The Wall Street Journal-20080131-Ahead of the Tape

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Ahead of the Tape

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China Slump

Effect at Pump?

Not So Much

If China's energy-hungry economy is slowing down, as many investors fear, that would at least seem to have the benefit of bringing down energy prices. Don't count on it.

China, the world's biggest consumer of coal, is the second-biggest consumer of oil, after the U.S., gobbling up nearly eight million barrels a day, nearly a quarter of OPEC's daily output. Its demand for oil has increased about 38% since 2003.

Its economy is highly energy-intensive -- by some estimates, any 1% increase in gross domestic product is matched by a 1% rise in energy demand. Both the International Monetary Fund and Goldman Sachs Group forecast that China's GDP will rise 10% this year -- still blistering, but down from 11.4% in 2007.

The government, worried about inflation, is taking steps to cool growth. Weakness in the U.S. and other developed economies may be hurting China's export sector. Partly in anticipation of a slowdown, Chinese stock markets have sold off this year.

Meanwhile, high energy prices are making China's heavy industries less profitable, says Lehman Brothers analyst Adam Robinson. That, along with a desire to curb pollution before and after this summer's Olympic Games in Beijing, will lead China's economy into less energy- intensive industries, Mr. Robinson believes.

Such a shift is probably a long way off, and the effect may be insignificant relative to the 84 million barrels the world consumes every day. Even if China's economy slows more dramatically than expected, the government may spend its vast cash reserves on improving bridges, roads and ports, if only to keep unemployment at bay -- and that will take lots of energy.

Downhill Ride for Investors

Of Refiners Likely to Go On

Investors who plowed cash into booming oil refiners enjoyed quite a ride. Recently, however, the ride has been mostly downhill. There is a good chance it will stay that way.

Shares of Tesoro, a major refiner that reports fourth-quarter earnings today, have more than quadrupled since 2003. But the stock has tumbled 39% since its 52-week high on Oct. 26. A surge in oil prices outpaced the price of gasoline and other refined products, crimping refiner margins. Investors also worry that consumers will cut back at the pump as the economy struggles.

On Tuesday, rival Valero posted a smaller profit decline than Wall Street forecast. If Tesoro follows with a better-than-expected report, its shares could pop. Analysts surveyed by Thomson Financial forecast net income of two cents a share, far below $1.14 in the 2006 quarter.

In the past few years, refiners often enjoyed gross margins well above $10 a barrel, with a surge to nearly $30 last May. Before the recent boom, margins averaged roughly $5. A report this week from Moody's argues that margins are likely to return to their longer-term average.

Sky-high profits unleashed record investment in refining capacity. A major refinery in India is expected to come online this year. In the next few years, capacity is forecast to rise from Saudi Arabia to China to the U.S. The boost in capacity is arriving just as the global economy is slowing. This week, the IMF said it expects the global economy to expand at a 4.1% pace, the weakest gain in five years and down from 4.9% in 2007. That is a recipe for lower profits for refiners.

-- Scott Patterson

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