Chinese demand pushes oil prices higher

Increased energy consumption in China and other developing countries is outstripping demand destruction in the US and Europe and is pushing oil prices still higher, analysts said.

Jul 7th, 2008

Sam Fletcher
Senior Writer

Increased energy consumption in China and other developing countries is outstripping demand destruction in the US and Europe and is pushing oil prices still higher, analysts said.

Total energy consumption around the globe was up 2.4% in 2007, slightly lower than the 2.7% increase in 2006 but still above average. "With China accounting for more than half the total world increase, it is hard to see much slowdown, even with more recent declines in Eurozone and US consumption," said David Wyss, Standard & Poor's chief economist.

Nariman Behravesh, chief economist at Global Insight Inc., Waltham, Me., expects crude prices to hit $160/bbl by December and remain high for 6 months before falling as global demand eases. "First and foremost, the growth in both real gross domestic product and energy demand in emerging markets is likely to remain strong for some time," he said. "While some countries are beginning to tighten monetary policy and some are cutting fuel subsidies, these moves have been modest and are unlikely to have any significant impact until late 2009 or 2010. In the meantime, strong energy demand growth in emerging markets will outstrip additions to non-OPEC supply and will offset the declines in demand that have already occurred in the US and Europe," said Behravesh.

Global Insight raised its estimated peak price for West Texas Intermediate to $160/bbl from $124/bbl previously. It expects the price to drop to $130/bbl by the end of 2009 (compared with $111/bbl in the prior forecast) and to $105/bbl by the end of 2010 (unchanged). But conflict between Israel and Iran and more supply disruptions in Nigeria could push prices higher, Behravesh said.

Fortunately, energy is a smaller part of the US and world economies than it once was, said S&P's Wyss. "Even this year, we expect the average US household to spend 6.7% of its income on energy, which is about the same as in 1971." In 1980 and 1981, energy was 7.9% of income, reflecting a greater efficiency in energy use relative to gross domestic product, he said. Even so, per-capita use of energy has increased. "In the US, higher per-capita GDP has increased energy use per person by 2.0% (1971 to 2005). Worldwide energy use per head has risen 15.7% (1971-2004). "The average American used 4.7 times as much energy as the average for the world in 2005 and nearly twice the average of Western Europe and Japan," Wyss said.

Sword rattling
If attacked, Iranian forces would impose controls on shipping in the Persian Gulf and the Strait of Hormuz, said the head of Iran's Revolutionary Guards. However, at a gulf naval security meeting in Abu Dhabi, Vice-Admiral Kevin Cosgiff of the US Navy's Fifth Fleet, said, "Iran will not attempt to close the Strait of Hormuz and we will not allow them to close the Strait of Hormuz. I can't say it anymore clearly than that."

Despite widespread speculation about possible Israeli plans to bomb Iran's nuclear plants, analysts at Friedman, Billings, Ramsey & Co. Inc., Arlington, Va., remain skeptical. "We would be cautious before interpreting the July 5 Israeli Air Force drills over the eastern Mediterranean Sea as a practice run for a bombing campaign against Iran," FBR analysts said. "We concede the exercises superficially resemble Israel's practice runs with its [then] newly acquired F-16s prior to the successful 1981 bombing of the Iraqi Osirak reactor at al-Tuweitha."

However, they said, the latest drills may have been only a sword-rattling warning to Iran as well as a political maneuver for Israeli voters. "With Prime Minister Ehud Olmert's Kadima party primaries scheduled on Sept. 25 and general elections possible in November once the Israeli parliament returns from summer recess, it should not stretch US investors' credulity to imagine that incumbents want to look tough on security," the analysts said.

Iran may be using today's "robust communication infrastructure" to "scare up" the price of crude while also permitting the US and Iran to engage in "megaphone diplomacy" via public statements reported in the media, despite the halt of official relations 3 decades ago, analysts said. Any price premium for the escalated risk of a disruption of crude exports from Iran may already be imbedded in current prices, they said.

Meanwhile, Russia is revising its combat training programs for military units that might be deployed in the Arctic in case of a potential conflict. It began preparing for an Arctic war after the US, Canada, Norway, and Denmark contested its claim last year to a large area of the Arctic shelf thought to hold vast mineral resources.

(Online July 7, 2008; author's e-mail:

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