Oil’s price out of US hands
TRAFFIC jams in Beijing and humming airconditioners in Dubai are replacing US highways and suburbs as the driver of global oil prices. China, India, Russia and the Middle East for the first time will consume more crude oil than the US, burning 20.67 million barrels a day this year.
This is an increase of 4.4 per cent, according to the International Energy Agency in Paris. US demand will contract 2 per cent to 20.38 million barrels daily, the IEA says.
Economic growth of more than 8 per cent in China and India, coupled with increasing car ownership among the countries’ combined populations of 2.45 billion people, will more than compensate for falling US demand. Oil use worldwide will increase 2 per cent this year because of growth in emerging markets, the Paris-based IEA says.
‘‘ Does the US matter anymore?’’ asked Mike Wittner, head of oil research at Societe Generale SA in London. ‘‘ Has the US mattered for the last few years? It is debatable. As far as the oil market is concerned, demand growth is going to continue to be driven by China and the Middle East.’’
Crude oil futures jumped to a record this week on the New York Mercantile Exchange, and are more than twice the level of three years ago.
CIBC World Markets, Societe Generale and Barclays say oil prices are heading higher because of increasing fuel consumption in emerging markets, regardless of a US downturn.
‘‘ The US recession will be a footnote as far as the oi market is concerned,’’ says Jeffrey Rubin, chief economist at CIBC World Markets in Toronto, who has correctly forecast higher oil prices since 2000. ‘‘ Supply isn’t growing and demand is growing robustly in the developing world.’’
Oil will average $120 a barrel for all of 2008, compared with almost $98 in the first quarter of the year, and reach $150 ‘‘ by the end of the decade,’’ Rubin says.
Historically, a recession in the US would lead to lower prices. Oil fell 26 per cent to $19.84 a barrel in New York in 2001 when the economy contracted. The US consumes 24 per cent of the world’s oil, down from 26 per cent seven years ago.
Oil demand in both China and India will rise by 4.7 per cent, according to the IEA. China, the world’s second-biggest energy user, will consume 7.89 million barrels of oil a day this year. India will use 2.92 million barrels of oil a day in 2008, more than is pumped by OPEC member Venezuela.
Emerging markets burn a fraction of the energy of the US, leaving room for growth. The 2.45 billion people in China and India used only half as much crude as 301 million Americans last year. The average person in China consumed less than 20 per cent as much energy as the average American in 2005, according to US Energy Department. In India, energy use is less than 10 per cent of America on a per-capita basis.
China’s passenger car sales jumped 22 per cent to 6.298 million last year and may rise 16 per cent to about 7.3 million this year. China may boost vehicle output by a million units a year for the next decade to reach 20 million a year by 2017, according to the China Association of Automobile Manufacturers.
Russia and the Middle East are benefiting from rising oil prices. Russia’s economy expanded at an annual 8 per cent rate in the first quarter. Russia, the world’s secondbiggest oil exporter, will probably grow 7.1 per cent this year.
The Russian Government plans to spend some of its new wealth on updating Soviet-era transport links. Russia may invest as much as ($895 billion) to improve transportation infrastructure during the next seven years.
Middle Eastern economic growth will probably accelerate to 6.1 per cent this year from 5.8 per cent in 2007, the International Monetary Fund said on April 9. Oil demand in the region will surge 5.8 per cent to 6.97 million barrels a day this year, according to the IEA.
‘‘ Many emerging economies are relatively isolated from the impact of the US recession,’’ says Edward Morse, chief energy economist at Lehman Brothers Holdings Inc. in New York. ‘‘ In the Middle East demand is expected to grow 350,000 barrels a day this year. These are a large number of very small countries having rampant demand growth.’’
Prices may rise as much as $20 a barrel this northern summer because of Middle East power needs, Morse says. A hot summer would likely result in more burning of crude oil for power generation and a diversion of natural gas from enhanced recovery of oil deposits.
‘‘ The predominant market view is that the emerging economies will overcompensate for any possible demand slump in OECD countries,’’ says Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt. ‘‘ I couldn’t rule out that oil may go to $150.’’
The Paris-based Organisation for Economic Co-operation and Development represents 30 industrialised nations, including the US, Japan and Germany.
Government price caps and subsidies in India, China and the Middle East protect the public from higher gasoline and diesel prices, measures designed to limit inflation. In Iran, OPEC’s second-biggest oil producer, subsidised petrol pump prices are 1000 rials a litre, about 11 US cents.
‘‘ Subsidies of commodity prices buffer populations in oil emerging economies from price increases,’’ Morse says. ‘‘ This has the effect of increasing fuel demand.’’
US pump prices have followed crude oil higher. Regular gasoline, averaged nationwide, rose 2.7 cents to a record $3.44 a (US) gallon on April 18, according to AAA, the nation’s largest motorist organisation. In the UK this would have cost $7.99 on average on March 31, according the Automotive Association.
‘‘ Even if the fundamentals in general, particularly this quarter, were to weaken, we would think investment flow could be pushing prices to records anyway,’’ Wittner says.
Investors have transferred money into commodities, especially energy, during the past year because their returns have outpaced stocks and bonds. Oil gained 22 per cent, while the S&P 500 slid 5.6 per cent and government bonds returned 12 per cent. Bloomberg
Biggest users: Emerging economies such as China now fuel demand for crude oil, not the developed US