Crude: Where's the Demand Destruction?

China released its monthly crude oil import figures this morning, and the results show that even with oil hitting record highs, imports during May reached their second highest levels on record.

So weren't higher oil prices supposed to hurt demand? While there has been some demand destruction in the US, the figures above suggest that China keeps on chugging. 

However, as we know, one explanation for the lack of demand destruction in China is because the government has controls on the price of gasoline.  These price controls have gotten so expensive for Chinese oil companies that PetroChina (PTR) announced an $8.7 bln bond offering this morning.  The purpose of the offering was to cover losses from its refining operations due to price controls.

Comments

[RB9562:]

Whats the point of this? You answer your own question: "weren't higher oil prices supposed to hurt demand?"


"as we know, one explanation for the lack of demand destruction in China is because the government has controls on the price of gasoline."


Why would demand be destroyed in China when gasoline prices have remained constant?

2008 Jun 11 11:16 AM

[Seriously:]

There was an earthquake. That is really all that needs to be said. I cannot believe that anyone would seriously pose this question it is quite ridiculous.

2008 Jun 11 11:16 AM

[Thevian:]

Of course! Gasoline prices in China are controlled by the government. With a price ceiling, demand can continue to grow!

2008 Jun 11 11:23 AM

[jerry p:]

The question is how much longer can these governments continue to subsidize fuel prices?

2008 Jun 11 11:35 AM

[Brian Pursley:]

The earthquake in Sichuan was caused by a subterranean methane eruption: oilismastery.blogspot....

2008 Jun 11 11:49 AM

[User 208499:]

Methane eruptions don't cause earthquakes. Crust shifts cause them. End of that chapter. This article is worthless.

2008 Jun 11 12:09 PM

[User 208499:]

All oil issues are caused by limited supply and excessive demand, coupled with the fact that all oil is traded in dollars, which now are basically worthless, thanks to the Fed's insistence on believing that low interest rates are the answer. They only serve to weaken an already shaky dollar.
The giant oil field in Saudi Arabia called Gawhar is now past peak and cannot supply the oil needed in a world economy.
Learn to live with much much less.

2008 Jun 11 12:13 PM

[fireman:]

Just proves that price controls work only for the end user. What we really need is profit controls for American oil. Simply put, if it were to cost the company $5 to get the oil from the ground to the holding tank and they were allowed a 200% profit cap (wow!) then that barrel of American oil would be only $15. They could be allowed CPI increases or decreases to adjust seasonally.

This would be a more realistic price control our government could instill upon such a natural resource that is directly affecting American lives, livelyhood, and our economy.

Why can't our oil company paid-off elected officials see this as more and more necessary? I would support ANWR drilling if such took place and American oil were not to be traded on any open market.

Just my thoughts, doesn't mean I am by any means correct. Just thinking outside the box as I pay $2400 to fill my heating oil tank.

2008 Jun 11 12:40 PM

[Commodity B...:]

The import number is not surprising for two reasons:

1. China is building a very large SPR system like we have here
2. They are trying to increase their forward cover ahead of the Olympics.

I don't think that the Chinese drivers are using 25% more than last month. It has more to do with inventory accumulation and less with increased demand

2008 Jun 11 01:02 PM

[proseadvocate:]

The article is good because it brings to mind two important facts. China has a generally planned economy and with such planning they continue to grow and use more oil. Our idiots in this country should learn from it.

2008 Jun 11 01:11 PM

[Mmarrkk:]

fireman: keep fighting fires and stop trying to be an economist. What you don't understand is over 60% of the oil we use is not "American oil" as you called it. The remainder comes from overseas. So for 60% of the oil, the refinery will have to buy (real cost) the oil at $100+ per barrell.

Now, as an oilman, if you will only allow me to sell the oil at a certain price well-below international market prices, then I'm going to invest my drilling money in other areas overseas. Now, we have even less "American oil" and have to import more and more of the oil that you can't price control.

