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CERA examines possible global impact of China's energy situation

HOUSTON, May 17 -- China accounted for 40% of total growth in world oil demand during 2000-04, said Cambridge Energy Research Associates (CERA) in a report on China energy.

"China's growing weight in world consumption virtually assures a heavy long-term impact on energy prices, trade, and investment. In a decade, China has gone from self-sufficiency to being the most dynamic factor in the world oil market and one of the main elements in today's $40-plus per barrel price," said the report by Daniel Yergin and Scott Roberts.

"Urgent action is required (in China) to ensure that energy supplies are adequate, lest shortages become a brake on the roaring economy," Yergin and Roberts said, noting widespread power shortages, increasing oil imports, and coal bottlenecks.

Otherwise, energy shortages might become severe enough to constrain manufacturing activity and limit overall growth, they said. Meanwhile, international oil markets are counting on steady demand growth with expansion of oil production capacity by some members of the Organization of Petroleum Exporting Countries.

"Although a price collapse is far from certain if China hits a rough patch, OPEC cohesion would be put to the test. Whether torrid economic growth can be sustained in China is now a signpost of global significance, helping to set the tone for world energy markets in 2004-05," Yergin and Roberts said.

Investment
China is estimated to need nearly $1.4 trillion in energy investment by 2020, an amount equal to the regional totals of Latin America and Africa combined. But, capital investment is hampered by structural problems in China's economy.

"Nevertheless, energy investment is increasing 20% annually, partial privatization and pricing liberalization are advancing, and potential foreign participants are increasingly attracted to the opportunities China offers," they said.

Energy-related development and investment responses can accelerate and decelerate quickly, creating boom and bust cycles, said. "Whether this is possible in 2005-07 will depend largely on the capital discipline of Chinese energy firms," Yergin and Roberts said.

Macroeconomics
"The pace and direction of China's short- to medium-term development is less certain— and far more volatile—than most observers now anticipate. Indeed, there is the possibility within the next several years of a more significant slowing of growth, or worse: a so-called hard landing," Yergin and Roberts said.

This is forcing Beijing to move away from policies oriented solely toward rapid growth, and to focus on stability and managed growth, confirmed with Premier Wen Jiabao's March pledge at the National People's Congress to cut China's 2004 economic growth to 7%, a full 2% below the year-earlier level.

"If Wen and his team succeed, if fiscal and monetary policies can be tightened gradually, investment activity should slow over the course of the year," the CERA report said. "Under this scenario, CERA would expect energy demand growth to slow accordingly— to slightly above 7% for oil (versus 13% in the first half) and to approximately 11% growth for electric power (from 15% in 2003)."

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