China not to be responsible for energy price
According to economists, the real causes of the huge spikes in international commodity prices are the weak dollar and speculation rather than the so-called China factor that China’s rapid economic growth has indeed increased demand for commodities in general.
As a recent Economist article points out, the low prices of Chinese products, thanks to its low manufacturing costs, have contributed to stabilizing prices across the globe. “China helped to hold down inflation in developed economies not because its prices were falling, but because its goods were much cheaper,” the article said.
Because of China’s higher demand for oil and other commodities, some critics insist on pointing the fingers at China to put the blame on a country that is facing the daunting task of development, said Hua Min, director of Fudan University’s Institute of World Economy.
Indeed, China’s oil imports increased significantly in 2007, up more than 14 percent year-on-year compared with the 10 percent in the preceding year, when the Fed was complaining about deflation, not inflation.
The International Energy Agency published a report in 2005 saying the increase in demand from China and India can be well compensated by Russia’s increase in its oil exports, thus keeping the overall supply-demand situation unchanged.
The decision of the Organization of Petroleum Exporting Countries (OPEC) late last year not to raise production was also based on its reading that supply matches demand, which indicates that the accusation that China’s demand has pushed up prices does not hold water, said Zuo Xiaolei, chief economist with China Galaxy Securities.
The organization has balanced the supply and demand in the oil market, dismissing the rationale for increasing output.
Pushing up oil and other commodities prices should be imputed to the lax US monetary policy started some years ago and the ensuing loose liquidity across the world, analysts said.
Since 2001, the US government has tried to save an economy battered by the bursting of the “new economy” bubble through continuous interest rate cuts. The interest rate, as a result, came down from 7.5 percent to as low as 1 percent. This led to a steep depreciation of the dollar against all major currencies, said Zuo. As oil price is denominated in dollar, prices rose. “In the dollar’s latest round of depreciation since last year, oil prices crossed the $100 a barrel line,” said Zuo.
The loose US monetary policy also caused the credit crisis, which is fundamentally the result of loose money, and the crisis has in turn exacerbated the dollar’s depreciation, said Hua. As it pushed up the relative price of oil, the falling dollar has also prompted global investors to shift to commodities instead of the US currency in their investment portfolio, said Hua, indirectly pushing up prices of oil and other commodities.
As the sub-prime crisis continues to spread, part of the international capital has flown into the commodities futures market, increasing their prices as a result of speculation, said Zuo.
In January 2000, speculators controlled 37 percent of contracts to buy West Texas Intermediate crude oil on the New York Mercantile Exchange. By this April, however, they controlled 71 percent of the contracts, according to data provided to the US House Energy and Commerce Committee by the Commodity Futures Trading Commission.
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