Monday, July 07, 2008

A bit more on the oil dilemma

The Wall Street Journal reported today that oil may be moving into $200 a barrel territory. Here's a piece of the story.

The one shift in demand that would have a serious price impact would be any sign of diminished thirst for fuel in China. Speculation has run high for months that Chinese demand may have surged artificially in advance of the Beijing Olympics as the country turned to oil over coal for power generation to ease pollution. It is also unclear whether China stockpiled gasoline and diesel to avoid any shortages.

"But if consumption roars on even after the Olympics, then the upside pressure on prices will remain pretty strong," said Stephen Brown, an energy economist at the Federal Reserve Bank of Dallas.

Another force that could shove prices down in a hurry would be signs of a significant buildup in oil inventories in the U.S. But even with oil use down in the U.S., crude stockpiles remain unusually low. The U.S. now has just over 19 days of total commercial supplies, compared with 23 days worth at the same time last year.

The first part of that excerpt doesn't make sense to me. If China converted from coal to oil in preparation for the Olympics, would it then dump its oil investment to go back to coal afterwards? Would that make economic sense?

And even if China simply stopped adding to its oil dependency, what its done so far has driven up prices significantly. Would they drop if China's demand remained flat with nothing else changing?

1 comment:

Patrick O'Hara said...

It is interesting to me that this is news to so many people on Wall Street. China has 1 in 3 human beings. They are improving their industrial base so they can export more goods overseas (which is good for their economy). Why would they not continue to do this? Furthermore, right behind China is India, who also has 1 in 3 human being and is also ramping up their industrial base for the same reasons. No matter what happens here in the USA, demand for oil will be increasing for the immediate future, which means that the prices will go up, or at best stabilize.