High Gas Prices Are Driven By Demand From China

The United States will not be able to offset the rise in foreign demand for oil; it must adapt instead.

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Patrick DeHaan is a senior analyst at gasbuddy.com.

Gasoline demand in the United States that peaked in 2007 has begun to fall in recent years, thanks to a recession and more fuel efficient vehicles, yet gasoline prices remain stubbornly high. Americans wrongly assume that it's U.S. demand that has the largest determining factor in how high prices go, failing to realize that explosive growth in China is the headline.

According to the International Energy Agency, since 2009, gasoline demand has dropped in Austrailia, Austria, the Czech Republic, Denmark, Finland, France, German, Greece, Hungary, Iceland, Ireland, Italy, Japan, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. Meanwhile, developing countries in Latin America, the Middle East, and China all continue to see demand for gasoline and crude oil surge, and the stakes are high as these countries continue to grow—the Middle East grows as its revenue for oil rises, China grows as the United States continues to import cheaper Chinese goods, and Latin America growth also continues.

[See a collection of political cartoons on gas prices.]

In fact, Chinese oil demand has surged 400 percent and may be five times higher this year than what it was in the late 1980s. In the same timeframe, U.S. oil demand has risen just 12.5 percent. Countries seeing the largest growth in demand are seeing their supply/demand picture looked at more closely than the United States, a country experiencing falling demand. In other words, the U.S. market is becoming less relevant to traders as the powerhouse it used to be because of its falling demand against China's surging demand.

It's because of such rapid growth in the last decade that we've seen crude oil prices rise and become so volatile. A decade ago, OPEC had significant spare capacity, but in the years since, has not made enough investments to keep up with such large increases in growth, and it's partially China's fault that prices are on such a roller coaster—the International Energy Agency forecasts demand to outpace supply.

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The situation will only get worse as Corporate Average Fuel Economy standards take a decade or more to completely phase in, and small reductions in demand here will easily be offset by continued rampant growth in Asia. American motorists need to understand that falling demand in the United States is offset by China's increased demand, accept that oil is globally consumed, and minimize the risk of high priced fuel as soon as they can—or we won't be ready for the day that oil prices go sky high.

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