Economists have predicted a long-term upward trend in the oil price.
a) How will this development affect the Chinese economy and how can Chinese policymakers react to it?
b) What impact will these developments have on the Australian economy and how can the Australian authorities react?
c) Choose a specific Australian firm and discuss the effect on it of the developments discussed in (a) and (b). What policies can the firm adopt to deal with these effects?
China is the world’s fastest growing and seventh-largest economy. It is the world’s largest recipient of foreign direct investment (FDI) and the world’s fourth-largest trader. China’s economic growth is impressive and has consistently outperformed all other major regional economies.
China’s economy has a significant impact on the Australian economy given the close trading relationship. This means that the prospects for individual Australian firms will be impacted by reverberations from the Chinese economy. This paper explores the link between the impacts of sustained higher oil prices on the Chinese economy, flow on effects on the Australian economy and the way one firm, toll road operator Transurban, is impacted by these developments.
The Impact on China
Chinese reliance on oil
In 2003 China overtook Japan in becoming the world’s second largest oil consumer after the US. With China undergoing significant industrialisation, manufacturing industries are developing rapidly and living conditions are improving, meaning the consumption of oil based products will continue to rise rapidly.
China’s swelling demand for oil has meant it is sourcing increasing amounts from overseas, with over 50% of its oil requirements in 2006 met by imports.
Figure 1: Chinese Demand for Oil – Total Consumption & Imports
Source: China National Bureau of Statistics, 2007
General economic slowdown
The effect of higher oil prices on aggregate supply and demand is illustrated in Figure 2. An...