A research report suggests that persistently high oil prices could enhance the global market share of China's midstream manufacturing sector. The analysis is based on four key arguments.

First, regarding global manufacturing's reliance on oil and gas imports, China occupies a moderate position. Many other manufacturing economies exhibit a higher dependency on energy imports compared to China.

Second, historical external shocks, such as the 2020 pandemic, often lead to supply chain restructuring and generate new demand. The current period of high oil prices is expected to spur new demand in areas like energy substitution, potentially benefiting China.

Third, an examination of the 1970s-1980s oil crises indicates that major manufacturing nations with relatively lower reliance on oil and gas imports, such as the United States at the time, experienced a noticeable increase in their midstream manufacturing share during those periods. Unlike the US, which implemented tight monetary policies to combat high inflation during the crises, China's current inflation levels do not necessitate such measures, potentially reducing obstacles for the expansion of its midstream sector.

Fourth, data since 2000 shows that China's share of midstream manufacturing exports has increased during every major oil price surge. This trend may be linked to China's energy costs, such as industrial electricity, being less affected by oil price fluctuations.

The report details the current state of global manufacturing's dependence on imported oil and gas. Using 2024 data from 50 economies representing 92.5% of global manufacturing value-added, it finds that 68.6% of global manufacturing value-added comes from net oil and gas importers. China's oil and gas imports account for 8.6% of its manufacturing value-added. Twenty-five other economies show higher import dependency than China, and collectively, their manufacturing value-added exceeds China's, accounting for 30.1% of the global total.

Analyzing historical oil crises, the report observes that during these events, global oil consumption declined unevenly across countries. During both the 1973-1975 and 1979-1981 crises, the United States, a major manufacturing power with relatively lower import dependency, saw its share of global midstream manufacturing exports increase. In contrast, Germany's share declined during the second crisis, potentially due to its greater reliance on oil imports and a sharper reduction in its oil consumption compared to the US.

Looking forward, the report outlines three potential pathways for high oil prices to boost China's midstream share.

Pathway one involves supply chain restructuring, with orders shifting to China. Drawing a parallel to the pandemic, which significantly impacted global supply patterns, the report notes that despite a 4.8% contraction in global demand for machinery and transport equipment in 2020, China's exports in this category grew by 5.2%. Consequently, China's global market share in this sector increased from 17.7% in 2019 to 19.6% in 2020 and has remained elevated. The current high oil prices and geopolitical conflicts could cause significant supply disruptions for economies with weaker energy security, potentially allowing China to further increase its export share due to its robust energy supply capabilities.

Pathway two focuses on increased new demand, from which China could benefit. Similar to the pandemic-driven surge in demand for protective textiles and pharmaceuticals, the current situation may generate new demand in areas like energy security, national defense, and supply chain resilience. Potential beneficiaries include sectors such as new energy, new energy vehicles, power grid equipment, shipbuilding, and military supplies.

Pathway three relates to enhanced cost advantages. China benefits from an energy mix with high proportions of coal and non-fossil fuels, making its electricity prices less susceptible to oil price volatility compared to Europe and the US, where industrial power costs are more closely linked to oil. For instance, in 2022, while European and US industrial electricity prices surged by 61% and 90.5% respectively due to the Russia-Ukraine conflict, China's prices rose by only 5.1%. Historically, years with significant oil price increases (over 30%) have consistently coincided with an increase in China's share of global midstream manufacturing exports. Furthermore, as Chinese midstream manufacturers often achieve higher profit margins overseas and may enjoy greater cost advantages over foreign competitors during oil price spikes, market share gains could be more readily achieved.

The report concludes by highlighting risks, including the potential for prolonged high oil prices to significantly dampen global demand and the possibility of substantial tightening in global monetary policies.