Big Thirst for Oil Is Unslaked
Demand by U.S., China Rises
Even as Price Nears $60 a Barrel
By BHUSHAN BAHREE
Staff Reporter of THE WALL STREET JOURNAL
June 21, 2005; Page A2
Oil consumption remains strong even as petroleum prices approach $60 a barrel, sparking concerns that growing demand could spur still-higher prices and further damp economic growth.
Gasoline and diesel use continues to rise strongly in the U.S., the largest oil consumer by far, despite high prices and a slowing economy. China, the world's No. 2 oil user, continues to burn more fossil fuel to power its domestic economy and meet rising demand for its goods.
The rise in prices is being driven primarily by strength in these two giant economies, not by shortages as in the great oil crises of the 1970s and 1980s. But the dynamic nonetheless leaves the world economy in a bind: Economists say energy prices are re-emerging as a prime constraint on the world's growth potential. At the same time, rising oil prices haven't inspired the kind of conservation measures that helped the world get through past energy crunches.
"Oil prices aren't really going to turn down until the global economy turns down," says Philip Verleger Jr., a senior fellow at the Washington-based Institute for International Economics. "I could see oil at $90 a barrel" by next March 31, Mr. Verleger added, citing supply tightness, particularly in refined products, and the approaching winter in the northern hemisphere, when oil use typically peaks on a seasonal basis.
U.S. benchmark oil futures for July delivery settled up 90 cents, or 1.5%, to $59.37 a barrel on the New York Mercantile Exchange. Intraday, it traded as high as $59.52, the highest level since Nymex began trading crude oil futures in March 1983. While still well below oil's inflation-adjusted high of $94.77 a barrel in April 1980, yesterday's price marks a 22-year inflation-adjusted high for crude, exceeding the high of $58.81 reached before the first Gulf War in 1990.
The world economy suffered a modest slowdown from last year's burst in oil prices above $50 a barrel, and this year's higher prices have led some economists to trim their growth forecasts. In a report published Friday, economists at Citigroup Inc. cited the sharp jump in oil prices of the past month in shaving their forecast for U.S. economic growth this year by a quarter of a percentage point, to 3.5%.
The U.S. economic growth rate is expected to slip to 3.6% this year, according to the International Monetary Fund, from 4.4% last year, due not only to higher oil prices but also rising interest rates and budgetary concerns. Rising rates and pricier energy are damping the global economy, too, with global growth expected to dip to a rate of 4.3% this year, down from 5.1% last year.
The latest jump in oil prices could be a particular problem for the sluggish euro zone, coming at a time when the euro has been falling against the dollar, the currency in which oil is traded. A strong euro helped insulate the continent from last year's gain. This year, the oil-price boom and weakening euro have resulted in a 20% jump in oil prices in the 12-nation zone in the past month, economists at J.P. Morgan Chase said in a report Friday.
This year, the U.S. and China are expected to account for more than 40% of the 1.8 million-barrel-a-day growth in world demand of oil to 84.3 million barrels a day this year, according to the IEA. "There is absolutely no sign of flagging oil demand in the U.S.," Barclays Capital noted in a review last week. "Indeed, oil-demand growth is actually speeding up," the review said, noting that U.S. government data for early June showed gasoline demand at a level never before seen in any month.
According to IEA data and forecasts, U.S. oil demand is expected to rise to 20.80 million barrels a day this year from 20.52 million barrels a day last year and 20.03 million barrels a day in 2003. China's oil demand is seen rising to 6.89 million barrels a day this year from 6.43 million barrels a day last year and from 5.58 million barrels a day in 2003.
Analysts say one reason American consumers continue to burn ever-more gasoline is simply that after more than a decade of depressed energy costs through the 1990s, gasoline and other fuels still haven't risen enough to trigger conservation. The rise in petroleum prices has been much smaller than increases in the cost of other items, such as movie tickets, medical care and school tuition, since 1981, the peak of the oil crisis.
Nick Cacchione, co-director of research at John S. Herold Inc., a Houston-based consulting company, says gasoline is a "bargain liquid" -- 10% less costly than bottled water, one-third the cost of milk, one-fifth the cost of beer and less than 2% the cost of Jack Daniel's whiskey. Petroleum is much more expensive in other parts of the world, notably Europe and Japan, primarily because of higher taxation. Consumption is growing much more slowly in those countries.
No one is certain just how high prices would have to rise to curtail demand enough to start lowering prices. Some economists have said it could take oil rising above $70 a barrel to lead to a substantial fall in consumption.
"The thing that will really fix it [reduce demand] will be a recession, but nobody is talking about a recession," says Adam Sieminski, a Deutsche Bank analyst. Otherwise, Mr. Sieminski said, "I think there is no set price point that is going to do it without a crisis, a geopolitical crisis" that would result in an actual shortage of oil.
The oil crises of the 1970s and 1980s were just such supply shocks, with pockets of outright fuel shortages in the West and long lines of cars outside filling stations as consumers rushed to buy fuel. Consumer fear of empty gas tanks resulted in radical change, such as a large-scale switch to fuel-efficient autos. Prices have risen sharply this time around, but it has been strong demand, not shortages, driving the market.
Booming economic growth last year led to a demand shock: The world consumed an average of 2.5 million barrels a day more than it did in 2003, up 3.4%, according to the BP Statistical Review, the industry's annual data bible. That was the biggest rise in oil use since 1976, and was more than double the average increase of the previous 10 years, BP says. More than a third of the increase came in China alone.
Caught off guard by that leap in consumption, the industry was barely able to keep up, and prices soared. This year, global economic growth has slowed -- in part because of pricier energy -- and oil-use growth is expected to slow to a still-strong rate. This run-up in fuel demand virtually exhausted the world's supply of spare capacity to pump and refine oil.
A rebound in idle capacity would help tame prices. But with demand growing by such great leaps, the global petroleum industry isn't capable in the short term of producing, transporting or refining additional fuel fast enough. Increasing capacity substantially is expected to take years, rather than months.
Industry officials caution that supply-side surprises -- whether caused by accidents, political shocks or bad weather -- will inevitably lead to shortfalls in a global petroleum system stretched to its limits.
Last week, fears over supply outages in politically fragile Nigeria and the stormy Gulf of Mexico helped bolster prices. |
