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Asian oil boom no passing phase

SINGAPORE - A surge in Chinese and Indian oil demand that has helped push world prices to record highs is no passing phenomenon, analysts say.

Government price controls have protected emerging Chinese consumers from the jump in international energy prices. Beijing is also trying to control the boom and avoid a hard landing that would hurt consumers and damage oil demand.

Structural shifts that have driven demand, such as higher personal wealth, booming car sales and crippling electricity shortages, will not soon be reversed, underpinning the need for transport and power-generation fuels.

"High prices have not yet resulted in any decline in demand," said International Energy Agency chief economist Fatih Birol.

"We would need to have prices at today's levels for at least one more year before prices start to have any impact. But demand growth could slow compared to what growth would be if prices were in the US$20s."

The IEA estimates Chinese and Indian demand will grow 970,000 barrels per day (bpd) this year - nearly 40 per cent of total world growth. China accounts for the lion's share with 840,000 bpd of incremental demand.

The surge in consumption has stretched world production capacity and helped drive oil prices to record highs. US crude has averaged US$38.60 a barrel so far in 2004, up more than US$10 from the previous five years.

Birol said short-term measures to curb consumption and increase efficiency would most likely come in the transport sector.

Growth in Chinese car sales, which almost doubled last year, has decelerated this year as the Government tightened controls on loans, but even so sales are forecast to increase 10 to 20 per cent in 2004.

Sales of passenger vehicles in India rose more than 18 per cent in July from a year ago.

"Vehicle fuel efficiency will give the fastest results in Asian countries," said Birol. "The Chinese Government is very alert to this point and is looking at fuel efficiency standards."

Although China's domestic oil prices are linked to the three global trading hubs of Rotterdam, Singapore and New York, the Government controls retail pricing and had kept a cap on domestic levels since May, squeezing margins at the refiners.

Beijing ordered an average 6 per cent increase to retail gasoline and diesel prices in August, but despite the rise the domestic levels are still far below international markets.

The Chinese Government, worried that excess growth could set the economy up for a painful downturn, has clamped down on credit, banned lending to some industries like cement and steel, and made it tougher to gain approval for industrial projects.

"It's not prices that will slow Chinese demand, not at all, it's the credit crackdown," said Deborah White, senior economist at Societe General in Paris.

"Some of the sectors the Government has pinpointed like cement are energy intensive so, in effect, the measures could be seen as a form of energy efficiency."

In India, where a week-long truckers strike last month was expected to shave demand for the third quarter, the Government slashed taxes on oil products in August to dampen inflation, which was running at a 3 1/2 year high at more than 8 per cent.


Editorial Notes: An alternative view, that China is heading towards a Great Depression, is given by Krassimir Petrov here:

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