Nearly half of the energy industry executives polled at the recent North American Energy & Power Conference in Boston said China's growing demand for energy is the primary stimulus of the recent rise in oil prices and the biggest issue now facing the energy industry.
"Chinese demand is going to keep energy prices high for the foreseeable future. But I think the results of the poll show that attendees are feeling that this issue and the resulting high energy prices will not kill the global economy," said Kurt Hallead, energy analyst at RBC Capital Markets, a division of Royal Bank of Canada, which organized the conference.
"The increasing energy demand around the world is providing the potential for more-predictable growth, which should translate into premium valuations for energy companies," he said.
Other studies have reached the same conclusion about China, which recently replaced Japan as the second largest consumer of crude behind the US. The International Energy Agency has cited China's voracious appetite for energy as the reason behind multiple increases in its estimates of worldwide energy demand growth this year (OGJ Online, Apr. 19, 2004).
Cambridge Energy Research Associates reported China accounted for 40% of total growth in world oil demand during 2000-04 (see related story, this page). "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/bbl price," said the report by Daniel Yergin and Scott Roberts.
Respondents to RBC's survey said they believe crude prices essentially have peaked but will remain high. They predicted the average retail price for gasoline would remain near the current level it is today and that the price of benchmark US crude would be $35.80/bbl by yearend. "If oil and natural gas prices were to remain at levels suggested by the survey, it would only have a nominal impact on economic growth," said Hallead.
Other survey results
Terrorism remains a major issue for the industry, and 55% of those polled at the Boston meeting said an attack leading to a serious disruption in oil supplies was inevitable or likely this year. "Terrorism is a major issue," Hallead said. "It's fair to assume a security premium for oil will persist indefinitely. The only question now is its relative magnitude. At this point, the premium appears to be about $8-12/bbl." Other sources have estimated the terror premium to be below $8/bbl, however.
Respondents said exploration and production companies and oil service firms provide the greatest investment opportunity over the next year. They picked Russia as the region with the greatest incremental opportunity for oil production, followed by West Africa, the Middle East, and Libya. However, executives were doubtful about business opportunities in Iraq over the next few years. In fact, almost 80% predicted it would be 2006 or later before that country would be safe enough to produce oil in significant amounts.
Executives said natural gas prices also would trend higher and remain above historic levels. On average, they said gas prices would hit $6.20/ Mcf at the end of this year, and $6.10/ Mcf at the end of 2005.
A year ago, respondents identified natural gas supply as the biggest issue facing the energy sector, and it remains an important piece of world energy. Hallead said, "LNG will continue to be an increasing source of supply volume, with a more meaningful impact in 2007 and beyond." Nearly 400 industry executives and institutional investors attended the conference.