Oil demand from China and India alone is expected to double in the next two decades as their economies continue to expand, with consumers buying more cars, moving to cities, and demanding greater access to electricity.
China's economy has grown at 10 per cent or more a year since the 1990's, lifting nearly 300 million people out of poverty. As recently as ten years ago, China was a net oil exporter, but in 2006, nearly 50 per cent of its oil consumption was imported from abroad.
India and China are two Asian giants that consume only a third as much oil as the US today, but by 2030 India and China together will import as much oil as the US and Japan do today. If the Chinese and Indians consumed as much oil per capita as Americans do, the world's oil demand would be closer to 200 million bpd, instead of 85 million barrels today. And with the world running on a limited cushion of Saudi spare capacity, any interruption in supplies from Mexico, Nigeria, or hurricanes and talk of armed conflict with Iran, causes oil prices to spike higher.
China and India, with a third of the world's population, accounted for 45 per cent of the increase in global energy demand this year. From January thru September, China imported 124 million tons of crude oil, up 14 per cent from the same period in 2006.
Sinopec, Asia's top oil refiner, wants to increase crude oil imports from Saudi Arabia by 30 per cent to 600,000 bpd for next year, and also aims to raise imports from Iran. India is set to become the world's third largest oil importer after the US and China before 2025, according to the International Energy Agency.
Ironically, the Shanghai red-chip market, the world's greatest bull market, might have been a casualty of its economy's insatiable thirst for oil. Shanghai red-chips have been hard hit by a double whammy - the Global "Oil Shock" and multi-year highs in Chinese bond yields. Beijing lifted retail gasoline prices by 10 per cent last week, sparking riots across the country, and fanning the flames of inflation, which is already 6.5 per cent higher from a year ago.
When Chinese central bankers speak to the media, their comments are usually brief, and subject to mis-interpretation. On October 16th, Chinese central bank governor Zhou Xiaochuan might have signaled a significant shift in monetary policy, indicating a willingness to deflate the Shanghai red-chip bubble, in order to contain inflation pressures in the economy, that threaten the social order of the country.
"Asset prices are not the primary consideration for the bank when it comes to setting monetary policy," Zhou said. Instead, "combating consumer inflation and increases in global commodity prices are the main reasons why China has been raising interest rates," he explained. On Oct 28th, PBoC deputy Su Ning added, "We will continue implementing a stable monetary policy leaning toward moderate tightening.
The global "Oil Shock" lifted prices above the psychological level of 700-Yuan per barrel, and coupled with Beijing's latest monetary tightening, sparked a selling spree in the mighty Shanghai red-chip market to as low as 5,032, down some 15 per cent from the all-time high set in mid-October.
The People's Bank of China lifted the proportion of deposits that commercial banks must keep in reserve by a half-point to 13.5 per cent for big banks on Nov 10th, to the highest level in nearly two decades.
The latest tightening move is expected to drain 190 billion Yuan ($25.6bn) from the Shanghai money market - and also to "strengthen the coordinated use of interest rates and the exchange rate to help stabilize expectations of inflation," the PBoC said. The latest tightening move will mop up the inflows of cash generated by Oct. 's $27 billion trade surplus. It is also designed to keep the Chinese 5-year bond yield on an upward trajectory, last seen at 4.30 per cent, up 50 basis points from two months ago.
China might permit faster appreciation of the Yuan against the Dollar in the months ahead to help offset higher prices for crude oil and other raw materials imported from abroad. From the start of 2007 to mid-October, the yuan rose at an annualized rate of 4.7 per cent versus the dollar. Since then it has been climbing at a rate of nearly 20 per cent, to a record post-revaluation high of 7.41 yuan /dollar. Beijing might also allow the Yuan to climb faster, to deflect criticism from its trading partners in Europe.
China posted a record monthly trade surplus of $27 billion in October, as exports grew 22.3 per cent from a year earlier. For the first 10 months the surplus rose 59 per cent to $212.4 billion, outstripping the full-year 2006 sum of $177.47 billion. Chinese exports to the European Union are growing at a 30 per cent clip, twice as fast as shipments to the United States, aided by the yuan's 10 per cent devaluation against the Euro.