A puzzling drop in China's oil consumption
 
Jul 14, 2005 - International Herald Tribune
Author(s): Keith Bradsher

 

The International Energy Agency on Wednesday lowered its estimate of global oil demand this year, citing a sudden and mysterious drop in Chinese consumption. After growing 11 percent in 2003 and 15.4 percent last year, China's oil use dropped by 1 percent in the second quarter of this year from a year earlier, the agency said.

 

The drop is the latest in a series of unclear and often conflicting indications about whether the Chinese economy is still growing strongly.

 

Top International Energy Agency officials said in interviews that they believed that the decline was temporary, and that they expected Chinese demand to recover in the second half of this year. But they added that world oil prices could take a heavy blow if Chinese oil use did not rebound. Supported by the governments of the leading oil-consuming countries, the agency is usually known for warning that the world does not have oil and calling for the Organization of Petroleum Exporting Countries to authorize more production. But William Ramsay, the agency's deputy executive director, said there were signs now that the worldwide capacity to produce oil was starting to move ahead of demand.

He expressed surprise that oil prices have nonetheless stayed high. "There are not the conditions out there right now that should lead to these kinds of prices," he said in an interview in his office, which faces the Eiffel Tower two blocks away. The international oil market has become out of line with the actual availability of oil, he said. "It gets in one of these bullish moods, and it has to be dynamited out of it," he said. "The fundamentals are not disquieting." While many oil traders have expressed concern about Beijing's announcement a week ago that it was close to completion of the first of three oil tank farms for a strategic reserve, Ramsay said that he doubted Chinese officials would opt for quickly filling the reserve as long as oil stays near $60 a barrel.

The most likely explanation for the drop in Chinese oil demand is a temporary one, said Fatih Birol, the agency's chief economist.

 

He said that it was possible that China has not been allowing the domestic price of electricity and many refined petroleum products, like gasoline and diesel, to rise nearly as quickly as world prices.

 

This has caused power generators and service stations to sell less electricity and less gasoline and diesel in order to limit their losses. Chinese refiners have been selling part of their output overseas at higher prices than they can obtain in the highly regulated domestic market, where gasoline, for example, now sells for the equivalent of 43 cents per liter, or $1.65 a gallon. China's consumption of fuel oil plunged by 19 percent in the second quarter from a year earlier, said Jeff Brown, a Paris-based oil demand analyst, while growth in refined fuel consumption has slowed to a crawl. But while diesel shortages and lines of trucks at empty service stations were a visible problem in China in April, they were not evident during trips over the past three weeks through southern China and to Beijing, and there has been little talk of shortages in the mainland or Hong Kong media.

When told this, Birol said that a vigorous debate had taken place over the past two days within the energy agency over how to explain the decline in Chinese consumption. He said that other, longer-lasting explanations were also possible. These include the possibility that the entire Chinese economy is starting to slow, that China is generating more of its electricity from coal instead of oil and that China is improving energy conservation in response to higher prices. Economic statistics have been contradictory. Exports are still growing rapidly. But energy-intensive output of steel, cement and other construction materials has started to slow as Beijing has cracked down on real estate speculation.

In the past year, China has expanded considerably the capacity of its coal mines and, just as important, the capacity of its rail system to haul coal to markets. Beijing has also urged businesses and households to use less energy and has asked them to take steps like setting thermostats higher to cut use of air conditioning systems.

 

 


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