China's Quest for Oil

Is China trying to capture the oil market?

From Fueling the Dragon:

With 1.3 billion people, the People's Republic of China is the world's most populous country and the second largest oil consumer, behind the U.S. In recent years, China has been undergoing a process of industrialization and is one of the fastest growing economies in the world. With real gross domestic product growing at a rate of 8-10% a year, China's need for energy is projected to increase by 150 percent by 2020. to sustain its growth China requires increasing amounts of oil. Its oil consumption grows by 7.5% per year, seven times faster than the U.S.

Growth in Chinese oil consumption has accelerated mainly because of a large-scale transition away from bicycles and mass transit toward private automobiles, more affordable since China's admission to the World Trade Organization. Consequently, by year 2010 China is expected to have 90 times more cars than in 1990. With automobile numbers growing at 19% a year, projections show that China could surpass the total number of cars in the U.S. by 2030. Another contributor to the sharp increase in automobile sales is the very low price of gasoline in China. Chinese gasoline prices now rank among the lowest in the world for oil-importing countries, and are a third of retail prices in Europe and Japan, where steep taxes are imposed to discourage gasoline use.

In the below CNBC clips Alan Tonelson says China's oil deals are something to have serious concern about.

China Oil Deals

In Q1, Q2 2009 alone, it is reported China, through $45 billion in loans, gained access to oil supplies in Russia, Brazil, Venezuela and Kazakhstan.

In 2006

Chinese President Hu Jintao jetted off to Saudi Arabia to shore up ties with the world's largest oil producer. After a brief stop in Morocco, he traveled to Nigeria, where he agreed to a $4 billion investment in infrastructure in return for first dibs on a specific drilling area in the impoverished but oil-rich African nation. He went on to sign a deal for oil exploration rights in Kenya, a country that has only begun to assess its potential oil reserves.

2008, China even captured a $3 Billion oil deal with Iraq.

It also appears state subsidies are fueling the deals, while private Western companies are readjusting to the oil commodity bubble burst.

How far will China go in trying to capture commodity markets?

Pretty damn far, if the implications in this Wall Street Journal article on China suddenly finding Rio Tinto spies is true:

If the Rio arrests mark the beginning of a Chinese war to remake the global ore market more to China's liking, Beijing might want to think again. Its clumsy attempt to make computer makers instruments of Internet censorship was not exactly confidence-inspiring. Ensuring nobody wants to do a business deal with China for fear of being charged with a death penalty crime hardly improves the case. Then there's the epic civil disorder in Xinjiang.

From a 2006 study, China's overseas investments in oil and gas production:

Chinese oil companies enjoy several major advantages over Western firms under some circumstances, some of which involve China’s adoption of energy-driven policies in other spheres that can be detrimental to US interests. Chinese firms can enter countries where international sanctions restrict activities by US or European firms, and have access to financing from state-owned banks, which are willing to back projects whose risk-versus-return tradeoffs would seldom appeal to ordinary investors. China’s existing projects in Sudan, as well as the preliminary agreement by Sinopec to develop the Yadavaran oilfeld in Iran, illustrate these effects. The Chinese government can also
make side deals involving foreign aid and arms sales to promote its interest in acquiring oil production assets.

Finally, in some cases lack of transparency may constitute another source of competitive advantage. This is inherently difficult to document, but Western firms have reporting requirements that do not apply to Chinese firms and are often under pressure from their home country governments and investors to keep their transactions with foreign governments transparent. For US firms, the Foreign Corrupt Practices Act prohibits some types of side payments that Chinese firms could easily make.

Oil is a critical strategic resource, regardless if the U.S. goes green immediately, especially for U.S. manufacturing.

A must watch documentary, The Prize is masterwork on the history, strategy and global domination oil plays in an industrialized society. Right or wrong, like it or not, oil is still a critical commodity in economics, including U.S. trade exports (manufacturing). Having one nation try to capture the world's oil supply, well, that is not only bad juju at the pump for America, it's a major threat to national security.

You might read some of New Deal Democrat's posts on how oil affects the U.S. economy.

The Continuing(!) Effect of the Oil Shock on the Recession
OIl, consumer spending, and the Recession
Global economic tipping point: at the intersection of China and Oil

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China at the margin

Oil demand/prices over the next decade will to a large degree be driven by emerging economy demand at the margin. Here is another thought experiment using Chinese demand to generate some rough back of the envelope€ forecasts:

- China moves from 3 bbls/person/year to the South Korean per capita consumption level of 17 bbls/person/year over the next 30 years
- No peak in global production

Result: In next 10 years we must find 44 million BOPD - 26 million BOPD to maintain supply and 18 million BOPD to keep up with demand increases.

If you superimpose peak production on top of this demand profile using the following parameters oil prices would increase approximately 250% in real terms over next 10 years - most likely something would give far before that price level:

- Oil demand elasticity of -0.3
- Current production 84 million BOPD
- Current price US$ 80
- Peak production 100 million BOPD
- Post peak decline rate of 3-4%

If you want to try the china oil demand or the peak oil models for yourself using your own assumptions they can be found at Enquirica in the "Research" section: http://www.enquirica.com/index.php?option=com_content&view=article&id=11...

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