- The Washington Times - Thursday, April 7, 2005

Explosive growth in car usage in China and in other developing nations will keep fuel prices high for years, even as volatile OPEC producers increase their control over oil supplies, the International Monetary Fund said yesterday.

While oil use grows steadily by 2 percent in the United States, growth in China — with 1.3 billion consumers — is rising at double-digit rates, as millions of people earn enough income to buy cars. India — with 1 billion consumers — and other developing nations are not far behind, the agency said.

“We should expect to live with high and volatile oil prices, which will continue to pose a risk to the global economy,” said Raghu Rajan, the agency’s research director, because demand may come close to outstripping supplies for much of the rest of the decade.

“Any supply disruptions or unexpected movements in demand can cause sharp changes in the price of oil,” he said. The IMF projected that a spike in premium crude prices to $80 per barrel from $54.11 in New York trading yesterday could cause substantial damage to the U.S. and world economies.

The average price of regular gasoline will hit a record $2.35 next month and stay high for some time to come, the Energy Information Administration projects.

Behind the problem is China’s rapid emergence as the second-largest consumer of oil behind the United States. China alone will account for 24 percent of the growth in world demand in coming years, the IMF estimated.

“It is reaching the stage where transport demand will explode and more and more people will buy cars, and this will have a significant effect on demand for oil going forward,” Mr. Rajan said.

The IMF’s warning echoed remarks by Federal Reserve Chairman Alan Greenspan earlier this week, who noted that the failure of supplies to keep up with robust growth in demand is causing a “price frenzy” in the oil market.

Some Wall Street observers think oil prices have spiked because of speculation fueled by hedge funds and other big investors that have become big players in the oil futures market.

“It’s an Internet-type speculative bubble,” said Lawrence Kudlow of Kudlow & Co. “Mutual funds, hedge funds and even insurance companies are buying oil on the momentum trade. This could be dangerous.”

But an IMF investigation concluded that speculation was not driving prices artificially high.

The agency found that the attraction of major investors to the energy markets has raised volatility, but it also has had benefits, helping increase efficiency in a market previously dominated by big energy companies such as Enron.

Like Mr. Greenspan, the IMF found that a principal reason prices are high and likely to stay high is a lack of investment in new oil production around the world since the 1990s.

As mature wells in countries such as the United States, Canada, Norway and Britain top out in the next few years, growth in supplies will depend increasingly on the Organization of Petroleum Exporting Countries, whose members control 70 percent of the world’s oil reserves.

Most of those reserves are held by Persian Gulf states, with the largest shares in Saudi Arabia and Iraq, whose oil resources have been bottled up by war and economic blockades.

“Investment has been subdued,” and even last year’s record-high prices have not produced “an overwhelming response,” Mr. Rajan said. “It’s going to be a rocky ride going forward” because it takes years for wells to start producing oil.

OPEC’s slim margin of spare capacity — less than 1 million barrels per day in a world that consumes 82 million barrels — could fall to zero by 2010 if adequate investments aren’t made, the agency said.

Because production is set to decline within years in major producers outside OPEC — including Russia — OPEC’s share of the oil market will grow, the IMF said.

Some OPEC states, such as Venezuela and Iran, are outright hostile toward the United States and are pushing for high prices and tight supplies. Saudi Arabia and other moderates want to keep prices relatively low, but have not been successful, the IMF noted.

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