China and Oil

If you think the drop in oil prices recently from around $114 in early May to around $100 a barrel today is a signal that we've seen the last of high oil prices, think again.

The drop in oil prices was due to several factors. The increase in margin requirements for silver spooked investors and immediately sold oil. Also, the strengthening of the US Dollar has cause oil to get cheaper in US Dollar terms.

However, we should not forget that oil is a commodity that is used up everyday. One of the biggest importer of oil is China. China's demand for oil has increased 400% in the last 20 years and it is estimated that China will use more oil than the US by 2020.

What's triggering the demand for oil in China is the number of cars being bought by its citizens. The annual growth rate in demand for cars is between 30 to 40%. Only 10% of China's population own cars right now. That's a huge growth market.

I found this chart showing a comparison of the demand for oil by US and China. China's oil demand has not fallen since 1990 and there's no expection it will decrease in the near future.



Here's an interesting article by Jim Brown from Oilslick.com that explain this better.

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