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January 17, 2006

The China syndrome

In October I wrote that “growth in Chinese energy consumption—which most Chicken Littles use to explain why oil will soon cost $100+ a barrel—has stalled. In 2004 it increased by 17.5%; this year will see growth of well under 5%, and consumption is still slowing. This shift—in part a result of China’s fast-maturing economy—will have a huge [i.e., negative] impact on oil prices over the coming years.” According to the (paid-subscription) Wall Street Journal, I was wrong, but in a good way:

China has confounded world energy markets by reporting that its apparent oil demand was flat last year instead of modestly higher, renewing doubts about Chinese oil data and raising questions about how the fast-growing economic giant will affect global oil prices this year and beyond.
… Friday, the Chinese government reported that imports of crude oil rose just 1.2%, while imports of oil products such as diesel fell 34%. Overall, apparent demand – domestic output plus imports, minus exports, factoring in changes in oil-inventory levels – fell 0.3%, to about 6.4 million barrels a day. An official at China’s top economic planning body, the National Development and Reform Commission, yesterday declined to comment on the data, but did say China’s dependence on oil imports had declined.

Perhaps because of the sheer weight of institutional cash that is betting oil prices will continue to rise, the Journal seems to be in denial about this:

With China’s economy now growing at nearly 10% a year, analysts are split over how oil demand could have held flat in 2005, and some are expressing skepticism about the accuracy of the new Chinese numbers.

I’m sure “some” are. But the smart analysts get it:

Cambridge Energy Research Associates’ China analyst, K.F. Yan, says the new figures match his own projections of flat or declining demand.
Mr. Yan points to lower Chinese imports of certain oil products such as fuel oil, which can be used to generate electricity. Imports of fuel oil soared in 2004 as factories turned on emergency generators during widespread blackouts caused by power shortages. That boosted Chinese overall oil demand. Last year, China rolled out new power capacity, idling most of the generators and damping demand for fuel oil.
Another factor that may be capping demand, paradoxically, is China’s reluctance to fully raise domestic gasoline prices in line with international rates. The government-set prices have jumped enough in the past two years to entice Chinese consumers to drive less and to buy cars with better fuel efficiency, said Han Xiaoping of Beijing-based consultancy Falcon Power Ltd. But they remain low enough that Chinese refiners lose money on each barrel of oil they turned into gasoline. Thus they cut purchases of oil; last summer there were gasoline shortages in some regions.

Plus China’s domestic oil production is soaring—last year it hit yet another new record. And then there’s faltering global demand, as economies (such as the U.S.—sorry, the Journal again) see slowing economic growth. Once the big hedge and pension funds start to understand that oil has nowhere to go but down, they’ll unwind their positions at breakneck speed. That, in turn, will annihilate a speculative price premium that could be as high as $7-10 a barrel.

All of which explains why I’m sticking to my prediction that oil prices will fall to around $40 a barrel this spring.

Posted by Stephen at 12:39 AM in Energy + environment | Permalink | TrackBack (0)

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