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Overall world consumption of oil is about 87 million barrels a day. The United States is the biggest consumer of oil at 21-22 million barrels a day – almost one-fourth of the world supply. About 50 percent of the oil consumed in the United States is imported. That puts the country in a position as precarious as the others if the supply is interrupted or prices rise too rapidly, as they have done in the past 18 months.
China’s economy is worth US$2.6 trillion (2007 World Bank data) with exports running at about $1.1 trillion. This requires huge amounts of energy. Although the bulk of China’s energy needs – 65 percent – are met by domestic coal, the country imports as much as 4-5 million barrels of oil per day. Total Chinese consumption of oil is about 7.7 million barrels a day. At today’s prices, imports are costing the Chinese about US$200 billion.
The bulk of energy consumed in China is for its exports. A reliable estimate puts energy consumption to maintain exports at current levels at about 60 percent of total energy consumed. The Chinese depend mostly on coal for energy, followed by hydroelectric power and then gas. A small amount is generated via nuclear power plants. Oil is used to power transport, petrochemicals, fixed power equipment (diesel in rural areas), lubes and aviation fuel.
India is in a very poor state to meet its rising energy bill. It imports about 2 –2.5 million barrels a day and is likely to pay US$90 billion to meet its requirements. This huge bill is partly offset by remittances from Indian workers in the Middle East – US$16 billion – but this is insufficient to meet the rising oil import bill. Hence a percentage of India’s merchandise export dollars (US$160 billion) and earnings from business process outsourcing and the information technology sector (US$40 billion in the current year) are used to pay for oil imports.
Unlike China, India does not have a huge export industry, hence only a small component of imported oil is used to maintain exports. The bulk is consumed to meet domestic needs.
India’s finances are in a relatively precarious state compared to the Chinese. India has small cash reserves of US$350 billion, as opposed to $1.2 trillion for the Chinese. China can afford to pay for additional oil imports from its cash reserves. In the case of India, a 5 percent dip in cash reserves will set the foreign exchange market in panic. Hence, the increased oil bill is having a detrimental impact on India’s finances.
China can get through the present oil crisis, but the long-term prognosis is not good. China cannot afford to dip into its cash kitty continuously. Alternatively, it can raise the price of export goods, but that would dent its export earnings. The whole equation of China’s exports is based on cheap products. If the products are not cheap enough, consumption will drop and Chinese exports will suffer. This coupled with 10-12 percent inflation, a rising labor bill and revaluated currency is not good news for the Chinese economy.
What can India and China do about this monstrosity?
Chinese planners are oblivious to the unfolding circumstances in the world. They are merrily planning their next export conquest. The prosperous West cannot help; it has its own financial problems to worry about. For example, the United States has a $1 trillion sub-prime loan crisis at hand; a $1 trillion Iraq war expenditure has strained its finances and, like everybody else, it has to pay for its inflated oil import bill of $500 billion. But the U.S. economy is strong enough to withstand the crisis.
No oil-producing country is about to back down on current oil prices. They are enjoying the bounty. Hence the best way to deal with oil producers is to cut consumption. The United States can help by switching to smaller cars and adding a few nuclear power plants. As for the Chinese, they should cut their ambitious plan to dominate the world in manufacturing.
An upcoming recession in the western world may be a blessing in disguise. It would cut wasteful consumption. It would also curb demand for cheap, worthless goods, which are bought and sold only because they are so cheap.
In addition the West could stop outsourcing manufacturing and begin rebuilding its manufacturing base at home. Newer manufacturing sites at home would most likely be labor and energy efficient and would save heavily on per unit energy consumed. Additional cost savings in transportation and handling from China to the United States or Europe would save energy. Labor movements in the West would welcome all this, because their membership has borne the brunt of outsourcing. Returning industry would be a blessing in disguise to them.
Say, for example, that upcoming events cut U.S. and Europe oil consumption by 3 percent. This would have a profound effect on consumption of consumer goods. China could suffer a 10-15 percent decline in its exports. That decline would translate into about 1 million barrels less oil consumed by them. Overall it would be a step in the right direction, although the Chinese would not be happy about it.
Another benefit of a 3 percent reduced consumption of oil in the West would be a deathblow to the oil speculators. They are part of the problem. A 20-fold growth in speculative funds in just five years has contributed badly to the futures market. Part of this money flows into oil speculation and the rest goes into speculating in food grain futures, mineral and metal futures, etc. Futures traders cannot expect any sympathy from the public, as they are responsible for higher prices. Reduced consumption could be a blessing in disguise.
In summary, cheap imports from China are contributing to the country’s high oil consumption. High consumption is the root cause of rising oil prices. It is better for the West and United States in particular that they cut consumption. One way is to consume less. A more efficient manufacturing system at home would cut imports, which in turn would bring oil consumption down in China. Overall, if less oil is consumed there will be less cash for speculation. This in turn will bring prices down.
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(Hari Sud is a retired vice president of C-I-L Inc., a former investment strategies analyst and international relations manager. A graduate of Punjab University and the University of Missouri, he has lived in Canada for the past 34 years. ©Copyright Hari Sud.)