BTW, why don't we try your little experiment on Microsoft or record companies. It only takes them like a few cents to print up a CD; why do they charge me over $100 for Windows/Vista? or $15 for that cool music CD??

With thinking like yours, we are doomed because you somehow have the right to vote for like minded simpletons in Congress.

2008 Jun 11 03:40 PM

[me3tv:]

Where is the 200 pct profit mentioned by one poster? Good grief ! This is hyperbole for the uneducated masses and apparently a few well rehearsed "angry" congressmen who speak for "the little guy". A 10 pct profit on billions of barrels of oil and value added products like gasoline and you have a lot of money, but you still have to re-invest for more oil and more exploration. Thousands of share-holders and employees, not unlike the ethanol farmers in the midwest, need their company to stay profitable and 10% is very reasonable for a commodity. Now if it was a diamond bracelet you'd need a 500 percent markup. Or if it was an I-phone - you'd need a big markup. And still, we buy our tap water in plastic bottles at a huge markup and have no complaints about the water commodity being "overpriced". So tax the oil companies an extra amount? Ok, fine, then that price goes into the final product at the pump and you still pay more, the oil company still earns its10 pct. But the plan to tax the oil company will do one thing - increase the price and decrease use even more. Maybe that was the plan ( and who cares if the little guy has to shell out more to get to his $10 an hour job?) Solution - high prices will create the base for low prices to follow including more alternatives to fossil fuels.

2008 Jun 11 04:28 PM

[Brian Pursley:]

User 208499: an earthquake IS a crust shift. How can something cause itself? Earthqaukes are caused by magmatic outgassing: oilismastery.blogspot..../

2008 Jun 11 07:28 PM

[Brian Pursley:]

Pardon the typo.

2008 Jun 11 07:28 PM

[bearfund:]

me3tv, alternatives to fossil fuels? Well, maybe. That's happening, of course, and will continue to happen, but basic research is expensive and not many companies have the money for it just now. That situation will only worsen. What will certainly happen is that less fossil fuel will be used. But that can happen many ways. Do you believe it's more likely that, 10 years from now, American Joe Six-Pack will:

Have moved closer to work, found a new job closer to home, started telecommuting, or started taking the bus or streetcar like his grandparents did,

-or-

That he will keep driving solo 40 miles each way to work in his inefficient private auto but instead of getting 25 miles to the gallon of petrol it will instead run on magic pixie dust that costs him a penny a mile?

The question is not academic. If you really believe the latter, you're probably holding crap like Solarfun. I'll stick with the oil companies, urban residential REITs, and companies like New Flyer and Bombardier that make transit equipment.

2008 Jun 11 10:28 PM

[me3tv:]

bearfund - good points - and for sure a longer term expectation.

2008 Jun 12 11:01 AM

[billddrummer:]

fireman,

What makes you think that it costs $5 to get oil from wellhead to storage? One of the reasons the U.S. began importing oil in the 1970s is because it was economically unfeasible to drill for it here--in other words, it cost more to extract than to purchase elsewhere.

And to MMarrkk,

Let's get one thing straight. The majority of the oil we import comes from CANADA!!! So it's not an amorphous 'overseas empire' that's controlling oil imports. Canada has been the top exporter to the U.S. for three years now. And as long as NAFTA doesn't get tampered with by the politicians, the situation will probably not change.

Just because oil has spiked recently doesn't mean that companies will be willing to spend millions of dollars looking for it domestically. As long as environmentalists prevent drilling in 'ecologically fragile'
locations (oddly enough, the cheapest places to drill), we as a nation will continue to rely on imported oil for 60% of our needs.

Don't try to say we can unwind the economy back to the days when everyone lived and worked in factories clustered in big cities. Urban sprawl began before gasoline reached $1/gallon, and we imported virtually none of our petroleum.

I'd like to think that our ingenuity would come up with some solutions to energy costs besides domestic ethanol, which as most people don't realize, uses more energy to create than it delivers.

But then, we all thought that houses prices never go down, didn't we?

2008 Jun 12 12:27 PM