China's oil demand unlikely to decline
(China Business Weekly)
Updated: 2004-10-07 08:57

A surge in Chinese and Indian oil demand, which has helped push world prices to record highs, is not a passing phenomenon, analysts suggest.

Government price adjustments have protected emerging Chinese consumers from the jump in international energy prices. China is also trying to rein in the economic overheating, and trying to avoid a hard landing that would hurt consumers and damage oil demand.

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

"High prices have not yet resulted in any decline in demand. We would need to have prices at today's levels for at least one more year before prices start to have any impact," said Fatih Birol, chief economist at the International Energy Agency (IEA).

"But demand growth could slow compared to what growth would be if prices were in the US$20s."

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. The US crude has averaged US$38.60 a barrel so far this year, up more than US$10 from the previous five years.

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

Growth in Chinese car sales, which almost doubled last year, has decelerated this year. Even so, sales are forecast to increase 10 to 20 per cent this year.

Sales of passenger vehicles in India rose more than 18 per cent, year-on-year, in July.

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

Although China's domestic oil prices are linked to the three global trading hubs -- Rotterdam, Singapore and New York -- the government controls retail pricing, and has maintained a cap on domestic levels since May.

That has squeezed margins at the refiners.

The Chinese Government ordered an average 6-per-cent increase to retail petrol and diesel prices in August. Despite the rise, 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 curbed credit, tightened lending to some industries, such as 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.

Chinese demand grew at a much slower rate in July, at just 778,000 bpd versus a year ago, compared with the proceeding three months, which booked annual growth of 1.1-1.45 million bpd each, White said.

"Some of the sectors the government has pinpointed, like cement, are very energy intensive. So, in effect, the measures could be seen as a form of energy efficiency," White said.

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.

"Inflation is causing some worries. But I do not see any major decline in oil demand growth in the next two or three years," said R. K. Pachauri, director general of The Energy and Resources Institute in New Delhi.

There is debate over whether China's massive crude imports for this year -- up about 40 per cent from 2003 -- represent real demand.

Some analysts reckon the Chinese Government has ordered State oil companies to hold inventory.

JP Morgan has estimated China may have stocked as much as 285 million barrels of oil since early last year.

Chinese officials have said work is going on to build the initial phase of a strategic oil stockpile, which could start to be filled within the next year.

"Even if there's no formal strategic stocking, some refiners have been building stocks. Substantial volumes have been stocked already, of that there is no doubt," said Al Troner, president of Seattle-based Asia-Pacific Energy Consulting Inc.

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