China booms … we pay the price

All of those cheaply produced goods from China-everything fromNikerunning shoes to electric kettles – are coming home to roostrightherein Britain. As factories multiply there to satisfy the Western world’s insatiable demand for consumer goods, they use ever-increasing volumes of fuel.

The result is a coming oil crunch that will force up the price of fuel for cars, trains and planes, for home heating, for our own (diminishing) stock of factories and even the cost of money in the form of interest rates.
The consequences of this assumption for businesses and households in Britain and the rest of the West are painfully clear: prices for practically everything requiring fossil fuels in its production will rise. And indirect taxes will rise with it.

The whole world is vulnerable to oil prices. Developed economies dependonaregularand affordable supply of it. “Although mostoil-importingeconomies around the world have continued to grow strongly since 2002, they would have grown even more rapidly had the price of oil and other forms of energy not increased,” the IEA points out.

And impoverished nations, struggling to compete in world markets, will suffer more those in the West from the coming crunch. “An oil-price shock caused by a sudden and severe supply disruption would be particularly damaging – for heavily indebted poor countries most of all,” the IEA explains.

Nor can users of natural gas expect to escape the consequences of the crunch. Oil prices, whether caused by shocks or not, are generally reflected in the cost of competing fuels such as natural gas, which broadly follows the trend set by the black stuff because of the practice of oil-price indexation in long-term gas supply contracts. Similarly, coal prices track the general direction of oil and gas.

So there is no escape, except for those switching to renewable energy (of which more later).

We have heard doom-laden scenarios before but this time Opec, even though it puts the case differently, seems to agree. The oil cartel’s own formidable team of analysts and consultants, who look at everything from the increase in the working population of China to predicted global levels of car ownership, have consulted the crystal ball as far ahead as 2030. They have concluded that requirements will increase significantly faster than the rate of supply: “Oil demand is set to rise from the 2005 level of 83 million barrels a day to 118 million barrels a day over the next 23 years.”

As for demand for energy from whatever source, that is predicted to grow by more than half between now and 2030. Merely by 2015, the world will need a quarter more energy than now.

For this, look for the usual suspects – more than 70% of demand will come from developing countries. China alone will account for 30% as its factories expand to supply its own and world markets, and India is not far behind. As the IEA puts it, the needs of the economies and populations of mainly Asian nations have “shifted the centre of gravity of global energy demand”.

Regardless of which nation consumes the energy, the way it is used is similar. Roughly half goes in the generation of electricity and roughly a fifth in transport – and nearly all of that is supplied by oil-based fuels.

This reliance on oil and fossil fuels in general, which is increasingly regarded as regrettable for the state of the planet, will not change over the next 20-30 years. In fact the world’s dependence on fossil fuels will rise in percentage terms unless something dramatic happens to shift our bias away from oil and its derivatives.

Where will all this oil and gas come from? OECD and developing Asian countries cannot keep pace with demand from their own resources, which leaves production from outside the Opec cartel. But this is forecast to peak by around 2012, leaving massive shortfalls that will inevitably constrain economies. By 2030, OECD countries, Britain included, will have to import about 66% of their oil compared compared with 56% today.

Sunday Herald