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. Chinese hands help push Americans into small, diesel cars: IEA

by Staff Writers
Paris (AFP) June 10, 2008
Subsidised Chinese demand for fuel is a central force behind a major change in the US lifestyle: Americans are at last turning to small diesel cars, the IEA said on Tuesday.

The effect of high oil prices on inflation, consumer spending and growth are evident but complex, the IEA said.

It explained that although oil prices in current and inflation-adjusted terms have reached record levels, the real burden on the global economy is lower than in the 1980s. But the effect on many poor countries is severe.

The global amount spent on oil relative to global economic production "has not yet reached its early 1980s peak" but high prices were stoking inflation, may delay recovery of the US economy and "in some non-OECD countries the cost of imported oil and/or subsidies is becoming unbearable."

But the current energy squeeze was fundamentally different from the oil crises of the 1970s and 1980s because it was driven by a "demand shock" rather than supply factors.

In its monthly assessment of trends in the oil market, the International Energy Agency, an offshoot of the OECD, explored whether high prices might lead to "demand destruction."

The IEA said that this "will depend mostly on whether China and the Middle East, which account for almost three-quarters of global oil demand growth, substantially modify their administered price regimes," a reference to subsidies.

In the area covered by the Organisation for Economic Cooperation and Development "oil demand is already falling."

US oil demand was expected to fall by about 2.5 percent to 20.3 million barrels per day in 2008.

"More interestingly, even if economic conditions were to improve sharply, it is unlikely that US demand -- largely driven by transportation fuels, notably gasoline (petrol) -- would rebound sharply.

"Indeed, the US seems to be entering a 'post-Hummer' period -- the gradual switch away from SUVs and light trucks to smaller, more efficient vehicles, largely prompted by the perception that oil prices will remain high."

In April almost one in five vehicles sold in the United States was a "compact" or "subcompact" from one in eight 10 years ago when demand for sports utility vehicles peaked. In the first four months of this year, sales of SUVs were 25 percent below the figures 12 months earlier.

US oil demand, the traditional driver of oil demand growth in the OECD, was "poised to contract markedly in 2008 as a result of the double squeeze of the slowing economy and higher prices.

"In the short term, discretionary driving is likely to contract further, while the use of public transportation should continue to increase."

In the longer term, "the structure of the vehicle fleet will arguably change gradually in favour of smaller cars."

The trend could be boosted by tighter federal regulations for fuel efficiency and "by the adoption of diesel-fuelled passenger cars, unthinkable in the recent past but now gaining attention."

Short-term growth of demand for oil would come only from countries with strong economic growth and where consumers were protected by subsidies, which meant essentially oil-producing countries, China and some big countries in Latin America.

Oil-exporting countries were unlikely to abandon fuel subsidies in the short term as they could "arguably" afford them.

Other countries "will probably only make token adjustments" because of domestic factors, chief of which was inflation. And each country had special considerations, for example the Olympic Games in China and social tensions in Argentina.

"However, only China has arguably the financial might to sustain subsidies, and could thus be able to delay any price adjustment even if international prices continue to rise," the IEA said.

"A retail price adjustment in China would have to be very large in order to effectively curb domestic, and more generally, Asian oil demand growth.

"Despite all the hype generated by the recent adjustments of administered price regimes in the region, only a large price adjustment in China has the potential to significantly alter the demand picture."

Growth of oil demand in China could even accelerate if an increase in retail prices improved supply.

"The continued fuel shortages that have beset the country since 2007 suggest that pent-up demand remains considerable," the IEA said.

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Toyota says to produce hybrids in Australia
Nagoya, Japan (AFP) June 10, 2008
Toyota said Tuesday it will produce hybrid cars in Australia, whose Prime Minister Kevin Rudd is trying to battle spiralling fuel prices and revive the country's ailing auto industry.

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