China's
Growth Fuels Global Energy Markets
by Joseph Dancy,
LSGI Advisors, Inc.
Adjunct
Professor, SMU School of Law
January 5, 2004
An increasingly energy-thirsty China is expected to surpass Japan to become the world's second-largest crude oil importer next year. China's faster-than-expected growth in oil demand has lead to a huge shortfall in meeting its’ requirements from domestic production.
The energy shortfall may eventually limit China’s economic growth, and even trigger a worldwide struggle for limited reserves according to a study by analysts at China’s Ministry of Communications and the Shanghai Shipping Exchange.
China was a net exporter of energy for the three decades that preceded the 1990’s. Since then its’ economic growth and need for energy has far outstripped its’ domestic production of crude oil. The shortfall of domestic oil production, combined with soaring energy use, forced China to become a net crude oil importer in the early 1990’s.
Statistics
from the Chinese government indicate that imported oil has increased
from nothing in 1990 to over 20 million tons (0.4 million barrels per
day) in 1996. Today nearly 90 million tons (1.8 million barrels per day)
will be imported into China in 2003, up 30% over year earlier levels.
In the next five to ten years China's oil demand is expected to grow by 4% yearly, following an average 6% annual increase over the past ten years (see chart). As a comparison, U.S. crude oil demand increased around 1.5% per year in the last decade and is projected to continue to grow around 1% per year.
In 2005 China is expected to increase its’ imports of crude oil to 100 million tons (2.0 million barrels per day). By comparison, the United States currently imports around 530 million tons (10.6 million barrels per day). Domestic production in China is only growing at 1.7% annually, so will not meet the growing demand.
Dr. Marc Faber, an economist, recently noted that the pace of development in China is nothing short of incredible. He points out it took Great Britain nearly 60 years to double per-capita income from 1780 to 1838, during its industrial revolution. Japan took more than 30 years to accomplish the same thing from 1885 to 1919. But China is doubling its per-capita income every 10 years according to Faber. As a result, if the growth of China continues on its current path, Faber claims it will need additional oil equal to the "total current output of Iraq, Kuwait and Qatar," possibly requiring "83 percent of total current [world] oil output" by 2015.
The surge in current Chinese oil demand is being driven by economic growth the energy-hungry automobile, electricity generation, infrastructure, and construction sectors. In Beijing, as personal wealth grows, the number of cars on the city's roads is rising by 25% a year. Despite the rapid growth, there are still only three cars per 1,000 people in China, compared with more than one vehicle for every driving age American.
More than half of China's provinces have been hit by energy shortages this year, and the government has warned that energy shortfalls could hinder the economic growth. Power consumption is expected to rise 15% to 1.88 trillion kilowatts next year, according to the national power grid. The International Energy Agency (IEA) recently concluded that China's campaign to reduce its dependence on polluting coal-fired power generation has led to a shortfall in electricity generating capacity, and has increased the use of crude oil for oil-fired power plants.
Although
new generating plants are being built they are not sufficient to meet
the growing demand for electricity. According to the China Economic
Times the shortages will worsen next year, and output will remain
insufficient until at least 2006. Nuclear plants account for only 1% of
generating capacity, increasing the consumption and reliance on crude
oil for electrical generation. This consumption has lifted China into
the ranks of the world's biggest oil importers.
China will see an increasing dependency on crude oil imports, with the amount of imported crude oil rising from 31% of demand in 2002 to 50% four years later according to the research. Due to the increasing reliance on imports, China plans to establish a 90 day strategic oil reserve to protect itself against global supply shocks.
In a globalized economy that is heavily dependant on energy to fuel economic growth, this massive increase in Chinese demand should provide energy producers with an attractive pricing environment. Investments in the energy sector – natural gas, crude oil, or coal – should do well over the next decade.
ANOTHER BULLISH VIEW OF THE NORTH AMERICAN GAS INDUSTRY
In light of our analysis of the natural gas market last month, we thought we would share the conclusion of a recent note on the energy sector prepared by Raymond James & Associates:
Underpinning our overall bullish view of the energy stocks is our belief that U.S. gas production is falling and will continue to fall regardless of increased drilling activity. Simply put: If production keeps falling, then the market must ration natural gas with higher prices. . . .
Recently, there have been several data points suggesting that maybe U.S. gas production is actually increasing. To better gauge real U.S. gas production trends, we took four different approaches to estimate year-over-year production trends, including: 1) reported – and certified – quarterly gas production data from publicly traded companies; 2) rig efficiency comparisons between public and private E&P companies; 3) Canadian gas production trends; and 4) state production data.
While some assumptions had to be made with each method, all four of these methodologies tended to arrive at similar conclusions. That is, overall third quarter U.S. gas production has fallen at least 2.5% on a year-over-year basis. More importantly for investors, we believe this type of production decline is likely to continue for the next several years. While we may be in the minority, this gives us confidence in our $5+ [per thousand cubic feet] gas forecast for this winter and next year. Eventually, the market will reward the energy stocks for these very healthy industry fundamentals.
© 2004 Joseph Dancy
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Joseph Dancy, Adjunct Professor
Oil & Gas Law,
SMU School of Law
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