Saturday, April 30, 2005

China futures

“A high oil price will damage markets, and he knows that,” President Bush proclaimed this week following his meeting with Crown Prince Abdullah of Saudi Arabia.

The image was unseemly and troubling. President Bush walking hand in hand with the robed monarch as they strolled down a path at his ranch, beseeching the Saudi's aid in alleviating oil price increases that are threatening to stall the U.S. economy and ground his presidency. The tension was palpable as the Saudis--vilified as the home of the 9/11 terrorists and the global financiers of militant Islam--have little reason to placate the United States, or even this President with his family ties to the Royal Family. After all, it is the Bush Doctrine that threatens the legitimacy of the House of Saud, and the riches and privileges of a clan that was just another Bedouin tribe a few generations ago.

What commitments came out of this episode of superpower groveling? Allusions were made to a commitment to increase Saudi production by 2009. However, officials agreed that there had been no request by the United States for the Saudis to increase production in the near-term to alleviate current price pressures. This was diplomat-speak for the President didn't ask for something that the Saudis had determined in advance that they would not provide.

The plain truth is that Saudi Arabia does not have the capacity--in the ground or in the pipeline--to solve the problem that is reflected in the oil markets today. The world has changed, and the Saudis know this. The problem of rising oil prices cannot be solved by incremental Saudi production. It cannot be solved by releasing oil from the Strategic Petroleum Reserve. It cannot be solved by drilling in Alaska. The problem reflected in the oil markets today cannot be solved through measures that incrementally address the supply of oil, for the simple reason that the problem reflected in the oil markets today is not a problem of supply, as it has been in the past, it is a problem of demand.

Yes, there are still problems with supply. Venezuela and Iraq have both had difficulty keeping their oil flowing, and the Russian government's prosecution of Yukos has periodically rattled the oil markets. But these problems are endemic to an industry concentrated in developing nations rather than a reflection of organized efforts at global supply manipulation as in the energy crises of years past. As oil rocketed past $40 and $50 per barrel, and predictions of $90 oil were heard, analysts recognized that the driving force in the market is not a problem of supply, it is a problem of demand. It is a problem of China.

China, with 1.3 billion people and an economy growing at almost 10% annually, has become the dominant force in world commodity markets, as illustrated by a doubling of world steel prices over the past two years. The scale of the Chinese economy is evident in the energy markets, where China has become the second largest energy consumer in the world, behind the United States, despite very low consumption on a per capita basis.

The raw numbers illustrate the depth of the problem. In 2001, China consumed 40 quadrillion Btu, or 10% of global energy production. At the same time, per capita energy consumption was 31 million Btu, or less than 10% of the 342 million Btu per capita in the United States. If Chinese per capita energy consumption were to grow over the next two decades from the current level of 31 million Btu to 175 million Btu, as in South Korea and Taiwan, aggregate annual Chinese energy consumption would grow by 144 quadrillion Btu, or an amount equal to 46% of current global production!

The problem that China presents is not going to go away. To the contrary, China has years of growth ahead of her as her people aspire to middle class comfort. While energy demand will ebb and flow as China learns the economic cycles of a market economy, Chinese energy demand will grow inexorably.

The President said at his news conference this week that it was his duty “to define problems facing our nation and to call upon people to act." And so it is. The image of the President toadying to the visiting Saudi symbolized eloquently the problem we face. It remains for the President to articulate to the American people that the current problem of rising oil prices is not transitory, that the world has changed and that it is time to act. We must commit ourselves to the development of a diversified energy economy because the price of not doing so, like the price of oil, is only going to increase.

Today, the dominant challenges facing our nation derive directly from our dependency on oil. The war in Iraq. The trade deficit. The value of the dollar. The stagnant economic recovery. These all flow back to the oil markets, and the oil markets flow back to China. The challenge that we face today in the oil markets is not about the price at the pump, it is about the future that we choose to create for our nation.

1 comment:

Chip Pierce said...

Amen. Market forces are going to end up doing far more to control energy consumption in this country than any policies coming out of Washington. As the price of filling up the family SUV passes $50 and moves toward $100, the market for gas guzzlers will diminish. That said, the fact that the federal government has done nothing to lead this nation away from dependence on foreign energy and toward energy independence is one of the great policy failures of the past 25 years.