the recent article by Collins (2008) for a discussion of the incentives for
refiners to exploit the deep discounts being applied to certain crudes.
investments in China are likely to have a substantial impact on
global crude oil and refined product markets.
Where China’s quest to secure equity oil abroad has met with
limited success, the inverse strategy appears to be proving itself
more successful. Instead of obtaining equity oil from the large oil-
producing NOCs, invite these companies to invest in downstream
refining capacity to serve the Chinese market. Saudi Arabia and
other Gulf countries have already committed to invest in joint
ventures with Chinese refiners. These ventures are useful to China
on several margins: they help to increase Chinese refining
capacity in addition to providing incentives for the crude
producers to assure security of supply. The alignment of
incentives is a brilliant example of how mutual cooperation
among diverse national oil companies has unleashed the whip of
competition in international oil markets. Simin Yu states this
as well as anyone, ‘‘by providing the Saudis with an interest in
China’s petrochemical and refinery industries, China creates a
profit motive for Saudi Arabia to export more crude oil to China,
making its Chinese refinery ventures more profitable. These
refineries are specifically designed to process the type of crude
oil produced by Saudi Arabia and some of its smaller neighboring
countries’’ (Yu, 2008, p. 11).
4. Toward a more integrated world market
International trade in petroleum products has expanded
significantly over the past two decades, making markets for
gasoline, diesel, and jet fuel increasingly global in nature. A key
impetus for global trade in petroleum products has been a
structural surplus in production of gasoline and deficit in
production of diesel in Europe as a result of a systematic switch
in European countries to diesel-burning automobiles.14 Growth in
international trade of petroleum products is likely to continue,
though several factors may limit or change the patterns of trade,
including plans and mandates to introduce significant volumes of
biofuels and the potential expansion of differing fuel specifica-
tions that a proliferation of biofuel blends would entail.15
14
This surplus of gasoline is largely the result of a systematic switch in
European countries toward automobiles with diesel-powered engines, which are
more efficient than gasoline-powered engines. European regulators promoted
diesel fuel use in Europe by taxing diesel at a lower rate, and European demand for
diesel-fuel-powered vehicles rose. The European refining and marketing sector
responded to this change in demand by importing increasing amounts of diesel,
and exporting a growing surplus of gasoline to the United States. The United States
has purchased increasing amounts of gasoline, including gasoline blendstocks,
from Europe in recent years.
15
In fact, China introduced a 10% ethanol blend of gasoline in the provinces of
Henan and Heilongjiang provinces in 2002, and as of 2007 had been introducing
10% ethanol into five provinces and individually 27 designated cities in four other
 ARTICLE IN PRESS
2114 W.D. Walls / Energy Policy 38 (2010) 2110–2115
To understand how the refining industry and trade in finished
product are related, it is instructive to consider in more detail the
expanded trade between Europe and the US. The structural
imbalance within the European Union results in exports of
European gasoline and blendstock components to the United
States. The profitability of the US gasoline market acts as a draw
for surplus gasoline worldwide. US demand for gasoline –
combined with many European countries’ declining demand –
has resulted in surplus gasoline being exported to the United
States. Refiners in Europe have configured their refinery opera-
tions to supply gasoline to the US construction costs have
increased significantly, raising the cost of investments in refining
capacity or upgrades. Some planned conversion and upgrading of
refinery capacity in Europe was on hold, because of increased
construction costs worldwide. Some of these upgrade plans called
for enhanced diesel fuel production mainly for the European
market, as well as surplus gasoline exported to the United States.
European refiners are reluctant to make large investments
necessary to produce significantly more diesel, because doing so
will increase their greenhouse gas emissions. Their concern is that
as greenhouse gas emissions caps are lowered, companies will be
required to pay to reduce emissions or buy costly emissions
credits.
For much of the past 25 years, there has been excess refining
capacity globally. However, excess capacity has shrunk consider-
ably in recent years as demand has increased faster than capacity
growth. This has caused refineries to operate at production levels
closer to their maximum capacity. In conjunction with rising
crude oil prices, this has contributed to recent increases in
petroleum product prices and price volatility. Demand for
petroleum products has grown more quickly than has refinery
capacity, because excess refining capacity historically caused
profitability of the refining sector to be low compared to many
other industries. More recently, this tightening of the balance
between supply and demand for petroleum products has, along
with higher crude oil prices and other factors, contributed to
increased petroleum product prices, higher oil industry profits,
and could contribute to greater price volatility. Recently, high
petroleum product prices and high profits in the refining industry
have spurred new refinery capacity investments. However, it is
unclear whether or for how long the current market tightness will
continue, in part because of uncertainties about how much
additional refining capacity will actually be built in the face of
rising construction costs, and macroeconomic events and envir-
onmental initiatives that may reduce demand for petroleum
products in the near future. The absence of national standards for
blending biofuels with gasoline and diesel could also increase the
number of gasoline and diesel blending stocks refiners have to
make, which could require additional refining investment to make
those blends that could crowd out investment in refining capacity
expansions.
