Sudden, mysterious drop in China's oil consumption
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From China, Some Relief on Oil Demand
By Keith Bradsher

PARIS - A sudden and mysterious drop in China's oil consumption helped to push down the International Energy Agency's estimate on Wednesday of global demand for this year.

After growing 11 percent in 2003 and 15.4 percent last year, China's overall oil use declined 1 percent in the second quarter from the comparable quarter a year earlier, the agency said.

The drop is the latest in a series of unclear and often conflicting indications about whether the Chinese economy is still growing strongly. Top officials of the agency said in interviews they believed that the decline was temporary and that they expected Chinese demand to rebound in the second half of the year, but added that world oil prices could take a heavy blow if Chinese use did not increase.

The International Energy Agency, supported by the governments of the world's leading consuming nations, has recently become known for warning that the world does not have enough oil and calling for the Organization of the Petroleum Exporting Countries to push its member countries to increase their output. But William C. Ramsay, the agency's deputy executive director, said Wednesday that there were signs that worldwide production capacity was starting to move ahead of demand for the year, and he expressed surprise that oil prices had nonetheless stayed high.

"There are not the conditions out there right now that should lead to these kinds of prices," he said in an interview in his office here.

The international oil market has gotten out of line with the availability of oil, he said, adding: "It gets in one of these bullish moods and it has to be dynamited out of it. The fundamentals are not disquieting."

While many traders have expressed concern about China's announcement a week ago that it was close to completing the first of three oil tank farms for a strategic reserve, Mr. Ramsay said he doubted that Chinese officials would opt to fill the reserve quickly as long as oil remained around $60 a barrel. [In New York on Wednesday, oil for August delivery declined 61 cents, settling at $60.01 a barrel.]

China's strong demand for energy has helped push Cnooc, one of its leading oil companies, to make an $18.5 billion proposal to acquire Unocal of California.

Officials of the International Energy Agency said there were four possible explanations for China's drop in oil demand in the second quarter, the most probable being that this was a temporary decrease. The most likely cause, said Fatih Birol, the agency's chief economist and head of economic analysis, was that China had not been allowing the domestic price of electricity and many refined products, like gasoline and diesel fuel, to rise nearly as quickly as world prices. This has caused power-generating concerns and service stations to sell less electricity, and less gasoline and diesel fuel, so as to limit their losses.

Many Chinese power stations have stopped burning fuel oil to produce electricity because the prices they are allowed to charge per kilowatt are not high enough to cover the cost of importing fuel. Chinese refiners have been selling part of their output overseas at higher prices than they can get in the highly regulated domestic market - where gasoline, for example, now sells for $1.63 a gallon.

China's consumption of fuel, a portion of overall oil consumption, plunged 19 percent in the second quarter from a year earlier, said Jeff Brown, an oil-demand analyst here, while growth in refined fuel consumption slowed to a crawl.

Mr. Birol said that artificial energy shortages caused by distorted prices were the most likely basis for the curtailed availability of fuel, especially diesel.

But while diesel-fuel shortages and lines of trucks at empty service stations were a visible problem in China in April, they were not evident during trips over the last three weeks through southern China and to Beijing, and there has been little talk of continuing shortages in news media on the mainland or in Hong Kong.

When told this, Mr. Birol said there had been a vigorous debate in the last two days within the International Energy Agency over how to explain the decline in Chinese consumption, and he acknowledged that other, longer-term explanations were possible.

These include the possibility that the overall Chinese economy is starting to slow, that China is generating more of its electricity from coal instead of oil, and that China is improving energy conservation in response to high prices.

Economic statistics have been contradictory. Exports are still growing rapidly. But energy-intensive production of steel, cement and other construction material has started to slow as the government cracked down on real estate speculation.

In the last year, China has considerably expanded the production capacity of its coal mines and, just as important, the capacity of its railroad system to haul coal to markets. It has also exhorted businesses and households to use less energy, through steps like setting thermostats higher so air-conditioning systems do not have to work as hard.

NY Times ~ Keith Bradsher ** From China, Some Relief on Oil Demand