Oil’s price out of US hands

The Weekend Australian - Travel - - University & Higher Education -

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

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