US refineries have invested in equipment to upgrade their
refineries to be able to produce more high-value products from a
wider variety of raw inputs; the refining industry in China has
made similar investments over the past several years, some in
conjunction with crude-supplying national oil companies from
the Gulf region.16 Hydrocracking equipment, for example, permits
(footnote continued)
provinces. See Siang (2007) for a detailed discussion of the policy issues and
implementation difficulties of introducing biofuels into China. See Rusco and Walls
(2008) for a discussion of how non-uniform biofuels standards contribute to
increased price volatility through the disintegration of fuel markets.
16
However, as a result of Asian refinery expansion, and Chinese refinery
expansion in particular, it is likely that discounts of heavy, sour, and acidic crudes
will narrow relative to the benchmark crudes as refiners exploit profitable
Table 4
Gasoline price correlations across world markets.
Correlation between US Gulf coast and market listed
Year Los Angeles Singapore Rotterdam New York
2007 0.8918 0.9702 0.9831 0.9805
2006 0.9108 0.8737 0.9415 0.9741
2005 0.8590 0.7584 0.8720 0.9192
2004 0.8358 0.4854 0.8760 0.9574
2003 0.7126 0.5665 0.7534 0.7892
2002 0.6564 0.6925 0.8406 0.8691
Note: Price correlations reported are for wholesale conventional gasoline prices at
each location net of the contemporaneous price of West Texas Intermediate crude
oil.
Source: Author’s calculations.
refiner adjustments to the yields of various products, and coking
capacity allows refiners to process heavier crude oils. The addition
of down-stream units does not increase the distillation capacity of
refineries – the traditional measure of capacity – but enables
refineries to produce a greater portion of products in high demand
(such as gasoline, diesel, and jet fuel) and also to process more
heavy and sour crude inputs.
Petroleum product markets becoming increasingly interna-
tional means that supply disruptions or unexpected increases in
demand anywhere in the world can influence prices at other
locations. While we have not investigated this in any level of
statistical detail in this paper, wholesale fuel prices in the United
States, Europe, and Asia did rise significantly, following hurricanes
Katrina and Rita, indicating that prices in these markets are
linked. Table 4 displays the simple Pearson correlations of
conventional gasoline prices across Asian, European, and North
American markets, and there is a clear trend of increasing
correlations through time. This is consistent with the increased
integration of markets for refined petroleum products. On a
smaller scale, where more systematic research has been
conducted, there is clear evidence that increasing the
integration of markets leads to higher levels of price dispersion
as idiosyncratic shocks propagate across market locations
(Ludwigson et al., 2005; GAO, 2005). Recent plans and mandates
in the United States, the European Union, China, and other
countries to greatly expand the use of biofuels blended with
petroleum products – for example, ethanol blended with gasoline
and biodiesel blended with petroleum diesel – may have the
unintended effect of reducing opportunities for trade, because
blending different levels of biofuels with petroleum blending
stocks will require changes to these blending stocks and thereby
reduce their fungibility. For example, if European and Asian
countries adopt widely different blending levels biofuels in
gasoline and diesel products as current plans call for, the
refineries serving these countries will have to alter petroleum
blending stocks for those blending levels and this could make the
blending stocks themselves less tradeable across countries. China
has begun to delineate its own standards for automobile gasoline
and diesel oil after referring to relevant standards of the EU, which
could further exacerbate demands on the petroleum supply chain.
5. Concluding remarks
Fuel demand in developing economies, especially China, has
grown rapidly and has remained resilient to rising crude oil prices,
(footnote continued)
differentials in the choice of refinery configuration. For more discussion on this
point see Collins (2008).
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W.D. Walls / Energy Policy 38 (2010) 2110–2115
due to subsidy policies that result in below-world-market prices
for refined products.17 Global demand for gasoline, diesel, and jet
fuel grew particularly quickly in the past several years, partly as a
result of rapid growth in China, where demand surged by over
15%. In order to increase production and meet this recent surge in
demand of petroleum products, refiners have had to run their
refineries even more intensively; capacity cannot be added
quickly, because of the long lead times involved in designing
and constructing a refinery or an expansion project. World
refinery utilization rates have in recent years risen to the highest
levels since 1980. Multinational petroleum companies and China’s
domestic refined oil product manufacturing enterprises are
adapting to the situation and improving their production
technology and managerial expertise to meet the requirements
of the Chinese Government on environmental protection, the
demands of domestic consumers on product quality, and the
demands of their investors for financial returns.
Appendix. Supporting Information
Supplementary data associated with this article can be found
in the online version at doi:10.1016/j.enpol.2009.06.002.
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