| With the development of the internal combustion engine during and after the second industrial revolution, oil became an essential source of energy, eventually supporting the basic necessities of modern life. From a microscopic view, the fluctuations of crude oil price have an impact on the consumer, and at macroscopic level, prices influence global economic growth and monetary policy. In the last century alone, three separate oil crisis have resulted in recession for Western industrialized countries, their economies battered by fluctuating prices. China has become the world’s second largest crude oil importer and consumer, and the dependence ratio on foreign oil was over50%. Empirical studies show that there is correlation between China’s crude oil consumption and GDP, and fluctuations of crude oil’s price will also affect the volatility of CPI. In this context, this paper analyzes and demonstrates the nature of Petroleum Finance, and provides a suitable definition of petroleum financing for the Chinese economy, building the theoretical framework of the Petroleum Finance from three levels, and to apply it to practice, and improve China’s oil financial system to deal with specific measures of petroleum finance.The essence of petroleum financialization is that financial attributes of oil partly cover up its commodity attributes. Petroleum’s financial attributes are reflected in three interrelated areas:First, petroleum has developed gradually to function as storage of value and become a kind of commodity currency in the credit curreny system. Second, a large amount of standard oil-based financial contracts have been created along with the rapid development in oil finance markets, which provides financial vehicles and consequently financial attributes to oil commodities. Third, oil-based financial assets have been gradually becoming the’habitat’of the increasing international speculative capital, which enhances the importance and financial functions of oil in wealth allocation. Since petroleum possesses both commodity and financial features, oil prices would be temporarily free from the actual supply-demand constraint, showing the time-varying feature of financial asset prices. As a result, the financial feature of petroleum temporarily masks its commodity feature.Because of its base on the widespread use of petroleum, petroleum financialization cannot be unconstrained and complete. The financial characteristics of petroleum cannot conceal its commodity properties. At the same time, petroleum financialization is a double-edged sword to economic development; its resource allocation function favors efficient allocation of petroleum while its wealth effect might hinder the efficient allocation of petroleum as resource and turn the wealth creation into wealth reallocation.It can be validated through real-life data that the financial attribute of the oil covers up the commodity attribute. First, fluctuations in oil prices cannot be explained by the traditional supply-demand law of commodity. In recent decades, there has been no worldwide shortage of oil production which has actually surpassed consumption. The oil market also has no serious market segmentation. So the oil market price fluctuations, especially the huge fluctuation since2000, can not be explained by the commodity’s supply-demand law; second, the relationship between the oil finance and spot has gradually changed from "price discovery" to "price guide". Using daily transaction data of WTI spot and futures from2000to2009, the impulse response analysis, variance decomposition and information share model all indicate that futures markets have price guide not discovery relationship to spot markets; third, the oil showed a strong correlation with other financial assets. An empirical test of crude oil prices, gold prices and the dollar index between1986and2009shows crude oil was influenced by the other two financial assets. The U.S. dollar is Granger cause of gold and oil prices’ movements, and gold is Granger cause of oil prices’variation. It also shows that the oil asset is an "alternative financial asset," whose position is weaker than those of the U.S. dollar and gold.The theoretical analysis and empirical test proves that oil has a financial attribute. This article supports the theoretical framework of the oil finance defined. In accordance with the view of implications of modern finance, oil financial can be defined as:using financial markets and financial instruments allocate scarce oil resources under uncertain conditions (cross-period, cross-regional). And the extension of the oil financial contains participant subjects, financial instruments, financial markets and the theoretical level. Among them, participant subjects have consumers for the purpose of fixing cost, producers for the purpose of asset allocation, government for the purpose of sustainable development and oil security. Oil financial instruments include conventional financial instruments and specialized financial instruments. Oil financial markets include traditional financial markets and specialized oil and financial markets. The financial oil theory can be divided into three levels:consumer oil finance, manufacturers of oil finance and national oil finance. Petroleum comsumption finance theory studies the realization of cost minimization under uncertainty, while petroleum production finance focuses on asset allocation in order to realize return maximation, and national petroleum finance aims to determine the level of optimal strategic petroleum reserve and intervention strategies in the presence of market failure.Although the worldwide financial trend of the oil has been formed, China hasn’t made adequate preparations to deal with this trend. First, for consumers, prices of domestic crude oil has been completely market-oriented, but as the world’s second-largest oil consuming country, China does not yet have the primary financial instruments for hedging crude oil. The consumption of Shanghai fuel oil futures is low, which has no hedging effect for most enterprises downstream in the oil industry chain. Additionally, while dozens of large state-owned enterprises can trade the oil financial derivatives abroad, most of the domestic oil consumption can only passively accept price volatility, passing costs onto consumers. So oil consumers are badly in need of a financial oil market similar to those employed globally that will allow China to hedge on fluctuating supply. China has initiated market-oriented reform to support manufacturers, but those reforms are not deep. By setting up barriers to entry, splitting the upstream and downstream industry chain, as well as the administrative intervention in the refined oil market, China’s oil industry chain has not been optimized. The large state-owned oil enterprises are more like production units, rather than monopoly enterprises under marketize operation. This kind of non-marketize operation has caused significant welfare losses, and building the whole industrial chain of oil and financial markets is conducive to promoting the marketization of the oil industry. Third, China did not start its strategic oil reserve until2004, mostly because the country only recently turned into a net importer of crude oil. There was also a debate as to whether China needed enough oil to be self-sufficient for a long time. With regards to strategic oil reserves, on the one hand, it is enslaved to the building of the national oil storage, the other hand, China has not to pass legislation to promote the commercial crude oil reserves into the sequence of national crude oil reserves, and the time of our purchasing and storage of crude oil is the cycle of national crude oil price. For those reasons, oil reserves in China so far is barely enough to meet the needs of more than40days, and there are a long distance from the protection of "safety reserves", let alone the ability to effectively intervene in the oil market when the oil prices fluctuate substantially.China’s strategies of coping with the shortage of oil finance’s trend are: increasing oil financial instruments to meet the consumers’hedging needs; building the whole industrial chain of financial oil markets to satisfy demand of resource allocation for manufacturers; increasing the oil reserves of the multi-level strategies to meet the demand for economic security. Specifically, for the consumers, the investment portfolio needs are gradually met through market cultivation, channel expansion and mode innovation. Market cultivation is to establish China’s hedging market for crude oil and refined oil. Channel expansion is to expand the channels for consumer business in the extraterritorial application to hedging, including to open up new channels and the wider use of the existing Hong Kong channels. The mode innovation means to encourage oil consumption to satisfy the hedging needs by using CNY to settle accounts overseas and supply chain of finance. The manufacturers would meet the demand for asset allocation by promoting reform, and build the market with a combination of industry and finance. The first thing is to promote the oil industry in allocating resources to the need for efficiency through market-oriented reforms, and then gradually build the whole industrial chain of oil and financial markets to meet the financial needs of the petroleum industry, while combining the industry and finance to improve the efficiency of resource allocation. For the nation, it is recommended that China construct four levels of strategic oil reserves in conjunction with a three-step strategy to meet the nation’s oil security. The four levels are national strategic oil reserves, commercial oil reserves, financial oil assets reserves and oil property rights. The three-step strategy begins with building the strategic oil reserve to ensure the state’s basic safety, developing the system to support protection of domestic economic security, and accumulating a reserve capable of combating international crude oil price fluctuations. |
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