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China Electricity Shortage Looks Unlikely to Spur Oil-Binge Rerun

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China Electricity Shortage Looks 
Unlikely to Spur Oil-Binge Rerun

By SHAI OSTER
July 18, 2008

BEIJING — Here’s one reason for “oil bears” to be optimistic: History in China isn’t likely to repeat itself.

In 2004, China was swept by severe shortages of electricity, as supply from its coal-fired power plants couldn’t meet demand. Thousands of factories rushed to fill the tanks of diesel-powered backup generators in an effort to secure power to keep their production lines open.

The result: China’s oil consumption in 2004 jumped 16%, an unexpected surge that helped fuel a run in global oil prices.

This year, China is facing an electricity shortfall that officials predict will be at least as big as the one that rocked global oil markets four years ago. But analysts say China won’t go on another big oil-buying binge, thanks largely to already-rising prices and a crimp in the spending power of Chinese manufacturers.

“There will be a slight uptick in fuel-oil and diesel demand during the summer, but nothing in comparison to the blackout-driven spike in 2004,” says Trevor Houser, an energy expert with Rhodium Group, an economic research firm in New York.

What happens with China’s oil demand could have a big impact on the share prices of oil producers — not to mention on the global economy. China is the world’s second-largest oil consumer after the U.S., and its oil demand is among the fastest growing in the world; the country is likely to use an average of eight million barrels a day this year, 25% more than it consumed in 2004. That rapid growth has been widely cited as a main cause of the explosion in crude-oil prices over the past several years.

In the past week, crude prices have dropped significantly from the record closing high July 3 of $145.29 a barrel on the New York Mercantile Exchange. At midday Thursday in New York, crude for August delivery was trading down $1.01 at $133.59 a barrel.

Shares of big oil companies like Exxon Mobil, Royal Dutch Shell and BP have been falling since late May, however. On Wednesday, shares of Exxon Mobil closed on the New York Stock Exchange at their lowest level in 11 months. Shares in China’s major oil companies, including PetroChina, have been falling for even longer than those of Western producers have.

The power shortages this year have been triggered in part by surging global prices for another energy source: coal. Already, some provinces have started rationing electricity, and big energy users like zinc or aluminum smelters are warning that their output will have to fall.

China is rationing electricity in more than half its provinces, with a projected national shortfall of 30 gigawatts, equivalent to about 4.2% of current national annual capacity. In 2004, China lacked about the same amount of power, but the country has added hundreds more plants since then.

Unlike last time, however, many Chinese factory owners simply can’t afford to buy the fuel for generators. For many in the export-oriented manufacturing sector, the rising value of China’s currency against the dollar, the weakening global economy and rising prices for inputs have pushed them to the edge. Export growth overall remains robust, but it has slowed considerably; exports rose 18.2% in June from a year earlier, compared with growth of nearly 28% for all of 2007. Far from planning big new outlays for fuel, some low-cost factories are closing shop, analysts say.

“Coastal processing and manufacturing businesses, which used a lot of diesel generators in 2004, are slowing down,” says K.F. Yan of Cambridge Energy Research Associates.

Of course, China’s overall oil demand is still growing, even without an electricity-related surge. Growth has been driven by a continued wave of construction, transportation of goods, and the widening ranks of first-time car buyers from China’s emerging middle class. Tapping into growth like that is increasingly important as high gasoline prices are starting to affect consumption in the U.S., the world’s biggPetrooChinaest oil market.

Not surprisingly, foreign oil companies have been pouring into China. In late June, Shell signed a letter of intent with Qatar Petroleum International and PetroChina, China’s top oil producer, to study a joint-venture refining and petrochemical complex. Qatar would supply the oil, Shell the technology and project-management expertise, and PetroChina distribution in the market.

Exxon Mobil, meanwhile, is completing a $5 billion refining and petrochemical venture in Fujian with Saudi Aramco and China’s largest refiner, China Petroleum & Chemical, better known as Sinopec. BP and Total are also selling fuels into China’s growing market.

One factor that has helped keep demand booming is that China’s government controls retail prices for gasoline, diesel and other fuels, meaning consumers haven’t felt the full brunt of high global oil prices. The country’s oil demand in the first half of 2008 grew 7.5% from a year earlier.

But the government has increased state-set fuel prices twice in the past eight months, including a 17% to 18% rise in June. Over time, that could diminish retail demand for fuels — even though prices are still far below international levels. Some analysts think further increases could be in store after next month’s Olympics.

Write to Shai Oster at [email protected]

http://online.wsj.com/article/SB121632682476763067.html

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