China Raising Fuel Prices Unlikely to Cool Red Hot Oil Market

There is recent news out of China that the government there is going to raise the prices of gasoline and diesel by 16% and 18% respectively. Now a 16% rise in gasoline prices sounds like a lot, and in many economic markets it is, but in the case of oil markets things are always more complicated. The important fact to remember is that the demand for oil is relatively insensitive to the price of oil. In China, a 1% increase in the price of oil reduces oil consumption by approximately 0.03% in the short run (which is a period up to about one year).

As an example consider the impact of an 18% increase in the price of oil in China. This will reduce the demand for oil by 0.54%. Last year China consumed on average 7.86 million barrels of oil per day. This is a lot of oil (9.3% of total world demand in 2007). So, 0.54% of 7.86 million barrels of oil per day works out to a little over 42 thousand barrels of oil per day (roughly twice the amount of oil consumed per day in Iceland). By comparison, last year the United States consumed 20.7 million barrels of oil per day (approximately 24% of the world total).

Higher fuel prices means that the demand for oil and oil related products in China will drop, but not by much. For a country that is expected to grow by 10% this year and 9% next year, a 42 thousand barrel a day drop in the consumption of oil won't slow economic growth in China very much over the next year and certainly won't be enough to slow the global oil market.

Globally the outlook for energy stocks looks bright and popular oil ETFs (like the iShares Dow Jones US Energy (IYE), and the Energy Select SPDR (XLE)) should do well. The larger concern is what happens if the U.S. economy goes into a prolonged slowdown or if China experiences a steep economic downturn after the summer Olympics.

Disclosure: Author is long IYE.

Comments

[ispyoil:]

too technical and too politically incorrect!! great point,besides the Chineese are just buying their first moped or tiny car, not shifting to smaller cars like the US will over at least 8 years, so the demand growth in China and India comes from NEW consumers getting into the gasoline market.

2008 Jun 20 10:36 AM

[rdr4:]

Try driving through Hong Kong, Shenzhen, Ghangzhou or Chengdu.
Discounting extreme rural areas which are in the "first mo-ped" phase, the number of automobiles in China is staggering. Curiously enough, there are more Lambourginis, Rolls, and Ferraris on the road in Southern China than in the US.
The inclusion of India in the auto buying race is appropriate although the demographic data may require a closer look.
The amount of mis-information about China we are fed is astounding, even propagandistic in nature.
Spend a month or two in China, everything you think you know is significantly distorted.

2008 Jun 20 02:47 PM

[User 213334:]

We ain't gonna use oil-powered autos any more, especially those gas guzzlers as Hummer. Emission-free electric cars will kick in soon and put an end to the crude speculative party, as well as oil giants' good time. I'm just wondering what will happen to OPEC countries when the unreasonably high price of oil burn car-owners so badly they have to seek for alternatives, hence the permanent change of their spending habits and sharp drop in demand for oil .

2008 Jun 20 03:02 PM

[blanco-dee:]

It is never a matter of rejecting obsolete technology, only of embracing new...

Its is all a matter of style, and Americans will simply purchace an additional vehicle. I have 3 now, but considering daily driving, i'll just get another to reduce my daily carbon footprint, for commuter use.

I will still have a vehicle to tow my sloop to the lake, and a serious 4-wheeler, and a styling porsche for a road groove - I'll just change my habits, and today I saw a freakn' Tata motors go-cart in Santa Fe NM and I'll steal one if I have to. The way commuter traffic goes, who needs an air bag? Just drive something moore substantial on the freeway. And save your Hummer for weekends.

Plus, with the money to be made working the crack spread I've already made enough gazz $$ to sponsor a fun summer - at $4.89 a gallon for premium. At 18 MPG

Chill out and expect that the market can work for you, just don't turn your back on it for a single minute. Work it like a cheap date and forget about marriage - buy and hold is just too dangerous, and the divorce could kill you!

Communism and third world oppression were the best thing the US had going for it - but we'll adapt, we're investors!


Survive - and flourish!

DTBL

BDO

2008 Jun 20 10:15 PM

[Will F:]

What is the basis for such an absurd assertion! Of course, your long oil. Elasticity in demand in China--a country with far less discretionary income-- has to be at least comparable to US.

2008 Jul 05 02:58 PM