China and its Role in the Oil Price Rise
Walid Khadduri Al-Hayat - 28/10/07//
There are a number of reasons behind the rapid increase in oil prices. Some people say that the reason is OPEC members' failure to take the initiative to raise production to achieve the required balance between supply and demand in international markets. In fact, there is no actual shortfall in markets; the current anxiety is due to the fear of a surprise interruption in future supplies, for political, climatic or industrial reasons. The commercial oil reserve, especially in western industrial industries, stands at the average levels it has reached over the last five years. The criticisms of OPEC by the International Energy Agency can be summarized as follows: OPEC states don't want to increase production enough to enable western industrial states to compensate for what has been drawn down from the commercial reserve in past months.
For its part, OPEC criticizes the role of speculators in oil markets, since their daily investments are estimated at tens of billions of dollars, while the scope of oil transactions that they deal with on a daily basis is dozens of times bigger than OPEC's level of production, and thus, their big impact and influence on oil markets are not matched by any significant responsibility for developing the industry itself.
China is being cited as one of the chief reasons behind the price rise these days, although Chinese officials deny this "accusation." Their excuse is that the basic change, after important political and economic transformations in this big country, involves the fact that China was an oil exporting country until 1992, albeit in small amounts.
However, with the sustainable economic growth in recent years and the failure to discover new giant fields in the country, China has become forced to import three million barrels a day, making it the world's second biggest oil-consuming country, after the US and ahead of its neighbor Japan. Chinese officials add that their oil consumption rate of around 6.6 million barrels a day is a drop in the sea compared to total world consumption of 85 million barrels a day.
China has become an important importing country after its earlier status as an oil exporting country and has achieved huge growth when it comes to its annual average consumption; oil consumption has doubled over the last ten years alone. These Chinese transformations have fundamentally changed the balance of world supply and demand. Before the changes in China, the oil market basically depended on economic changes in western industrial countries. The annual average of oil consumption increases in Europe and Japan dropped considerably and this average grew at reasonable rates only in the US, due to the rising consumption of gasoline, which now exceeds 9 million barrels a day.
This was reflected on the world price level, which remained at around $20-25 a barrel until 2003, when a big and perceptible increase in China's consumption began. This coincided with a huge labor strike in Venezuela, which led to a big shortfall in oil production, as productive capacity fell by 400,000 barrels a day, and continues to suffer from this up to the present.
At the end of 2003, political turmoil began in Nigeria and the Niger Delta Liberation Movement began a guerrilla war against the federal government; this violence included the sabotage of oil facilities, which led to the stoppage of around 900,000 barrels a day out of Nigeria's productive capacity, or approximately one-third of the country's energy. The acts of sabotage continue today, although at reduced levels.
The US launched its war against Iraq in the spring of 2003, which led to the halt of Iraq's production for a number of months. Acts of sabotage and mismanagement during this period have meant that Iraqi production has not returned to earlier levels, and continues to fluctuate around 2 million barrels a day, instead of the 2.5 million mark that it reached in 2002. In addition, there have been continuing threats against Iran because of that country's nuclear crisis.
It's thus clear that the role of China is but one of the many complicated interconnected international factors that interact to determine the level of oil prices. These factors have combined to see oil enter a new era in terms of price. It's believed, in what is only an estimate, that the current range of prices is now $50-80 a barrel. If certain unrest comes to pass, such as Turkish military action against Iraqi Kurdistan, we should expect a jump to above $80 a barrel, as is currently the case. It is difficult to predict a new price level if armed conflict takes place with Iran.
However, despite all of this, it is expected that China will remain a major player in world oil markets for the foreseeable future. This giant is planning to move more than 300 million people from the countryside to the cities by 2025, meaning the increase in the growth of Chinese cities will nearly equal the population of the US today. The rural-urban transformation will certainly mean a big rise in energy consumption, from gasoline to electricity. Living in cities will require a higher standard of living and completely different consumption patterns than those of the countryside, meaning an increase in energy consumption that is much higher than the current one.
*Dr Walid Khadduri is an expert in energy affairs
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