*

Hitt og þetta 24. apríl 2006

DJ THE SKEPTIC: Oils Slippery Slope

LONDON (Dow Jones)--The rising oil price may not be the sole reason the Japanese stock market plunged 2.8% Monday, but it's a big part of the problem.

No surprise, either, that oil dominated G7 Finance Ministers' talks in Washington over the weekend, along with growing fears that global trade imbalances threaten economic stability.

The problem is that blaming the latest oil spike on political tensions between the West and Iran is too superficial. Iran is a justifiable cause for concern, creating additional short-term supply worries along with ongoing problems among South American and Nigerian suppliers, but the crux of the oil price problem remains soaring demand from fast-growing Asian nations.

Asia now accounts for a third of global oil consumption. Twenty years ago it was less than 10%. And with China expanding at such a fast rate, the figure is bound to grow.

Though there is still plenty of oil to go around right now, that could change in the decade ahead, and China's vociferous appetite could destabilize western economies.

So don't be swayed into thinking this is just another of temporary price blip. Get used to the idea that oil is headed for $100 a barrel in the years ahead.

Hot off from a visit to the U.S. and Saudi Arabia, China's President Hu Jintao now moves on to Africa were he will visit Morocco, Nigeria and Kenya. Extending trade links will be the dominant issue, as China is short on many raw materials that African nations have in abundance.

China needs everything it can get - and the visit to Nigeria, Africa's largest producer of oil, means China will probably promise to invest there.

Politically, Nigeria remains unstable and the benefit of its huge oil wealth has so far not been transferred to its people. But China could help solve the problem.

While in Saudi Arabia, Hu discussed setting up a strategic emergency oil reserve for China, to be supplied by the Saudis on top of the current huge levels it already delivers to the Asian customer.

Saudi currently exports around 17.5% of its crude production to China. Last year Saudi Aramco, together with Exxon Mobil and Asian refiner Sinopec, signed a $3.5 billion deal to expand an already large refinery in southern China.

Japan and the other big G7 nations are right to be concerned on the growth in demand for oil coming from China, which accounts for around 30% of the annual increase in oil demand. And this is probably just the start.

China still has huge areas that aren't even connected to the national electricity grid. In time, as the economy develops and the wealth created gets distributed to rural areas, demand for oil will further increase.

What we are seeing from China's development now is only the start - and it extends to steel and other mineral resources needed to fuel this economic growth.

Growing Chinese consumption is bound to push the crude price a lot higher, and western nations need to face up to the big inflation threat that could result.

The G7 ministers were right to remind that the price of oil and the increasing lack of supply stability poses a threat to the world economy. They are right, along with the IMF and World Bank, to warn about global instability caused by big trade imbalances.

Japanese markets are also right to be concerned that this, along with the prospect of rising domestic interest rates, could throw its economic recovery off course.

And if Japan is worried then the rest of the world should be too.