• Print
• E-Mail

The pace of China’s diesel imports is bound to keep pressure on the world market. In March diesel imports rebounded to 3.6 million barrels, after dropping to 2.4 million during the February snows and holiday season. In January imports were a record 6.1 million barrels. Preliminary information for May suggests that China will import at least 4.4 million barrels during the month, in part to offset production losses due to a refinery fire in Guangdong province. Reports of diesel shortages at retail stations across China continue.

Prior to last fall, China imported relatively small quantities of diesel. This rapid increase in their demand for diesel, together with efforts to mitigate power shortages around the world with diesel generators, suggest that diesel prices will continue to climb for the foreseeable future.

3. Food vs. Fuel

Rapid price increases, the suspension of food exports and the onset of food riots across the world is moving the issue of converting food grains into fuel to the world’s center stage. Food shortages that are now engulfing the world are unlike any seen in recent decades in that they are not completely weather-related. World population is increasing by 78 million people each year; some 4 billion people are now so well off they can eat more grain-intensive meat; climate change is causing droughts and reducing irrigation water; and the movement to divert food into biofuels for motor vehicles continues. More stories about "how the rich are starving the world by making biofuels—dubbed "a crime against humanity"—are appearing in the world’s press.

Currently, the U.S., the EU, India, China, and Brazil all have programs underway to substantially increase their use of biofuels. Since 2000, the amount of corn used to make ethanol has increased nearly six-fold. By next year, according to the National Corn Growers Association, some 4 billion bushels of corn--about one-third of the expected U.S. crop -- will be used to make motor fuel. The problem is being compounded by the increasing cost of oil and natural gas, which is pushing up fertilizer, irrigation, and shipping costs.

Thus far, the reaction to this situation has been minimal. In Europe and China, government leaders are beginning to question whether biofuels make sense, and have asked for studies on the issue. In the U.S., there is as yet little discernable movement. Concerned groups continue to publish tracts calling for the elimination of biofuels production while the ethanol industry continues to deny vehemently that there is link between corn-based ethanol production and global food shortages. Last week the U.S. administration, whose energy policy is largely based on increasing ethanol production, also denied there is a link.

If history is any guide, Europe is likely to change biofuels policies before it happens in the U.S., where the notion of energy independence through growing food has become deeply entrenched. As the situation worsens, and U.S. food prices continue to rise, a consensus will develop that food-based ethanol was a bad idea. After serious political struggles, ethanol mandates and subsidies should gradually be eliminated. The only question is how much irreversible damage will be done before this happens.

4. Brazil's Giant Field

Last week started on an optimistic note when the head of Brazil’s National Petroleum Agency announced that the country’s off-shore Carioca oil prospect may hold 33 billion barrels – enough to supply every refinery in the U.S. for six years. Carioca was immediately touted as the biggest discovery in 30 years and the third biggest oil field ever discovered.

The next day a statement from Brazil’s national oil company Petrobras pointed out that there was really no new information about the size of the field other than what was released last September. While fifteen wells have been drilled into the formation that is called "pre-salt", it will be some time before any definitive estimate concerning the size of the formation, which lies beneath 10,000 meters of ocean and seabed, can be made.

In the meantime, Brazil’s stock market regulators are investigating the man who released what he said was "informal information" from sources in Petrobras. Most observers believe there is considerable oil off the coast of Brazil, but that it will be many months if not years before the full extent of the discovery is determined. At any rate, extracting the first commercial flows of oil will be very expensive, won’t arrive for five or six years at the earliest, and will span many years.