Europe crisis, China fiscal policy risks for oil

DOHA Sun May 9, 2010 3:10pm EDT

DOHA (Reuters) - The sovereign debt crisis unfolding in Europe and the potential for China to tighten fiscal policy were among the biggest risks to global oil demand, the head of the International Energy Agency said on Sunday.

"Europe is still under a certain turmoil," the IEA's Executive Director Nobuo Tanaka told Reuters in an interview. "If there is contagion from Greece and economic growth worldwide is not as good as expected, that would have a substantial impact on oil demand."

U.S. crude dropped nearly 13 percent last week as the euro zone debt crisis stripped the market of the optimism about economic growth that took the price to a 19 month-high on May 8.

Exit strategies, especially in China, from the huge economic stimulus packages that governments worldwide put in place to nurse their economies through recessions were a potential risk to oil demand, Tanaka said.

With demand in developed countries set to register a small fall this year, he said, energy-hungry China was expected to provide the bulk of global oil demand growth in 2010.

But any move to tighten fiscal policy could cap the country's thirst for oil, he said.

"China is starting to consider inflation as an issue.. so are they moving toward more stringent fiscal policy?" he said. "This is a downside risk (for oil demand)."

Ending stimulus programs without hurting the very growth they were designed to encourage would be tricky, he said.

"If that undermines economic recovery, we're going back to square one," he said.

The global oil market is "very well supplied" he said, adding that spare crude output capacity and inventories were high.

SPILL, GAS

The BP (BP.L) oil spill in the U.S. Gulf Coast could lead to tighter regulations on offshore oil and gas work and slow development of a sector that is key to meeting future energy demand, Tanaka said.

"The future potential is offshore in deeper water and in the Arctic, so if offshore investment is going to be slowed down, that is a concern," he said. "We have to learn from the accident. We need good supply from offshore in the future."

The glut in global gas markets could take a decade to clear, Tanaka said.

Fundamentals in the global gas market have changed quickly as the United States developed unconventional reserves and the economic downturn cut demand. A large volume of new supply in the U.S. has reduced its import needs and depressed prices in international gas markets.

Spare capacity in global gas markets could reach 200 billion cubic metros a year in 2015, from around 60 billion now, Tanaka said. It would then take several years for the market to absorb the excess supplies, he added.

Markets were already showing signs of absorbing the excess as those that could switched to burning gas from oil, he said.

The glut and low gas price now could lead to future supply trouble, he said. If prices were too low to attract investment in new capacity, the world could find itself tight on supplies of the relatively clean fuel after the glut has cleared, he said.

(Reporting by Simon Webb; editing by Gunna Dickson)

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