A tiger's growing thirst for oil

Oct 09, 2004 02:00 AM

by Jehangir Pocha

American consumers watching the dollars rack up as they pump gas at stations across the country usually blame the high prices on the war in Iraq. But China's galloping fuel consumption could destabilize global energy markets and security even more profoundly, energy specialists say.
China, a net oil exporter until 2001, is now the world's largest oil importer after the United States. This year its booming economy will burn about 2.4 bn barrels of oil, one-third of it imported. Steven Roach, chief economist at Morgan Stanley, says China's oil consumption will double over the next decade. With global oil production barely 1 mm barrels over the global consumption rate of 81 mm bpd, Roach says this surge in demand could lead global demand to outstrip supply. This could cause gas prices to shoot beyond their recent high of $ 50 a barrel.

China also is driving up the global price of crude by "hoarding" large quantities of oil, Michael Rothman, a senior energy analyst with Merrill Lynch, said recently. According to Merrill Lynch's analysis of China's oil buying and consuming patterns, the country is buying about 500,000 bpd of oil more than it needs.
Without such "hoarding" oil prices, which are currently at a record $ 53 a barrel, would be in the range of $ 30 a barrel, Rothman said. With the International Energy Agency estimating that every $ 1 increase in the price of oil costs the global economy $ 25 bn, China's moves could have far-reaching consequences.

Roach says there is a tendency to blame China for any disturbance in world trade.
"Last year people said China was driving deflation, and now they're saying it's driving inflation," Roach said. "In reality the Chinese are very responsible economic players."
Though Beijing has not explicitly responded to questions about its oil purchases, Rothman and other analysts say Beijing wants to create an oil reserve along the same lines as the United States' Strategic Petroleum Reserve.

In the medium term, oil producers could meet a growth in demand by using new technology to extract more oil out of existing oil wells, and tapping into new oil fields that have been discovered but remain unexploited. However the long-term problem remains, says Zheng Hongfei, an energy researcher at the Beijing Institute of Technology in Beijing, because "there's just not enough oil in the world" to cover China's energy needs.
More than 4.5 mm new vehicles will hit Chinese roads this year, a far cry from the times when families used to save for months to buy a bicycle. Industrial consumption of oil is also soaring, despite talk of a slowdown in the economy.

To tamp down on demand, the Chinese government has taken the politically unpopular step of raising retail gas prices by 6 %. Beijing also is using incentives and subsidies to support the development of electronic vehicles and renewable sources of energy such as wind and solar power. Significantly, it has also joined the United States and other nations in the international fusion project, which aims to develop clean nuclear-based energy.
But the bulk of China's energy will continue to come from fossil fuels in the foreseeable future. Despite the serious environmental consequences of this -- the World Bank calculates China's annual environmental costs at $ 50 bn -- Beijing is putting in place extensive plans to secure oil supplies in a world where they could become increasingly scarce.

Chinese firms are investing heavily in local energy fields, such as the 200,000-square-mile Ordos Basin that stretches across the provinces of Shaanxi, Shanxi, Gansu, Ningxia, and Inner Mongolia in north-western China. The region is reported to have reserves of up to 60 bn barrels of oil.
To defray the costs of exploration China has opened up its energy sector, which was previously off-limits, to foreign investors. Companies such as ExxonMobil, which owns a 19 % stake in Sinopec, are being wooed not just for their capital, but for their refining and marketing capabilities. ExxonMobil ishelping Sinopec establish more than 500 gas stations across the country and building at least two refineries in southern China.

Sharon Hurst, an executive with ConocoPhillips in Beijing says Western investment and cooperation is helping Chinese oil companies morph into world-class players. Two of China's largest state-owned oil companies, PetroChina and Sinopec, have listed on Wall Street and others are undergoing massive rounds of recapitalisation and restructuring.
Chinese dealmakers also are pursuing oil contracts with governments in Southeast Asia, Africa, Central Asia, and Latin America. Just in September, China signed a landmark deal with oil-rich Venezuela and its neighbour Colombia. Under the terms of the deal the parties will construct a pipeline linking oilfields in Venezuela to ports along Columbia's Pacific coastline. This will allow Venezuelan oil to bypass the Panama Canal, creating a new and direct route to China.

Source: The Boston Globe
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