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The Wall Street Journal: Asia Keeps Pressuring Oil Prices

Wall Street Journal Chart

Economic Growth Offsets
Efforts to Curb Demand;
Ambivalence on Ethanol
By PATRICK BARTA
October 23, 2007; Page A2

Asia’s fast-growing economies have made some progress in addressing their seemingly insatiable demand for oil, but they continue to fall far short of the cuts needed to significantly reduce pressure on global supplies.

Galloping growth in Asia, led by China, was one of the key reasons global oil prices started shooting up in 2004. China’s economy was racing ahead after years of relative global insignificance, ignited by a spurt in new industrial output and a wave of domestic consumption of items, from cars to air conditioners, that pushed energy demand dramatically higher.

Since then, governments in the region have initiated projects to cut back on oil consumption, including boosting factory efficiency, conserving electricity in stores and government offices, and expanding the use of alternative fuels such as ethanol.

But many of the efforts have been thwarted by faster-than-expected growth and by the reluctance of governments to take unpopular steps to push up the cost of using fuel and rein in demand. Moreover, much of Asia’s oil demand is driven by transportation needs, making it difficult to alleviate with alternatives such as coal or nuclear power.

Asian demand for oil is on track to hit 25 million barrels a day this year, an increase of 2.5% from last year, according to the International Energy Agency in Paris. World demand is set to rise a more modest 1.5% and may even decline in Europe. (The U.S. — which is on pace to consume 20.9 million barrels a day this year, up less than 1% from last year — remains the world’s single largest consumer.)

Crude futures fell $1.04 a barrel, or 1.2%, to $87.56 yesterday on the New York Mercantile Exchange. Oil is up 43% so far this year.

Several countries, including China and India, continue to subsidize consumer fuel costs and in some cases have cut gas-station prices this year as oil prices have surged. Such moves help shield everyday users from the swings of global oil markets but also discourage them from cutting back when global prices rise.

The recent decline in the value of the U.S. dollar — and parallel rise in the value of some Asian currencies — has also given Asian consumers more power to spend liberally on fuels, because oil is typically priced in dollars and therefore cheaper to buy.

Distorting factors like energy-price subsidies “have not been conducive to the kind of energy-efficiency improvements that would have been warranted by the run-up in oil prices since the Iraq war,” says Ifzal Ali, chief economist of the Asian Development Bank in Manila. As a result, “we have not seen a slowdown in the appetite for energy from improved energy efficiencies.”

Asian governments are also becoming more ambivalent about crop-based alternative fuels such as ethanol and biodiesel, which are made with agricultural commodities, including corn and palm oil. Prices for such crops have soared in recent years, and many governments no longer want to promote fuels that use agricultural commodities because they fear it will cause broader food-price inflation and harm low-income consumers.

Officials in China and elsewhere remain keenly aware of the dangers that high oil prices pose to their economies. Asia must burn more fuel to generate economic growth than the West, primarily because it is more reliant on energy-intensive industries like heavy manufacturing than other parts of the world.

But Asia held up well when oil prices first jumped in 2004, and many Asian governments, including China, have huge cash reserves on hand to bail out their economies if oil prices keep climbing. The Asian Development Bank recently raised its estimates for 2007 growth in Asia excluding Japan to 8.3% from 7.6% in an earlier forecast.

Such success may have bred complacency. In Thailand, officials have long since abandoned a string of energy-conservation measures announced in 2004 that called for department stores and gas stations to close earlier to cut electricity usage, among other things.

Meanwhile, a nationwide effort to boost production of ethanol from domestic crops has fallen far short of expectations, in part because the Thai government backtracked on a plan to replace some regular gasoline with a blend that uses ethanol. Officials said they reconsidered the plan after determining that many of the country’s older cars aren’t equipped to use ethanol-blended gasoline.

The move infuriated ethanol producers, which had expanded production in anticipation of the policy change and are now left with a supply glut.

In China, the government and private sector have started initiatives to trim oil demand, including a doubling in the country’s wind-power capacity last year. Some Chinese provinces imposed mandatory use of ethanol to fuel vehicles, and the government has approved a plan to increase renewable energy to a larger percentage of the country’s overall energy use.

The government has also unveiled a number of energy-efficiency plans, including setting new emissions standards and incentives for factories that achieve efficiency targets. Overall, the Chinese government aims to cut energy consumption per unit of gross domestic product by 20% by 2010.

The efforts have yielded some gains, but not enough to fundamentally alter China’s energy equation. Energy use per unit of GDP declined about 1.3% in 2006, according to government records, reversing an earlier trend of worsening energy efficiency. But the improvement was well below the government’s target of 4% for the year, and many analysts remain skeptical the longer-term targets will be met.

Crude-oil demand growth in China has cooled some, too, but not dramatically. In the past three years, crude-oil demand grew an average of about 9% a year, according to the IEA. This year, the IEA says China’s oil demand is on target to grow 6% to about 7.6 million barrels of oil a day, followed by similar growth next year. But China’s economy continues to grow faster than expected. GDP growth is now estimated to be on track to surpass 11% this year.

“A lot of the positive things that the government is doing are overwhelmed by the forces” of rapid growth around them, says Jonathan Sinton, a China expert at the IEA.

More broadly, the Chinese government continues to promote the kind of economic development that is likely to keep oil consumption growing rapidly for at least the next several years. This includes massive outlays for highways and new factories. It also includes efforts by the government to encourage the development of a large domestic car industry.

•  Thirsty Asia: China and its neighbors have made some progress in curtailing energy usage but not enough to take upward pressure off the price of oil.

•  Why it Matters: Asia’s economic expansion has been a major reason for the oil-price rise.

•  Unquenched: Asian demand for oil is expected to rise 2.5% this year from last, while global demand rises 1.5%.

–Shai Oster, Gordon Fairclough, Sue Feng, Kersten Zhang and Ellen Zhu contributed to this article.

Write to Patrick Barta at [email protected]

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