An empirical analysis of the risk of crude oil imports in China using improved portfolio approach

This paper quantifies the diversification index of Chinaʹs crude oil imports during the period 1996–2004, and explores the relationship between the monthly prices and Brent crude oil cash prices. Accordingly, we calculate the systematic and specific risks using portfolio theory of Chinaʹs crude oil import over the period 1996–2004. Because Chinaʹs crude oil import increased rapidly since 1996, we improve upon the traditional portfolio theory and develop a risk index model of portfolio theory for crude oil imports in order to explore objectively the changes in Chinaʹs crude oil import risks. The results show that Chinaʹs crude oil import risk is affected extensively by the fluctuation of international oil prices. So the traditional portfolio theory is insufficient to measure Chinaʹs crude oil import risk. The improved portfolio theory risks index model reflects the effect of international oil prices, diversification, imports, and geopolitics factors etc., on crude oil import risk, and changes in crude oil import risk. Therefore, the risk index model of portfolio theory provides greater theoretical and methodological robustness as an indicator of Chinaʹs crude oil import security than that offered from the application of traditional measures of dependence.