Fuel driving China’s engine costing more

By David Smith Special to The China Post

At a recent lunch speech to the ECCT, noted German Economist Norbert Walter talked about the world’s booming economy and how long it would last. The thriving world market is being pushed by Chinese mainland and the United States, but they are being energized for different reasons. In the United States, a weak dollar and the incentives of a “permissive” monetary policy, are pushing things while in China the growth has been taking off so much that the government there when trying to control growth recently tried to push banks to curb rising interest rates. And while a recent report released by the U.S. Department of Commerce showed a growing U.S. trade deficit and a drop in consumer spending, not everyone thinks China’s economic run is stopping in its tracks. Last week, two economic reports were released, one from the director of the US Federal Reserve Chairman Alan Greenspan and the other from the director of the Asia and Pacific Group of the International Monetary Fund. They both talked about the economic slowdown in China. While Greenspan said the economy in Asia had a “braked sharply” in a written report to the U.S. Congress, the IMF said there was a “mixed picture” on whether China’s growth would be slowing. But one thing they both agreed upon was the China was the motor that was powering the world’s markets. The Chinese motor needs two commodities to sustain its run: those are steel and cement production, which are needed for their flourishing construction industry, both of these are highly energy intensive.

Asia’s oil demand

With China acting like a greedy magnet for energy while the manufacturing giant builds up its infrastructure, all the time consuming energy, whether from electricity or oil or to make steel and cement and automobiles. Asia’s oil demand is not getting any smaller, in fact anchored by China and India it is growing and as a result and helping spur demand which in turn is buoying prices even more. This is turn causing inflation for all the other Asian economies like Taiwan. So while the need for steel and cement drives up their prices it also drives up the price for energy, massive amounts of which are needed to produce them.

According to a Bloomberg report, these industries have seen a 31 percent expansion from a year earlier in the first seven months of 2004.

Among Walter’s many topics was, of course, oil prices and unlike a lot of analysts he said oil prices were too high and would more than likely drop.

But while he is a known as a good predictor of all things financial, the Chief Economist for the Deutsche Bank admitted he didn’t have a crystal ball. “Last night, Western Texas was US$48 a barrel, and everyone agrees that it will probably make it to 50, so is it time to revise my forecast upward,” Walter said. “I believe that we will have a few more days of these excessive prices, (barring events such as Saudi Arabia being attacked), I expect oil prices to fall back in 2005 to US$40 a barrel.”

World’s oil reserve

Walter gives the reasons that he believes oil prices are too high. “The oil reserves of the world are concentrated in Iraq and in Saudi Arabia. These two countries are anything but politically stable, therefore the supply of oil from this source is in danger.” He believes that to counter this lack of stability, different countries in the world are building up reserves in order to form a strategic buffer. “The world’s sea is afloat with floating oil. And many more countries are developing ideas to increase the potential to stock strategic oil reserves. “This has added strategic demand to the current demand of oil.” He also doesn’t think investors will be attracted to investing in oil. “In the next one to two years the belief in the oil floor price makes the potential developers, potential explorers hesitant to invest because they believe it would not be a yielding investment,” he said. Even the Taiwan government admits for that the short term, oil prices are going to rise. The Council for Economic Planning and Development (CEPD) recently said that local prices were almost certain to rise and stay for period of time.

Steady price in Taiwan

They say this is due to the deep concern about the size of international oil reserves.

Taiwan does however have the advantage of actually decreasing its percentage of oil imported per products produced as that type of manufacturing has shifted to the mainland. Taiwan’s Chinese Petroleum Corporation chief said in July they wouldn’t raise prices but if they don’t start putting in price hikes soon it will probably cut into their profits. The state-run corporation is like many in Asia that subsidize their economies by limiting oil prices, other notable ones being Thailand and Indonesia along with China and India of course. With the ongoing war in Iraq, continued troubles in Saudi Arabia, along with the imminent bankruptcy Russian energy giant Yukos is facing, there is little to be optimistic about as far as lower prices go. Or is there? According to other published reports, China has been trying to make a deal by purchasing Yuganskneftegaz, the production arm of Yukos. According to a recent report the Chinese government has denied such a claim. Yukos was recently convicted by a Russian court and ordered to pay billions of U.S. dollars in back taxes.