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.
Tags: Energy, Fuel, gasoline, oil