04/24/2004, 00.00
China
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Greater conflict in Gulf would spark economic and social crisis

by Maurizio d'Orlando

Rome (AsiaNews) - If a crisis in Iraq or any other Persian Gulf country were to block oil exports out of the region, Asia would be the hardest hit market. It depends on Middle East crude to satisfy a large part of its energy needs. Crude prices could end up varying 60-90 dollars a barrel, paralyzing economic growth throughout the entire Asian continent.

Yet even without calling to mind such scenarios, oil prices are already heavily influenced by Asia, especially China.

Prices have increased during the first quarter of 2004. Yet there is, in fact, no speculation that OPEC has played a major role in this. The main cause is precisely found in an explosion in energy demand across Asia, with China leading the way. It is China which has registered the greatest increase in oil imports, 60% coming from the Middle East.  

Proof of this is what has happened recently. We are in period of the year in which oil prices normally go down, since there is less demand to heat buildings and home in the northern hemisphere, where most of the world's population lives. To prevent a major drop in prices, in February OPEC cut supplies by 10%.  Yet both OPEC and IEA (the International Energy Agency associated with Western countries) have underestimated Asia's energy demands. They didn't take into consideration the continent's economic boom and, thus,  had to change their demand forecasts around the beginning of April.

According to the Chinese news agency, Xinhua, China's oil imports have increased by 35.7% during the first trimester of 2004. At the end of the year China is expected to import in excess of 100 million tons crude.

In 2003 China's demand increased by 31.2% with respect to 2002. This figure is particularly significant in that China has become the second largest importer of oil. Only the United States imports more crude. In January Chinese consumption reached a record 6.09 million barrels a day, roughly 7.5% world total per day consumption (80 million barrels).

On the basis of new projections more than a 35% global increase in oil consumption (1.65 million barrels a day) is derived from increased Chinese demand, especially in terms of oil used for production of electricity (due to rapid industrial expansion).   

At the same time China is trying to reduce its use of coal, which in 2003 supplied 61% of the country's energy but with antiquated plants consuming an average 22.5% more than their Western counterparts.

China's unusual large use of coal, incomparable to other countries, is due to two factors: the first reason is that it is mined locally and does not involve exorbitant expenditures; the second is the low salaries of the miners themselves, thus keeping prices competitive.

The use of coal has its disadvantages, both in terms of mining (accidents, deaths), transport (moving huge volumes which stifle traffic on national routes and local roads) and pollution.

Burning coal leads to serious environmental problems. Many cities are covered by clouds of coal smoke mixed in with the regular smog, precipitating in the form of acid rain and changing the circulation of air in the atmosphere. In some areas there is increased risks of desertification, as a result. Other areas suffer from massive flooding in certain periods of the year. 

Electricity production, even though it increased by 15% in 2003 and 16.4% in the first trimester of 2004, is not sufficient to satisfy China's potential demand. The lack of supplies this year will be at least 30 million kW. The consequence is that 21 provinces experienced continuous blackouts in 2003, and this year 24 regions have been likewise affected.

Having more convertible currency to spend on the world market, thanks to its strongly increasing industrial exports, China is now attempting to diversify its energy sources.

In past articles AsiaNews reported on Beijing's efforts to obtain natural gas from  Australia, Indonesia, Russia (Eastern Siberia), Turkmenistan, Qatar, Saudi Arabia and Iran. In terms of China's huge hydro-electrical plants there are 28 under construction (among which is the Three Gorges Dam hotly contested by environmentalists). Meanwhile, nuclear energy should supply 36 million kW by 2020, just 4% of construction. 

Hydro-electric and nuclear plants and gas lines require a long time to build and are huge economic investments. The latter plays a crucial factor in development, since China's investment in fixed capital (i.e. plants and machinery) is undergoing spurts at unsustainable levels. With a 43% increase this past trimester (compared to the same period in 2003) it is practically certain that the Chinese economy will "overheat".

Shortly, therefore, China will have to resort to importing more oil. Until now, however, affects on prices have been relatively contained. English Brent crude, mostly used on a world level as a point of reference, has increased from 28 dollars to 32-33 dollars a barrel in recent months. 

China's increased levels of consumption has had more marked effects on other raw materials. AsiaNews recently wrote articles on China's increased use of steal and iron products, which in certain cases has already increased by 300% due to the country's massive internal demand.

Record prices have also been recorded for many non-ferrous metals like molybdenum, copper (almost up 90% in 12 months) and nickel (nearly by 40% more in one year). Soy prices have reached their highest mark since 1988 while corn and wheat prices are at their peak rates in the last 18 years. 

The point is that the model of Chinese development is characterized by an intense use of resources. If in the fifty year period since the founding of the People's Republic of China the country's GDP (gross domestic product) increased by 10 times, its consumption of mineral resources increased by forty times more.   

Last year China, compared to worldwide totals, consumed 31% of all coal, 30% of iron ore, 27% of steel, 25% of aluminum oxide and 40% of cement. On the other hand, China's GDP was a bit less than 4% of that of the entire world with its population being around 20% of the entire globe. It is therefore likely that even oil consumption will increase by its current 7.5% of the total figure.

To shed even more light on the seriousness of the energy problem one must consider that in 2001 the Communist Party set the goal of quadrupling its GDP by 2020. Even supposing a relatively modest 6% increase in the rate of annual GDP growth (the current year is estimated at +9.5%) oil imports alone would be 6 million barrels a day in 2020.    

This figure is well over 6 timer the total volume of imports in 1999, 3 times that which has been projected for 2004, having thus rapid progression. For the sake of comparison, in 2002 the entire OPEC production was 24 million barrels a day and total Saudi Arabia exports were equal to roughly 7 million barrels a day.

Obviously, should growth be effectively that which is planned for 2020 and bearing in mind the need to reduce coal consumption and the increase number of cars in circulation (+ 75.3 % in 2003), more than the entire Middle East production of crude would be necessary to satisfy Chinese needs alone. Hence, more than any other continent, Asia needs the Middle East to enjoy lasting peace and stability.

China's (and in general Asia's) demand for oil is, as a matter of fact, ibent towards gasoline, diesel and kerosene consumption. Should a crisis ensue and block Persian Gulf exports, given Asia's little capacity to refine heavy and high sulfur content crude, only Western Africa would be able to supply light low-sulfur crude. Being thirsty for oil, Asia and China would then depend on shipments of oil on super-tankers forced to circumnavigate Africa around the Cape of Good Hope.

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