China Oil Crisis Could Cripple World Economy

Forget about the credit crisis and home mortgage problems. The largest single threat to economic stability in the US and most other country’s could be an emerging fuel crisis in China.

Yesterday, the Beijing government raised prices at the pump by 10%. In some regions of the country, diesel is being rationed, making it hard for local industry to transport goods.

One argument for raising the price of fuel in China is that it might cut consumption. According to The Wall Street Journal, oil demand in China has been up almost 9% a year over the last five years while the rest of the world has seen an increase of under 2%. China’s consumption is now 9% of the world’s oil output. Local fuel price increases that drop demand in China should move crude prices back down and keep them from pushing above $100 a barrel.

But, the problem is more complicated. China counts on nearly limitless energy to drive its export machine. If China faces constraints on its ability to produce and move goods, cheap exports to the West could face cutbacks. Rising prices for products out of China may push the inflation button.

If industry falters in China due to lack of broadly available cheap energy, economic growth there could slow and take it hot financial markets down with it. That would undermine the growth of China’s middle class and could drive the economy there into a prolonged slowdown. Ripple effects from a battered Chinese stock market and damaged China growth engine could certainly spread across the globe.

Cheap fuel in China driving up crude prices or a crippled economy that cannot serve the world’s demand for cheap stuff. Two bad choices, and no solutions at all

Douglas A. McIntyre