As China Grows, Will Our Pumps Run Dry?

As the Chinese economy develops and becomes more industrialized, there is a growing demand for energy for use in production. The Chinese manufacturing boom has long meant that we can enjoy lower prices on consumer goods ranging from clothes to electronics. But China's success as a manufacturing giant is also beginning to have an impact on other parts of the global economy, creating a feverish demand for basic commodities like oil that is sending prices skyward, as western economists beleive. However others disagree and say that this sudden increase was caused by instability in the oil market and panic buying.

Many have agreed that China's rapid growth comes with a thirst for oil that is helping push up gas prices in the rest of the world. "China is booming and they can't keep up with demand over there, so our prices double here. That hurts." As much as a third of new demand for crude oil on international markets this year can be attributed to China, according to the International Energy Agency. China's imports of petroleum were a major factor behind the price of oil breaking the fifty dollar per barrel mark at the end of September. China's growing demand for international commodities comes partly from years of intensive foreign investment in its manufacturing base. With all that money pouring in, China's economy has been growing at a rate of about 9 % a year. The Chinese are rushing to build new factories and office buildings, and the country's reserves of crude oil and coal cannot support the demand for electricity and gasoline to power millions of cars and trucks cranked out every year.

So China is rapidly increasing its reliance on foreign sources. In the meantime, US steel mills and steel fabricators and their foreign competitors don't have the capacity to meet the extra demand. This resulted in a higher price for commodities like oil and gasoline in the rest of the world. China is not the only reason for higher prices, but the war in Iraq and political instability in the Middle East and Nigeria have also contributed to higher prices. The steady demand for oil from China has helped to balance the unstable market. The Chinese have changed the whole supply-demand curve over the past couple of years. Even the availability of ships is becoming a problem because they've all been diverted to take steel and oil and other commodities to China.

We have seen this pattern before. Gas is expensive; gas is cheap; gas is expensive; gas is cheap. The reality is that oil and gasoline prices rise and fall all the time. As economic growth continues in China and other developing countries, increased demand for oil shows no sign of stopping. Many economists, including Federal Reserve Chairman Alan Greenspan, conclude that high prices for oil may be here to stay.

In the 1970s and early 1980s, the oil shocks were caused by the oil sheikhs. The first cut in production was motivated by the Arab reaction to defeat in the war of Yom Kippur in 1973. Arab OPEC cut its production to penalize the Western countries for their support of Israel. This year, the oil shock, though a milder one has come from the demand rather than the supply side. World oil production is at an all-time high, but so is world demand. OPEC could indeed produce the extra couple of a million barrels, and the non-OPEC countries could produce their extra barrels, but total world capacity is now uncomfortably close to current demand. Even more barrels of oil can be produced, but it would need both time and money. China is becoming a normal advanced industrial society, but an industrial society of more than one billion people. China already uses nearly 30 per cent of world steel and 40 per cent of world cement. How is China's demand for oil to be fitted into a limited world supply?

In itself, Chinese manufacturing growth is probably the most secure, but China depends on the availability of commodities, particularly oil, and on the continued strength of US demand for Chinese products. The US depends on oil, at a reasonable price, and on money. If oil prices and interest rates are destined to rise, that will be a double threat to the American economy, a threat therefore to China, and potentially to the structure of world trade.

China's demand for oil, as some Chinese analysts believe, is not a factor leading to high oil prices. As demand for petroleum grows, both OPEC and non-OPEC oil-producing countries keep increasing production. So far, the daily oil demand is approximately 80 million barrels - 81 million barrels worldwide, while the world's daily oil output ranges from 82 million barrels -87 million barrels. Thus, the supply and demand is basically in balance. However, as major oil producing countries like OPEC nations