China Bracing For Energy Shortages
Domestic coal shortages caused by China's two-track pricing;
strained oil reserves and higher gasoline prices in the
US and a scramble by the Japanese to secure reserves in
Iran all point to an energy shortage in China this spring
and summer.
Chinese factories have been working at full capacity
to fulfill domestic and foreign orders, driving up energy
demands. In many cases, factories have been so untrusting
of the national energy grid that they have installed generators
to produce electricity for critical services. China's
coal, which is domestically produced, operates on two
plans; the lower price is for coal produced under state-owned
company contracts, and the rest which follows market pricing.
Most older enterprises are in the plan, and getting cheaper
coal, while newer businesses are most frequently outside
the plan. This has created tensions between those inside
the plan and outside the plan.
Oil demand has recently been driven by demand for gasoline
from China's car buyers, whose numbers have been going
up. This has put a strain on the world's current oil contracts,
and the issue has become so serious that Chinese president
Hu Jintao took a trip
to Gabon to secure a deal with Total Gabon for oil.
Because of increased shipping rates, the Chinese have
also moved to secure shipping
capacity.
The Chinese government, at the central government and
provincial government levels, have been signing deals
to build electricity plants. But, there will be a 2-3
year lag before these plants are built. China, which already
had blackouts last
year, will face more serious shortages this year.
In the meantime, energy prices will have to go up.
The Japanese have recently signed a deal to develop the
Azadegan field in Iran, which has reserves of 26 billion
barrels, and is worth US$2 billion. Japanese factories
have been running at near full capacity with orders from
China.
This deal had been delayed for three years by the US,
which sought Japan's support in its stand against the
Iranian nuclear program. Japan's willingness to stand
up against US government pressure in a rare show of defiance
just underlines how serious they perceive the energy shortage
to be.
In the meantime, OPEC, unable to raise prices, has cut
production. Oil contracts are denominated in the US dollar,
which has been falling. Crude reserves in the US have
fallen to a new low.
All factors point to a rise in inflation which will be
driven by rising energy prices, which are already starting.
In the US, the inflation which has already begun with
higher gasoline prices will ripple out into other parts
of the economy. The same will be apply to the Chinese
domestic economy, which suffers from too much liquidity
in the economy.
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