Costly oil threat to India, China growth - IEA

SINGAPORE Tue Jun 21, 2011 7:15pm IST

An employee holds a gas pump to refill a car at a petrol station in central Seoul April 6, 2011. High crude prices may derail growth in China and India, the two economies that helped the world overcome financial crisis, the International Energy Agency said on Tuesday. REUTERS/Lee Jae-Won/Files

An employee holds a gas pump to refill a car at a petrol station in central Seoul April 6, 2011. High crude prices may derail growth in China and India, the two economies that helped the world overcome financial crisis, the International Energy Agency said on Tuesday.

Credit: Reuters/Lee Jae-Won/Files

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SINGAPORE (Reuters) - High crude prices may derail growth in China and India, the two economies that helped the world overcome financial crisis, the International Energy Agency said on Tuesday.

Asian countries led by China and India are tightening monetary policies to battle a surge in inflation, partly caused by high oil prices.

Brent crude has peaked at just above $127 a barrel so far this year, a level which analysts have said could hurt oil demand.

"High oil prices are a significant risk to derailing the economic recovery not only in the OECD countries, but also in China and India," the IEA's Chief Economist Fatih Birol told Reuters.

"China and India are two most important economies which helped us get out of the economic crisis. If they go for tightening of monetary policies, this may lead to a slowdown in their economies which is bad news for all of us."

Birol did not elaborate on the oil price that would derail growth.

Oil prices will stay above $100 a barrel in the next year as supply worries outweigh concerns about flagging global economic growth, a Reuters survey of oil industry officials, executives and traders showed last week.

Eight of 20 participants said they saw oil trading between $110 and $130 a barrel in June 2012, eight saw prices between $90 and $100 and three saw prices above $130. Only one respondent saw prices between $70 and $90 per barrel.

"If you look at the average over the year, oil prices are still significantly higher than the average for 2008," Birol said. "I'm also looking at the next couple of quarters and we expect that there will be strong demand growth and sluggish non-OPEC production."

Higher oil prices will also lead to a rise in fuel subsidies despite efforts by China and Iran to reduce them, he said.

The West's energy watchdog raised its five-year global oil demand forecast by an average of 700,000 bpd compared with the previous medium term report issued in December on growth from non-OECD countries. China alone accounts for more than 40 percent of the increase.

TIGHTER SUPPLY

Global oil production is expected to reach 96 million barrels per day (bpd) in 2035 with the Middle East and North Africa accounting for 90 percent of this, according to the IEA.

The world will need more oil production from OPEC, Canada and also non-gas liquids as many oil fields outside OPEC are maturing, Birol said.

"The era of cheap oil is over," Birol said."

Investments in the Middle East and North Africa may be deferred and it could be difficult to send in workers because of unrest in the region, he said.

By 2035, the IEA expects global energy use to grow by 36 percent with non-OECD countries - led by China, where demand is expected to surge by 75 percent by then - accounting for almost all of the increase.

Strong growth in oil demand is mainly from transportation sector where there are limited alternatives, Birol said.

GAS BOOST

China will still have to import half of its gas needs to meet requirement as domestic output lags growth in demand. It will import about 50 billion cubic metres of liquefied natural gas (LNG) by 2015, equivalent to imports by Europe, he said.

Australia will be a key supplier to China as it looks set to overtake Qatar as the world's top exporter of the fuel by 2020, Birol said.

His comments come as analysts express doubts over some of the Australian projects coming up on time due to higher costs and delays in environmental approvals.

Last year the IEA forecast that global nuclear capacity would grow by 360 gigawatts between 2008 and 2035.

If capacity growth is reduced by half to 180 gigawatts, the share of nuclear in the global energy mix will fall to 10 percent from 14 percent, Birol said.

"You will have less eggs in the basket" for energy diversification, he said.

Coal usage will increase about 6 percent compared with IEA's forecast last year, while that for gas will rise by an additional 80 billion cubic metres, he said, adding that one more Qatar will be needed to meet requirement.

"Nuclear is still very important for the global and Japanese energy system," Birol said. "Without nuclear, we will see higher energy prices and less energy security and higher carbon emissions."

(Reporting by Florence Tan and Luke Pachymuthu; Editing by William Hardy)

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