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China's Oil Appetite to Charge Electric Car Market

NEW YORK ( TheStreet) -- China's insatiable appetite for oil, and the resulting spike in gasoline prices in the U.S,. could trigger demand for fuel-efficient vehicles before the end of the year.

As Dan Cheng, A.T. Kearney partner and leader of the firm's automotive and transportation practice in North America explains, "if gasoline prices go to $5 over the next year and a half, your disposable income may go up proportionally -- and you will absorb additional costs and still be able to drive your SUV." But, if gasoline prices were to go up overnight due to an oil shock for example, "it would be harder to tolerate that increase."

Cheng says since 1996, gasoline price fluctuations have explained more than 72% of the volatility shown in fuel-efficient vehicles such as small cars. A migration to small cars was triggered in 2008 when gasoline prices went well above $4 in a short period of time, said Cheng. But when gasoline prices fell back to $2 near the end of 2008, there was a return in interest to gas-guzzling trucks.

Analysts believe that the gasoline price pop required to trigger greater demand for fuel-efficient vehicles could indeed occur before the end of 2011.

Oil prices are expected to heat up before the end of the year thanks to strong demand from China -- and the brevity of the lag between a rise in oil spot prices and increases in prices at the pump. There is around a one to two week-lag in the corresponding oil spot and gasoline prices depending on whether it's an increase or decrease, according to John Gamel, gasoline analyst for MasterCard Advisors SpendingPulse. It actually takes longer for prices at the pump to drop in response to a fall in spot oil prices.

For every dollar increase in crude, gasoline could go up on average by $1.15 a barrel, or about 3 cents a gallon, according to Neal Walters, A.T. Kearney partner in the utility and energy practice. The wholesale price of gasoline has on average been priced at about 115% of crude over the past ten years, according to the analyst, who notes that there are seasonal variations to his estimates, with the ratio being typically higher in the summer and spiking during short-term supply shortages during the summer peak driving season; and hitting a low during the winter and during short-term supply gluts.

Since October, China has raised interest rates five times to stem inflation. Yet second-quarter gross domestic product came in better than expected, as did June industrial and retail sales data in the week of July 15. Even amid signs of cooling manufacturing activity in the country, A.T. Kearney's head of energy practice Vance Scott maintains his view that U.S. gasoline prices are bracing for a surge.

"If China continues to expand this way, I would expect [U.S.] fuel prices to go up 20 to 30 cents a gallon by the end of the year ... I would be inclined to say that even if China slows in the second half, we're talking about a relative slowdown of a couple percent maximum of China's industrial output growth, at about 15% today, or GDP growth, at 9.7% today, so that probably pushes things to the low end of my range rather than nullifying the statement."
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