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US: Higher oil prices barely dent demand growth

Record oil prices above $40 a barrel are barely curbing surging demand growth in major consuming nations, despite concern over the economic fallout of higher energy costs.

Demand for gasoline in the United States is still up on last year, although growth is slowing, while Chinese oil buying is projected to keep powering ahead. European diesel consumption is steadily rising while global aviation demand is buoyant.

"We're experiencing the highest rate of oil demand growth in a generation," said James Burkhard, head of global oil markets at consultancy Cambridge Energy Research Associates. "There is no clear sign that higher prices have seriously reduced demand growth."

Demand for oil has been driven by economic growth in the United States and a booming China, eroding spare oil refining capacity and pushing producers' cartel OPEC to pump at full tilt.

Crude futures have climbed by more than a third since the end of 2003 to record highs, at nearly $41 a barrel in London and over $44 in New York, on worries that supplies are tightly stretched with no leeway for disruption.

Consumers of oil, from motorists and holidaymakers to the petrochemical industry and power plants, have continued to fork out.

"Not long ago U.S. motorists would have been up in arms about paying $1 a gallon for gasoline -- and they're now paying $2," said analyst John Waterlow at consultancy Wood Mackenzie.

The United States, the world's largest oil consumer, has seen gasoline demand rise two percent this year, though buying slipped 0.3 percent in the past four weeks against the same period last year, government figures showed on Wednesday.

Chinese oil demand is projected to jump 14.5 percent this year, and to grow another eight percent next year, the International Energy Agency says. Recent Chinese government measures to cool economic expansion are unlikely to significantly cut oil demand, the IEA says.

The West's energy watchdog forecasts world oil demand will continue to grow rapidly by 2.2 percent in 2005, only a modest slowdown from this year.

Analysts say that if prices stabilise in the mid-$40s they may stunt brisk growth rates in some oil importing nations and take the shine off consumer spending, though prices would have to climb above $50 for demand to contract.

They point out that in real terms oil is still cheap with prices only around half the levels hit in 1980 after the Iranian revolution.

DELAYED BUYING

Still, the latest economic data shows some signs that some consumers are beginning to feel the pinch.

In the United States, consumer spending dropped 0.7 percent in June, its biggest monthly fall since September 2001, as higher energy costs saw people cut back on car purchases. But U.S. auto sales headed back up again in July.

In Asia, economic powerhouse China is still on a relentless buying spree as its industry expands and consumers buy cars. But in India, also dependent on imported oil, analysts warn the rise in prices may hurt growth by choking domestic demand.

In Germany, Europe's largest economy, households and businesses have been put off from buying heating oil in the hope of lower prices later in the year.

But the delayed buying means heating oil inventories have been kept low ahead of peak winter demand, which is helping drive the oil futures rally. Traders say consumers will have to bite the bullet and start buying some time this quarter even if costs stay high.

European demand for heavy fuel oil, from power plants, has been sluggish amid a mild summer. By contrast, gasoline buying has stayed strong while diesel demand is surging as drivers increasingly switch to diesel-powered vehicles.

The effect of higher crude on European fuel retail prices has been cushioned in the past year by the strength of the euro against dollar-denominated oil markets. High fuel taxes mean a rise in world crude has a smaller impact at the pump in countries like Britain and Japan than in the United States.

The petrochemical industry, which uses light oil product naphtha as a feedstock, is also seeing healthy demand growth. Chemical companies can absorb the oil price increases by passing on costs to customers, industry experts say.

Aviation demand for jet fuel also shows no sign of slowing, despite some airlines adding fuel surcharges to fares as the extra costs eat into their operating profits. Global passenger traffic was up 25 percent in June from a year earlier, according to the International Air Transport Association.

$50 HIT

Global economic growth this year could still top the International Monetary Fund's forecast of 4.6 percent, despite oil's surge, IMF chief Rodrigo Rato said on Wednesday.

Analysts pointed to $50 a barrel as a level at which oil consumption and economic growth would start to be hit.

"If prices go to $50 and above, it will have a big psychological impact and could have more of an impact on consumer spending," Burkhard said.

"It could mean gasoline consumption in the U.S. slows, and it would put more cost pressure on the airline industry. It would affect longer term investment decisions and would contribute to higher inflation," he added.

Economists said the effect on oil demand also depended on the timing and cause of any price gains.

A disruption to supplies from Russia would boost oil prices further but would be unlikely to dent consumer sentiment, whereas terror attacks in major cities or major disruption in the Middle East might lead to more cautious spending.

(Reuters - LONDON)

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