Adamant: Hardest metal
Sunday, March 2, 2003

Wake up, America: It's time to deal with dependence on imported energy

www.pittsburghlive.com By Gregory M. Drahuschak FOR THE TRIBUNE-REVIEW Sunday, March 2, 2003

Investment commentaries lately have focused on two points, Iraq and the limp-along pace of the United States economy. But while the U.S. frets over its economic growth and numerous political uncertainties, one nation is moving full steam ahead economically, which, depending upon how you assess the politics involved, could either be very good or very bad for U.S. investors.

China's economy is booming. Imports are up 21.2 percent year-over-year, and the government is targeting 7-8 percent real Gross Domestic Product growth for 2003. The nation's trade posture is strong, also, with a current-account surplus of 2.2 percent of its GDP.

China quickly is becoming a force in nearly every basic industry, either as a maker or user. China accounts for 14 percent to 25 percent of the global steel demand and 20 percent of production. Aluminum production in China has grown 13 percent a year since 1990 and made the nation a net exporter of aluminum. China represents 12 percent of global commodity chemical demand and 11 percent of global consumption. It has been estimated that Chinese demand for plastics could rise 10 percent or more each year for the foreseeable future.

But this growth does not come worry free. As with any industrialized nation, energy availability is a crucial issue. It is notable to recognize that until 1995, China was a net exporter of oil. In 2001, it imported more than 60 million tons. It has been estimated that China's need for imported oil will at least double over the next decade.

China may now be another example of the old cliché that warns to be careful about what you wish for because your wish might come true. As long as 20 years ago, a widely voiced hope was that China's vast economic growth potential could be realized. Now that this is moving closer to reality, the offshoot of this growth could complicate economic life significantly everywhere else.

So where does China plan to get all the imported oil it needs? Where else but the same places everyone else gets it: primarily, the Middle East.

A comment from OPEC last week should have sobered those who believe a halt to Mideast tensions automatically will drop the price of oil and allow the oil tap to run wide open. An article in the Wall Street Journal suggested that OPEC no longer can control the upside in prices and that there is not much more room to increase production.

Knowing that the engine for its growth will be fueled by energy availability, China has been trying to cut delivery deals with many nations and reportedly has done so already with Sudan, Venezuela, Iraq and Kazakhstan. Arms deals with the Saudis appear to have an energy connection to them, also.

Just shy of 30 years ago, the U.S. got what should have been a huge wake up call when OPEC cut production and placed an embargo on shipments of crude oil to Western countries. Six years later, a revolution in Iran prompted another pricing and supply jolt.

Despite what might be termed Johnson & Johnson Band-Aid attempts at resolving the problems — like coal gasification projects, windmills and other energy alternatives — we essentially did little to extricate ourselves from the shackles that bound us to imported energy. And we now are paying a literal price again for our lackadaisical approach to the problem, and that's before China is considered.

China's growth finally may offer investment opportunities, but China also may have provided us with another reason to seek energy alternatives that would not only remove our energy shackles, but also could remove the Middle East as a political issue.

The question now is one of resolve. Finding economically viable energy alternatives will not come easily or cheaply.

In 1960, President Kennedy set out to land a man on the moon and was chided soundly supposedly for wasting money on something that would benefit nearly no one. The benefits today, however, are abundantly evident in the billions of dollars of GDP related to technology. Without the demands of the space program, development of computers as we know them might have been delayed years beyond the current time.

Today, an all-out alternative energy search likewise might be expensive, but it not only might allow us to achieve our objective, it also could have a multitude of spin-off benefits — not the least of which is not having to listen to the droning comments in the news about world political events and a slumping equity market.

Gregory M. Drahuschak is first vice president of Janney Montgomery Scott Inc., Pittsburgh.

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