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Is East the New West in Energy Markets?

China is expected to be the leading contributor to an expected increase in the consumption of oil. A former economist at the World Bank said Chinese economic growth could continue at full steam despite a recent slowdown. A string of mid-quarter reports suggested the Chinese economy was on a downward trajectory, though recent indications of optimism sparked talk of an Asian revival. China will need more energy to fuel its economic growth.  A move by Middle East producers to court Chinese energy companies suggests Beijing is pulling the world's economic engines from the grip of the West.

In July, speculation circulated the Chinese economy was headed south given the slowdown in spending and the high debt burden. There was, however, no reason to panic and by August, the situation had turned around. Justin Yifu Lin, a former economist at the World Bank, said the Chinese economy still had room to grow and Chinese analysts said it was premature to herald the end of the Beijing boom. Chinese stock indices by Monday had rallied to a two-month high on the back of renewed optimism in the world's second-largest economy.

The U.S. Energy Department's short-term assessment said Chinese liquid fuels consumption increased by 420,000 barrels per day last year. Despite the clamoring about the slowdown, the report said Chinese consumption should increase by another 420,000 bpd this year and 440,000 bpd by 2014. The Organization of Petroleum Exporting Countries, in its monthly market report for August, said it expected China will need about 10 million bpd for 2013, a 3.4 percent increase from 2012. That's compared with the 0.37 percent increase reported for North American markets.

Related article: U.S. Energy Independence Doesn't Mean a Thing

OEPC said China's economy expanded by 7.5 percent in the second quarter of 2013, above what analysts had expected. The economy should continue its trajectory next year with 7.7 percent growth. The state-owned China National Petroleum Corp. is said to be taking a close look at taking an interest in the West Qurna-1 oil field in Iraq. With a high tolerance for operating in unstable regions, that could give CNPC access to an oil field producing about 480,000 bpd.  The Chinese are also looking to partner with their Russian counterparts in West Qurna-2, expected to produce 500,000 bpd by next year. Analysts said the deal may be part of a move by Iraq, mired in post-war conflict, to move further away from the West.

OPEC said in its August report that oil supplies in the region are starting to shift from Europe, still mired in recession, to China. OPEC said it revised its demand growth for 2013 down to 2.9 percent from 3.0 percent because of lower growth estimates in the United States during the first quarter and the early 2013 slowdown in the Chinese economy. The August report warned of uncertainty on the horizon given the potential for a financial crisis next year in China. Nevertheless, it said its global growth forecast for 2014 remains unchanged at 3.5 percent. By next year, OPEC expects the Chinese economy will grow 7.7 percent compared with the 2.5 percent for the United States. While the U.S. growth rate is faster, China's durability remains a factor. China's economic success was, in some circles, part of the reason the U.S. military adopted its so-called "pivot to Asia." The poles of economic focus shift to markets were demand can sustain growth. Oil is, at least for now, needed to sustain that growth. So long as Chinese economic growth stays out of reach its rivals, it will continue to pull in interest normally reserved for Western economies.

By. Daniel J. Graeber of Oilprice.com




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