China, which has struggled in recent years to keep up with booming domestic demand for oil products, may soon have a major excess in refining capacity. In 2009, the country had refining capacity of about 227 million tons while domestic consumption was about 221 million tons. That’s a relatively modest excess capacity of about 6 million tons. But over the next five years, China’s refinery capacity will increase rapidly and by 2015, it will reach 750 million tons (15 million barrels per day), while the apparent consumption will be about 530 million tons, meaning that excess refining capability could reach a whopping 220 million tons (4.4 MMbbl/d). This looming excess refining capacity will almost surely create problems, some of them uniquely Chinese.

The ability to rapidly build new industrial facilities is typical of modern China, where infrastructure -- from superhighways to ports to refineries -- can be constructed at breakneck speeds. Indeed, new projects can be built in a fraction of the time that would be needed for similar projects in the West, where permitting delays and environmental debates can slow construction for years or even decades.

China’s rapid economic growth, along with increased motor fuel demand from the booming automotive sector has lead the refining industry to add lots of new capacity. By 2015, China will likely have about 113 million cars on its roads. That will lead to major increases in demand for motor fuel. But by 2015, the best estimates for total combined demand for consumption of gasoline, jet fuel and diesel fuel at about 300 million tons, (6 MMbbl/d) far less than the 750 million tons of refining capacity that is projected.

With excessive refinery capacity, market competition is likely to become fierce but also wasteful. Experts warn that China’s refinery capacity will be seriously excessive, similar to the surplus capacity that now exists in the country’s cement and steel sectors.

As in other industries, the Chinese may be hoping that they will be rescued by the export market, but that strategy is unlikely to work as oil demand in developed countries is not increasing rapidly enough to make a difference. Nor will China’s domestic demand for oil, healthy though it may be, be enough to handle the excess capacity. In China’s highly controlled market for refined products, which is dominated by two giant companies, CNPC and Sinopec, there is little latitude with regard to prices at the pump. And the central government has been unwilling (or unable) to curb the construction of new refineries.

Making the picture even more bleak is that China will not be alone when it comes to excess refining capacity. By 2015, India, Korea, Singapore and Japan will have a combined total of about 121 million tons of excess refining capacity. Meanwhile, excess refining capacity in the Middle East (where Saudi Arabia is completing several mega-refining projects) could total as much as 60.5 million tons.

Despite all of this looming excess capacity in the market, China’s domestic oil product pricing policy continues to be determined by the powerful National Development and Reform Commission. And that centralized control is creating a serious disconnect between international crude oil prices and China’s domestic oil prices. Indeed, it’s an economics lesson that could only happen in modern China: the coexistence of both excess supply and rising prices.