By BHUSHAN BAHREE Staff Reporter of THE WALL STREET JOURNAL May 14, 2004
China's exploding demand for oil -- one factor that helped drive petroleum prices above $40 a barrel this week -- has put energy markets at increased risk of disruptive price spikes and crashes, according to a study by an influential forecasting group.
Oil analyst Daniel Yergin, chairman of Cambridge Energy Research Associates and co-author of the study, said China has become a decisive but unpredictable player in world oil markets, because its fast-growing manufacturing economy is prone to sudden shifts in petroleum demand.
"China will be the most dynamic element in the oil market for several years," Mr. Yergin said. China last year passed Japan to become the world's second-largest oil market, after the U.S.
China's growing thirst for oil -- plus strong demand for gasoline in the U.S. and fears of supply disruptions in the Persian Gulf -- has driven oil prices to their highest levels since oil futures started trading on the New York Mercantile Exchange in 1983. The price for U.S. benchmark oil for June delivery settled at $41.08 Thursday, up 31 cents from Wednesday.
Iraq hasn't yet repaired a sabotaged pipeline feeding its two offshore oil-export terminals, missing a target set by the country's oil minister this week. The attack has cut Iraqi exports by 600,000 barrels a day, or almost a third.
Saudi Arabia, de-facto leader of the Organization of Petroleum Exporting Countries, is quietly asking ship brokers for extra tankers in the second half of next month to transport crude to the U.S., according to people in the Persian Gulf shipping business. The extra oil wouldn't reach American shores until late July. Still, the move reinforces the kingdom's call on OPEC this week to raise output quotas and echoes steps taken by Saudi Arabia in previous tight markets -- including just before the U.S.-led invasion of Iraq last year -- that helped damp prices.
Mr. Yergin and co-author Scott Roberts note that China's oil consumption is expanding mainly because of the country's huge and fast-growing manufacturing sector. Industry, which often relies on diesel-fueled generators, accounts for two-thirds of China's primary energy demand. Though auto sales are booming, the overall number of autos still is relatively small. Industrial energy use is more susceptible to swings resulting from recessions and booms. Also, runaway growth has resulted in energy bottlenecks, such as interior transport by barge and truck, that could constrain manufacturing in China, which has become the world's key supplier for a wide range of goods, the study said.
China's growth, and by implication its oil demand, thus could be more volatile than anticipated. China's leaders are trying to rein in the country's fast-growing economy. (See article.) If they succeed, growth in oil demand could slow to about 7% in the second half this year from the estimated 13% growth of the first half, the study said.
If policy makers fail and China's economic bubble bursts next year, the study said, such a scenario "could be a surprising event for oil markets that are now betting on straight-line growth [in China]." China's growth in oil imports could begin receding in 2004-2005 as quickly as it appeared in 2003, the study said.
Coinciding with strong gains in oil output by producing countries, a slowing in Chinese oil-import growth "could have a chilling effect on global oil prices," the study said. The price crash of 1998 resulted from a combination of large increases in world oil output and the onset of the Asian economic meltdown.
The International Energy Agency, of Paris, however, forecasts that Chinese efforts to cool the economy won't significantly cut oil-demand growth. Much of the increase in Chinese oil demand is to fill a growing power shortfall by using individual diesel generators. That gap, the IEA said in its latest monthly report released this week, may take years to bridge. The IEA also notes that China's increasing need for transportation fuels is unlikely to reverse itself. According to the IEA, China accounted for one million barrels of the 1.8 million-barrel increase in daily oil use globally in the first quarter of this year compared with the year-earlier period.
Originally at –
<http://online.wsj.com/article/0,,SB108448431588911131,00.html?mod=economy%5Flead%5Fstory%5Flsc >