Oil traded at a seven-year high last Friday, with Brent crude reaching US$93.70 a barrel, driven by increased demand and constrained supply. This might not be the end of it as China is not firing on all economic cylinders. When – not if – the Chinese economy picks up pace, this will only fuel even more demand for oil . Size matters. China accounts for a tenth of the global crude trade and is by far the world’s largest oil importer – it imported a record volume of 10.85 million barrels per day in 2020, but demand fell by 590,000 barrels a day last year as the economy ran into headwinds. Not least of these was the adverse economic impact of Beijing’s “dynamic zero infection” policy to contain the spread of Covid-19. Fast-forward to today and China’s restrictive policy remains in place while economic activity has also been seasonally affected by the Lunar New Year holiday and the one-off impact of the Beijing Winter Olympics. There have been factory closures in northern production hubs as China attempts to cut pollution and maximise the chances of a blue-sky Games . This confluence of factors helps explain the slowdown in the expansion of China’s factory activity in January. As it is, the National Bureau of Statistics shows China’s official manufacturing purchasing managers’ index edged down to 50.1 in January from December’s 50.3. A reading greater than 50 indicates production expansion, below 50 is a contraction. But the hit to economic activity related to the Lunar New Year and the Beijing Winter Olympics is transitory. Although China continues to adhere to its strict Covid-19 policy, it remains to be seen whether such a stance is sustainable in a world where many major economies are moving towards living with the virus . From an energy perspective, analysts and oil company officials are already predicting that China’s crude oil imports could rebound by 6 to 7 per cent this year, reversing that 2021 decline. For 2022, energy analysts at FGE, Rystad Energy and Energy Aspects believe crude oil imports are poised to grow by 600,000 to 700,000 barrels per day. The picture elsewhere is also revealing. In the week to January 28, US crude inventories fell by 1 million barrels, to 415.1 million barrels, a consequence of strong demand but limited supply. That might sound like a large amount of oil, but US crude stocks are now approaching the low levels of October 2018, when inventories stood at 409 million barrels. The bottom line is that, even without China’s economy firing on all cylinders, the oil price is already elevated. How China and the US could drive up the price of oil If there was room to raise production to help match the increased demand, that could make a material difference to the price equation, but there currently doesn’t seem much spare capacity to exploit. In fact, the crude supply seems somewhat inelastic. Opec members and other oil producers led by Russia said last week they would stick to their previous target of monthly increases of 400,000 barrels per day but would not go further. The grouping, known as Opec+, matters as it pumps more than 40 per cent of the world’s oil supply, yet, aside from Saudi Arabia , most members lack the spare capacity to raise production and some are even struggling to meet their current targets. In part, this is a result of underinvestment in the global oil industry in the face of the clear, well-documented international drive to wean the world economy off carbon-emitting fossil fuels and move towards a reliance on renewable energy sources . This international push is hardly going to persuade investors there is much to be gained from ploughing capital into new crude oil exploration and extraction projects. Yet, the world economy will still have to rely on traditional hydrocarbon fuel even as it moves from fossil fuel dependency to a clean, sustainable energy future. That leaves the global economy facing crude supply constraints even as oil demand is rising and before China’s economy is again operating at full capacity. As Chinese economic activity accelerates, the imbalance between oil demand and supply will only become more skewed. The price of oil was uncomfortably high for buyers at the end of last week, but in July 2008 it hit US$147 a barrel when Opec supply constraints collided with surging Chinese demand. This isn’t 2008, but as China’s economy picks up there will only be even more demand for crude oil. Neal Kimberley is a commentator on macroeconomics and financial markets