Before 1995, the correlation between GDP and oil prices was –0.4. During the period 1995 to 2004, the correlation stands at +0.3 (see Figure 3). Against this backdrop, economic developments in China play a crucial role. The integration of China into the world economy is likely to be a historic event. Indeed, its long-term economic consequences strike me as comparable to those associated with the integration of the emerging U.S. economy into the world economy at the end of the 19th century. China has become the second largest importer and consumer of oil behind the United States. The longer-term oil demand effect associated with Chinese growth is potentially vast. The fact that China is poor in natural resources undoubtedly strengthens the Chinese authorities’ resolve to avoid any potential energy shortages. The International Energy Agency IEA estimates that global demand for oil will increase by 2.5 million barrels per day or in excess of 3% this year. This represents the highest increase in global demand for oil during the past quarter of a century. Virtually half of that increase in demand can be attributed to the Asian emerging markets with China accounting for over 32% of the additional demand. Needless to say, China is merely at the beginning of its growth dynamic.
Average Inventory  Crude Oil Price (rhs)  Figure 5 Crude grade qualities  Source: JPMorgan Commodities Research, Energy Intelligence Group  BIS Review 69/2004  7  Figure 6 Crude oil futures contract volumes (NYMEX)  60  300'000  50  250'000  40  200'000  30  150'000  20  100'000  10  50'000  0  0  1995  1996  1997  1998  1999  2000  2001  Non-Commercial Long Contracts WTI Crude Oil (USD/ bbl) (lhs)  2002  2003  2004  Non-Commercial Short Contracts  Figure 7 Historical WTI futures price curves 50 45  U S D /b b  40 35 30 25 20 15 0  1  2  3  4  5  6  Y e a rs to e x p iry 2 0 0 4 -1 1 -1 2  8  1 ye a r a g o  3 ye a rs a g o  BIS Review 69/2004  Figure 8 Backwardation O il Spread (Spot - Futures 3M ) in U S D 3.00  2.00  1.00  0.00  -1.00 Spread Poly.