Monday, July 03, 2006

Driving oil prices 

Oil prices have been high for a couple of years now and don't seem to be heading down any time soon. What could be behind this? Its most likely a confluence of factors but here is a big one that was mentioned in the New York Times this past weekend:

The total miles of highway in China last year was 23,000 - more than double what existed in 2001.

In 2000 China had about 6 million passenger cars on the road - now it has 20 million.

Car sales are up 54% in the first three months of 2006 compared with the same period in 2005.

Every day a thousand new cars hit the road in Beijing.

The article wasn't about oil consumption - it was about how China is developing a car culture along the lines of the U.S. Of course this explosive growth in automobiles is what is likely to keep China's thirst for oil on an upward trajectory.

China has been growing rapidly for a couple of decades now but it is only recently that enough people are having high enough income to purchase cars. For the first two decades of growth people saw their incomes increase but they were still too poor to purchase cars. Now increasing numbers of people are passing the income threshold that allows them to buy cars. One wonders how long it will take before India passes that same threshold.

The bottom line is barring the development of an alternative to the internal combustion engine demand for oil is likely to remain strong. As long as OPEC can be at least keep supply somewhat under control prices should remain robust.


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