Bombs or Booms? Asia Pushes Oil Prices Higher: William Pesek
July 21 (Bloomberg) -- The surge in oil prices seems to have the Middle East written all over it.
Israel's confrontation with Hezbollah in Lebanon is unnerving markets already jittery over Iraq and Iran. Africa also is thought to have a role. Declining production in Nigeria is helping to keep crude oil above $73 a barrel. All these risks may push oil well above the recent record of $78.40.
The conventional wisdom that bombs and geopolitical risks are boosting oil prices and shaking up stock and bond markets is only half right. The other catalyst is one that won't soon go away: Asia's economic boom.
``While we recognize the risks associated with a supply shock in the oil patch, we believe investors should be just as concerned about the slow-motion demand shock evolving from Asia,'' said Joseph Quinlan, New York-based chief market strategist at Bank of America.
Asia, after all, is home to about 3 billion people edging toward simultaneous booms in industry, urbanization and demand for automobiles and air travel. And at the moment, Quinlan said, ``Asia's energy resources are grossly inadequate.'' The growing disconnect between Asian supply and demand alone could keep energy prices high in the years ahead.
The region's proven oil reserves and its share of global production of that commodity are in decline at a time when demand is expected to accelerate. Quinlan pointed out that Asia's share of global oil reserves slid to 3.4 percent in 2005 from 3.8 percent in 1995. The region's reserves would last just 13.8 years at today's production rates.
Asian Thirst
China's situation seems especially dire, Quinlan said. Asia's No. 2 economy has about 12.1 years of oil reserves based on today's consumption levels. India, by contrast, possesses about 21 years' worth. Tomorrow's usage will be much higher.
The bottom line is that neither of Asia's fastest-growing major economies has enough energy to feed its rapid industrialization and urbanization. And Asia's other major economies are unlikely to produce enough oil in a world awash in geopolitical risks and potential supply disruptions.
In 2005, Asia's oil production was 8 million barrels a day, outstripping both the U.S. and South America. Even so, Asian production has increased only slightly over the last decade, reducing its share of global output. That will become a bigger problem when 400 million Chinese and 400 million Indians -- or more -- own cars.
China's Boom
The region's thirst for oil may confound those who view energy prices as a speculative bubble. Sure, there's a lot of hedge-fund money in markets, and central banks are raising rates. Still, Asian demand matters and persistently high oil prices are fueling two obvious concerns. One, they're boosting some unsavory governments from Iran to Sudan. Two, they're imperiling global growth rates.
The irony of Asia driving up energy costs is that many of its economies are uniquely vulnerable. High poverty rates mean Asians are closer to the edge than western consumers. Oil is also fanning inflation and making it harder for governments to shield their people from the fallout.
Asia's resilience amid rising oil prices has surprised many. China's economy grew 11.3 percent in the second quarter, the fastest pace in more than a decade. Yet at the very least, expensive energy may boost interest rates globally. Perhaps it will even result in scattered bouts of stagflation, or inflation increasing faster than growth.
Rumblings about Chinese labor costs are also raising the stakes. It's often thought that multinational companies flock to China to exploit the nation's cheap workforce. Yet as economists such as Andy Xie of Morgan Stanley in Hong Kong are pointing out, lax environmental rules may be doing even more to encourage production in China.
Exporting Inflation
One side effect of China's industrial boom is rampant pollution. After years of keeping the global cost of manufacturing artificially low, there's political pressure within China to normalize production costs, which could force global inflation rates higher along with oil prices.
China's reluctance to let its currency appreciate versus the dollar also has analysts concerned the economy will overheat. It was a year ago today that China boosted the yuan 2.1 percent, and many investors have stopped betting on future revaluations. They've been burned too many times on such wagers.
Some observers doubt Asia will produce inflation. ``The concern about China exporting inflation is grossly inflated,'' said Stephen Green, an economist at Standard Chartered Bank in Shanghai. ``Though maybe less than before, China is still exporting deflation. Other countries in Asia are even more deflationary, and recent inflation is more related to lax monetary policy in the major economies than to price pressures from China.''
More Than Geopolitics
Even so, demographics may underpin today's trends. Marc Faber, managing director of Hong Kong-based Marc Faber Ltd., has been arguing that population growth and migration to Asian cities will increase energy demand in the years ahead. While the energy rally may take a breather, the odds favor it continuing.
Recent headlines offer little, if any, optimism that things will simmer down in the Middle East. And while factoring North Korea into oil prices is hardly straightforward, its nuclear shenanigans and missile tests surely don't help.
Even if geopolitical fears subside, oil markets still have Asian demand with which to contend. Billions of Asians getting richer by the day may leave prices with nowhere to go but up.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
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