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The Economic Impact of Price Controls on China's Natural Gas Supply Chain About KAPSARC Legal Notice The King Abdullah Petroleum Studies and Research Center (KAPSARC) is a non-profit global institution dedicated to independent research into energy economics, policy, technology and the environment, across all types of energy. KAPSARC's mandate is to advance the understanding of energy challenges and opportunities facing the world today and tomorrow, through unbiased, independent, and high-caliber research for the benefit of society. KAPSARC is located in Riyadh, Saudi Arabia.

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China's domestic oil production has lagged the growth in domestic oil consumption since the beginning of the 21st century, leading to a growing reliance on imports. In response, the Chinese government has introduced a number of policies, including import license constraints, to support domestic suppliers. In an effort to measure the economic impact of these policies we develop a short-run equilibrium model of China's wholesale oil and gas market at the provincial scale. We construct counterfactual scenarios that suggest that relaxing policies that prioritize domestic production in 2016, when the average price of Chinese oil imports was US$42 per barrel (bbl), could have increased China's import demand by 0.29 million barrels per day (MMbbl/d). This results in a substitution of 9% of China's domestic production in 2016, and a reduction of US $2.8 billion in crude supply costs including transportation as the imported oil has more direct access to the country's pipeline network, compared to the displaced domestic production. In addition, rising import prices since mid-2017 may provide a window of opportunity for Chinese policymakers to proceed with further deregulation of the domestic oil sector, as the short-term impact on domestic producers is reduced.

China is the largest energy user in Asia and the second largest in the world after the US. This paper documents substantial changes of the structure of China's energy use over the past decades. It explores the puzzling phenomena of China's low gross domestic product elasticity of energy consumption. Econometric analysis applying the AutoRegressive Integrated Moving Average model finds that factors such as institutional reforms and structural change can account for a substantial fraction of the downward impacts on the elasticity level. The paper also studies the future energy growth and energy security issues in China, and examines the regional and global impacts of China's rapidly growing energy consumption.