Nick Snow
Washington Correspondent
WASHINGTON, Feb. 4 -- China and India took center stage as four forecasters described possible implications of their surging energy demand at a hearing of the Senate Energy and Natural Resources Committee.
The implications could be significant if the two Asian countries strike more bilateral agreements with major oil producing nations, suggested Frank A. Verrastro, a director and senior fellow in the Center for Strategic and International Studies energy program in Washington, DC.
These arrangements are often secured "through the granting of foreign aid to the host governments," he said. "Moreover, political commitments between the representative governments—sometimes hidden, sometimes not—present a worrisome element."
Verrastro said China currently imports 6% of its oil from Sudan and 15% from Iran.
"It is entirely possible that as a consequence of this dependence, China could be expected to use its [United Nations] Security Council veto should the United States or other UN members attempt to impose oil-related sanctions on either nation," he observed.
Increasing pressures
Andrew J. Slaughter, a senior economist at Shell Exploration & Production Co., London, agreed that world energy markets will face increasing pressures as developing nations industrialize in the next 20 years.
"We need to prepare for a world in which continuing growing energy demand from rapidly developing countries, such as India, China, and Brazil, as well as continued demand growth in North America creates more competition for traditional energy sources and might require faster penetration of new energy sources," he said.
The US Energy Information Administration projects that total world energy demand will expand by 54% to 623 quadrillion btu in 2025 from 404 quadrillion btu in 2001.
"The fastest growth is projected for the nations of developing Asia, including China and India, where robust economic growth accompanies the increase in energy consumption over the forecast period," EIA Administrator Guy F. Caruso said.
EIA expects gross domestic product (GDP) in Asia's developing nations to grow at an average rate of 5.1%/year in the next 20 years, compared with 1.2%/year for industrialized countries and 3%/year for the world as a whole.
"With such strong growth in GDP, demand for energy in developing Asia is projected to double over the forecast, accounting for 40% of the total projected increment in world energy consumption and 70% of the increment for the developing world alone," said Caruso. He noted that energy demand grows by 3%/year in developing Asia as a whole and by 3.5%/year in China and 3.2%/year in India.
"Dependence on foreign sources of oil and, increasingly, natural gas will increase not only in [the US] but also in countries like China and India, which poses geopolitical implications," Caruso said.
China's demand
Jeffrey Logan, China program manager at the International Energy Agency in Paris, pointed out that China surpassed Japan to become the world's second largest petroleum consumer in 2003. Its demand grew by 15% to 6.37 million b/d in 2004, about one third of what the US consumed, he told committee members.
China's domestic crude oil production has grown very slowly the past 5 years as demand surged, resulting in a jump in imports to 2.42 million b/d in 2004 from 1.38 million b/d in 2002, Logan continued, adding that imports now account for 40% of Chinese oil supply.
He said that during the 1990s Chinese energy consumption grew slower than GDP. That had changed by last year, when, "For every 1% increase of GDP, energy demand grew by over 1.5%."
Logan said, "No one, as yet, has come up with a sufficiently satisfactory answer as to why this change has occurred in the Chinese energy-economic relationship. Indeed, it caught many economic planners in China off-guard and explains some of the problems that are occurring there."
Rapid industrialization made Chinese demand jump for electricity from oil-fired generators the past few years. Logan expects this situation to change as the country builds more coal-fired power plants. But he also does not expect this to reduce China's thirst for oil.
"As the oil demand falls off from the power generation sector, we anticipate that some of this will be replaced by stockpiling in strategic petroleum reserves, although this will be less than current power generation demand," he said.
China also is taking steps to increase use of natural gas, a strategy that the IEA official considers "simultaneously the most cost-effective measure to increase efficient use of energy and reduce greenhouse gas emissions."
Plans called for construction of a second cross-country pipeline to Beijing after the $24 billion West-East system began to operate late in 2004, he said. IEA expects liquefied natural gas imports will compete in China with pipeline gas from Russia, Kazakhstan, and other producing countries through 2025.
Non-OPEC uncertainty
Political uncertainty in producing countries outside the Organization of Petroleum Exporting Countries also needs to be considered, the forecasters agreed.
"Most people believe that Russia has substantial resources. The question is the rate at which they can be produced," said Verrastro. As OAO Yukos increased exports the past few years, there was concern that it was easily produced oil from quickly depleted reservoirs, he said.
"Russia's three restrictions are infrastructure, policy, and investment. I think the Yukos episode froze people, who are waiting to see what policies come from the Kremlin. ConocoPhillips used the approach of going to the Kremlin first, which seems to have worked," said Verrastro. "I think President [Vladimir] Putin recognizes that oil and gas will control economic growth in Russia. I believe he is trying to centralize control at this point."
Slaughter said Shell deals with Russia on a project-by-project basis.
"Over the next 20 or 30 years, the world will be capable of absorbing all new production," he said. "Russian production will fluctuate from year to year as its policies develop, but over the long term, we are optimistic. We believe the key will be to work with them on a country-to-country basis to develop a stable environment."
Verrastro also warned that producing countries whose leaders are pursuing ambitious domestic social agendas could adjust their sales priorities as a result.
Logan was less certain that this might pose a threat, particularly with Venezuela and its president, Hugo Chavez.
"Our forecasts, in the future, call for more of a surplus in the supply-demand equation than has existed in the last year," he said. "Venezuela is very much tied in to the global market, so it wouldn't make sense for it to stop selling oil at the current price."
