RED CHINA & BLACK GOLD

“The price of gasoline and oil is a reflection of problems that have been decades in the making,” U.S. Energy Secretary Samuel Bodman said earlier in the week after a demonstration of hydrogen-powered car, according to Dow Jones via Rigzone.com.


The prospect of automobiles for the masses running on the first element in the periodic tables remains a concept for the future, but the bull market in gasoline and oil is very much a creature of the here and now. No such luck for a comprehensive solution to America’s energy needs. Bodman went on to say that the answer will be slow in coming and that no silver bullets are imminent. A mix of alternatives is the ticket, and that includes hydrogen cars.
“We want to offer consumers [hydrogen] cars and trucks that perform just like today’s cars and trucks and don’t cost anymore than today’s vehicles,” Bodman continued. “Oil trading at over $50 means hydrogen makes more sense than ever before.”
Perhaps, but for the moment the energy bulls are unimpressed. Crude oil briefly touched a new all-time high in New York futures trading today, and gasoline followed suit and then some.
The Energy Secretary can talk of auto prototypes until he’s red in the face, but it doesn’t mean much when it comes to calming the energy market. After yesterdays’ provocative prediction from a Goldman Sachs’ analysts that a “super spike” in oil’s price could soon raise crude to over $100 a barrel, everyone’s wondering if they’ll be riding hydrogen cars or bicycles to work sometime in the near future.
Calmer voices are nonetheless trying to bring back some reason to the marketplace. Marshall Steeves, an oil analyst with Refco Group, told AP today via BusinessWeek, that the bull market in crude’s run ahead of itself. “I don’t think the sky’s the limit,” he argued. “At some point there’ll be some impact on demand [from the high prices].” If so, that would help lower prices, or the optimists say. “But where that price is, is hard to determine,” Steeves concedes.
There’s no law against guessing, of course, and that arguably starts with China. Or so the “super spike” theorist Arjun Murti, of Goldman Sachs, writes in his infamous piece from Wednesday. The “key risk” to his bullish call, he confesses, would be a “sharp slowdown in economic growth in China and other emerging Asian economies.”
China, of course, has been at the fore of the global economy’s rising demand for oil, and therein lies a fair chunk of the motivation for running prices up. As such, let’s take a look at China’s prospects for economic growth in the near term. The first number that comes up is 9.5%, which is the real (inflation-adjusted) annualized rate of increase for China’s economy as of last year’s fourth quarter. How fast is 9.5%? More than twice as fast GDP’s pace in the U.S.
But is 9.5% sustainable, a prelude to even faster growth, or a stepping-stone to something lower? The latter isn’t hard to fathom for an economy as large as China’s, and one that’s posted rapid growth in recent years. For the same reason that General Electric can’t grow as fast as Claude’s Plumbing Supply Inc., China’s rate of growth must eventually slow. The fly in that ointment is that no one’s really sure when “when” is. Today, tomorrow, 20 years from now?
No matter. China’s government may do what economic fate can’t, at least in the short term. The rapid growth in the country threatens to raise the inflation rate, some economists warn. The risk of letting inflationary pressures grow unchecked is no trivial threat in the world’s most populous nation, which is intent on keeping a lid on political dissent, calls for democracy, and so on in part by creating jobs and elevating living standards. On those twin scores Beijing has racked up an impressive, if still imperfect record. Letting inflation chip away, perhaps materially, at the progress is considered unlikely.
“China has to further resolve various existing problems in the national economy,” writes China Economic Net today. Number one on that list is calming the “great pressures from the overheating fixed assets investment rebound in China.” Number two is upward momentum in prices. Keeping a lid on runaway investment and any associated rise inflation, in short, are said to be crucial, the article counsels. “Controlling the scale of the overheating fixed assets investment is still the core task of the macro-economic control in 2005, and an important aspect to change the continuous high investment rate and low consumption rate.”
Meanwhile, there are other bumps that lie waiting in the economic road. The U.S. Department of Agriculture recently predicted that China’s “extraordinarily high GDP growth….may be dampened by several obstacles.” Among those: an undervalued currency, nonperforming bank loans, inefficient state-owned enterprises, and rising income disparities.
In fact, China’s central bank expects that the economy slowed to 8.9% in the first quarter. “Strong external demand is still a key driving force for economic growth and private investors remain confident, although rapid investment growth has been contained,” the research bureau of the People’s Bank of China said in a report issued Wednesday, according to China View. Another government research shop, the State Information Center, predicts that 1st quarter growth in China will slip to 8.8%. For 2006-2010, an annual 8.0% is the number floating around, according to Reuters via The Economic Times.
The kicker, the China View article adds, is that inflationary pressures have yet to dramatically ease. Is Beijing destined to put on the brakes that much harder? Or is the fate of slower growth in the hand of investors?
“A sharp decline in contribution from investment will be the most important factor for slowing GDP growth in the first quarter,” China’s State Information Center said via the China Securities Journal on Tuesday, reports Reuters via The Standard.
It looks like parsing China’s GDP reports is the new hot read for oil traders, as well as Secretary Bodman.