China Remains The 800-Pound Gorilla In The Oil Room

Todd Shriber
Printer Friendly Version

If you are an avid reader of this newsletter and if you monitor the various weekly oil inventory reports from the alphabet soup agencies in Washington, you are probably well aware that U.S. demand for crude oil has been tepid at best over the past year or more. Such is the case in much of the developed world as well, yet oil prices remain at levels that can easily be considered ''high.'' Yes, we are a long way from the go-go days of summer 2008 when oil flirted with $150 a barrel, but we are also a far cry from the $32 per barrel traded at in December 2008.

The reality is when players like the Saudi oil minister are saying $80 is a ''perfect'' price, you know that oil prices are trading at anything but a discount. And you probably know that China is playing a heavy hand in why oil prices are high. While sluggish economies in the U.S. and throughout the developed world have tempered demand for crude, China's demand is soaring, so much so that the world's largest country is likely to become the newest member of the 28-country International Energy Administration (IEA).

The Financial Times reported that China's oil demand rose by an ''astonishing'' 28% in February. Astonishing is indeed the appropriate adjective for increased demand of that nature. The FT added that for the first time, Saudi Arabia, the world's biggest oil exporter, is now sending more crude to China than it is to the U.S.

The interesting thing about China is that Beijing is arguably far more astute regarding oil politics than Washington, D.C. is. In other words, a communist country realizes the perils of dependence on foreign oil and is more than willing to apply free market solutions to solving this problem.

This fact is highlighted by a couple of stories that we ran here on on Sunday. One was about Sinopec, Asia's largest oil refiner, buying $2.46 billion in Angolan assets. OK, that is not the biggest news in the world, but it indicates Chinese firms are willing to search far and wide to bolster their country's energy reserves. Angola is Africa's top oil producer and an OPEC member.

The other story was about PetroChina (PTR), the largest company in the world by market value, saying it would spend $60 billion over the next decade on acquisitions. That sum is on top of the $7 billion the company has spent in the past year on purchases. Oh yeah, we cannot ignore the fact that Chinese energy producers have spent $32 billion on various acquisitions all over the globe in the past year.

There have been other news items recently that show China is finding unique ways to deploy its vast cash reserves in efforts to bolster its energy holdings. China's development bank loaned Brazilian oil giant Petrobras $10 billion last year and there are rumors another $10 billion loan to Petrobras (PBR) is in the works that would be backed by oil shipments to Sinopec. China also loans billions of dollars to Venezuela for infrastructure projects. Again, those loans are backed by Venezuelan oil exports to China.

Obviously U.S. oil majors have shown penchants for acquisitions. Of the three largest U.S. oil producers, Exxon Mobil (XOM), Chevron (CVX) and ConocoPhillips (COP), the current versions of all three firms are the result of massive mergers. However, China's energy shopping spree does accentuate the point that a major economic power should not allow itself to be held hostage to foreign fuel sources.

The real surprise, and it is far from pleasant, is what China has planned for all the oil it is trying to acquire. In essence, China is exacerbating the peak oil quagmire by not immediately using the oil it is purchasing. China is stockpiling reserves for its own future use, so peak oil arrival's may be hastened by China because the country is currently taking supply off the market and that is not an encouraging scenario.