23-03-05

China's red-hot economy is driving up oil prices. Or at least that's one key reason why many analysts expect energy costs to go up even further before they start coming back down.
But there may be a number of ways Chinese demand for energy could slow down somewhat, and what's more, a fall in demand for oil could come even if China's economy continues to expand at its current pace, or so some analysts hope.

One solution to ensure growth and oil supply simultaneously could be by boosting its energy efficiency, said Kang Wu, a senior fellow at the East-West Centre of Hawaii.
"It's not easy to estimate precisely... but it's clear that energy use (in China) is inefficient," he said, adding that simply improving utilization of existing energy supplies may actually boost the country's GDP growth rate still further.
Indeed, the government is already taking considerable steps not only to make better use of current supplies, but also by pushing consumers to conserve energy as well.

Certainly, China's unsteady and unreliable energy supply has proved to be of major concern for businesses operating in the country over the past few years. For instance, the World Bank warned in its World Development Report last September that China's shaky electricity supply was not only wasting precious energy resources, especially as the country continues to depend highly on the less efficient and more environmentally damaging coal as a fuel source, but it was also a drain on the bottom line of manufacturers as well.
By shifting away from coal and upgrading its oil-consuming production line, China may well be able to produce more goods without boosting its energy consumption, according to some analysts.

Nevertheless, such hopes may be far too optimistic, given the seemingly never-ending prospect for growth in China. The country is already the world's seventh-largest economy, and earlier, the Paris-based International Energy Agency upwardly revised its estimate for global petroleum demand primarily from growing oil needs from China as well as the United States.
The IEA now anticipates oil consumption worldwide to reach 84.3 mm bpd this year, up 330,000 bpd than it had initially expected.

Already, China has surpassed Japan as the second-largest consumer of petroleum products after the United States by guzzling down 5.56 mm bpd in 2004. Over the past four years, the surge in the Chinese economy has accounted for nearly 40 % of the increase in new global oil demand.
"China's annual growth in demand for oil is without precedent," said the head of the Centre for Strategic and International Studies' energy program chairman Robert Ebel. Furthermore, the US Energy Information Agency expects China's oil demand to reach 12.9 mm bpd by 2025, so in the long run, it appears that petroleum prices will only continue getting even higher, even if the country does succeed in modernizing much of its production facilities and become more energy efficient.

Moreover, the US EIA's administrator Guy Caruso said that China was not alone in pushing up energy costs, especially as growth in developing countries, especially in Asia, will only continue to increase global demand for oil to unprecedented levels.
"It's not fair to blame China alone," Caruso added. Given the continuous increase in global demand for oil, China is already taking steps to secure its own energy supply.
"Because its own production of oil is stagnant, the gap between supply and demand must be covered through imports," CSIS's Ebel said.

The country has already taken steps to secure oil supply directly by making deals with oil-producing countries both big and small. Last year, China promised Gabon that it would offer interest-free loans in exchange for Chinese access to Gabonese oil, while it made a similar offer to Algeria where China has invested in oil refineries.
So while 60 % of China's oil imports currently come from the Middle East, President Hu Jintao has been rapidly expanding China's energy supply source by signing mutually beneficial economic pacts with some unlikely partners including Nigeria, Kazakhstan, and Peru.

Some have regarded such moves by China as too aggressive, especially when it comes to dealing with countries that have less than stable governments. But others are more worried that even with China's deals to expand its energy sources, there will still not be enough oil to meet the country's ever-increasing needs.
Expectations of new energy sources are "overblown," said US EIA's Caruso, adding that imports from Africa and Latin America will only represent a small fraction of the country's huge demand.

Source: United Press International