It is looking like the course of China’s economy will have a lot more to do with your life and lifestyle over the next year or so than you had ever imagined possible. The logic behind this assertion is simple.
The U.S. and for that matter the rest of the OECD economies seem unlikely to be doing much growing in the near future.
Some believe the Chinese have found the formula for perpetual growth. Even if an unprecedented world-wide depression should devastate an export market that was some 38 percent of your GDP, all you have to do is to hand out $900 billion in various forms of stimulus and order your banks to lend, lend, lend and lend some more. These sorts of policies seem to work better in Peoples’ Republics than countries where bankers worry more about their bonuses than what the government believes is good for the nation. In the short run these measures seem to have produced some very impressive “growth” (pumping nearly a trillion dollars of stimulus into a $4.3 trillion economy is bound to do something) even if foreign skeptics question whether we are seeing real economic progress.
Among the reasons China’s GDP should be of interest is our old friend the price of oil. With world oil production flat and unlikely to grow much in response to renewed demand, 9 percent economic growth in China next year is almost certain to increase their demand for oil. In fact, the various world forecasting organizations are already predicting a jump in oil demand next year – largely based on growth in China, India, and the Middle East.
Some outside observers, however, are not sure China’s economy is is really growing as fast as Beijing claims. They cite numerous examples of anomalies in China’s recent economic statistics. As China’s exports are acknowledged to have dropped by 23 percent in July and August and 15 percent in September, this leaves only domestic consumption and investment in plant and infrastructure to be the source of the rapid growth. While Beijing says retail consumption has increased by 15 percent in the 3rd quarter, other factors such as falling consumer prices suggest that the government is fudging the numbers. While Chinese new car sales are reported to be growing from 70 to 90 percent year over year in the last quarter, gasoline sales are flat. Unlike western practice, Beijing counts goods as retail consumption as soon as they are shipped from the factory – even if fact they are still languishing in warehouses. Many suspect that at least some of China’s “economic growth” in going into inventory or not particularly useful infrastructure projects.
Whether or not China’s economic stimulus is being well spent really does not matter. Wars are usually not useful either. Jobs are being maintained in China and the demand for raw materials and oil is increasing.
Last week the politburo of the Chinese Communist Party announced that the Central Committee has decided to continue the stimulus for another year despite concerns that much of the money may be going into overcapacity, inventory, and a real estate bubble. The Central Committee tacitly acknowledged that there have been problems in the last year and that they would make efforts to improve the “quality and efficiency of economic growth.” Last week the government made an effort to clamp down on the free-wheeling bank loan policies that have been in place during 2009 by requiring banks to hold larger reserves.
This new policy coupled with what we have seen in recent months suggest that China will be using its massive foreign exchange reserves to continue heavy spending on investments during the next year. Not only is China doing well, but India just announced that its GDP grew by 8 percent in the last quarter and the Middle Eastern oil exporters are benefiting from oil selling in the vicinity of $80 a barrel.
The prospects for increased demand for oil from the U.S. and other OECD nations do not look that good at current oil prices. U.S. oil consumption has dropped by 2 million b/d in the last two years largely due to the reductions in industrial activity. While more reductions in the demand for oil will come with higher oil prices, these reductions will come more slowly as Americans reluctantly reduce their hard-to-cut driving. With much of the fat already cut from commercial use of oil, further cuts will come more slowly and with more pain.
Over the next year, the price of oil will be driven higher by two forces – a weaker dollar and increased demand that cannot be met. While there may be 3 or 4 million barrels of spare capacity to produce oil – mostly in the Middle East — the last couple of million barrels will be very expensive oil and will require higher prices to bring onto the market.
Taken together, the evidence suggests that higher, possibly much higher, oil prices in the year ahead are likely. The U.S. deficit is not going away and the dollar is likely to continuing falling without major changes in U.S. monetary policy. China is committed to another year of heavy economic stimulation, and India and the oil exporters are doing well. Keep in mind that for much of the world, oil prices are subsidized by the state so that much higher oil prices do not really impact consumer demand.
Those talking of economic recovery in the U.S. would do well to contemplate what the effects of oil prices north of $100 a barrel will be.
Tom Whipple is a retired government analyst and has been following the peak oil issue for several years.