Amongst the major players shaping the new oil economy, China plays an important role on the demand side of oil equation. China imported 145.2 million tonne of crude oil in 2005 and imported 159.3 million tonne in 2007. The figure for 2008 is estimated to be 170 million tonne. The rising living standard led by new found wealth in China (between 1996 and 2006 the number of private cars rose from 2.9 million to 23.3 million) and the rapid pace of industrialisation has create a ever rising demand for oil for foreseeable future.
China overtook Japan as the world?s second largest crude oil importer in May this year. Japan?s crude oil imports in May rose 8% to 3.76mbpd, which was surpassed by China who in turn imported 3.81mbpd. This surge in demand can also be temporary as Chinese tries to corner enough oil to avoid any disruption during the upcoming Olympics and ensure enough supplies for earthquake hit regions. In reality, the Chinese consumption of oil has actually decelerated in recent times. It is estimated by EIA that Chinese oil consumption will only grow from 8 to 8.4mbpd from this to next year and this is well below its anticipated GDP growth rate.
At current prices the demand for oil, which we normally assumed to be inelastic, may well drop in long run. Much of the inelasticity is stemmed from the subsidies enjoyed by populations of many countries. However, as governments starts aligning prices of oil to market levels, as recently being witnessed in Egypt, China, India, Indonesia, Malaysia and Taiwan, the demand will rationalise, consumption will fall and result in increase of supply as domestic oil companies capitalise on higher prices.
While the growth of emerging market is cited as one of the key reason that oil prices will continue to rise in future, ignored is the fact that many countries are witnessing aging population and many countries will see zero or negative population growth for many years to come. For instance, of the top 15 oil consuming nations, 10 of them will see negative or zero population growth for the next decade. This will severely restrict any significant increase in overall oil consumption.
If the fundamental demand supply situation is only partly responsible for the astronomical rise in the current oil price, can speculators be the real culprits? One technical symptom, which confirms this view, is the increasing anomaly between the spot and future prices of crude oil. There seems to be more demand for paper oil than physical oil at the current prices.
Most of the recent speculative activity in commodity prices in US is being channelled through a relatively unregulated mechanism. Energy futures, which were earlier traded through exchanges such as New York Mercantile Exchange regulated by The Commodity Futures Trading Commission (CFTC) are now traded on OTC electronic market which were removed from ambit of CFTC by passage of a act in 2000.
As of last year-end, the total outstanding contract value on OTC commodity exchange stood at $9 trillion, up by $1.9trillion over the previous year. Assuming oil constitutes around 70% of the contracts, the new money being poured in oil contract would be $1.33 trillion. The last several decades have been defined by rapid technological innovation on back of cheap and abundant energy. Hopefully, the same forces will prevent the energy price to devastate major structural pillars of modern economy.
Concluded
?The writer is the business development manager for Infosys and a fellow of India-China Institute. These are his personal views
