Aug 24, 2009

The Oil-Thirsty Red Dragon

Todd StrandbergBy Todd Strandberg

The past few years, China has been on an oil shopping spree. It’s locking up every source of oil that it can find. Beijing has made deals in Africa, South America, Russia, and the Middle East. The Western governments have been oblivious to China's activity.

Just look at this year alone:

China and Russia have signed a 20-year oil contract that would have Russia pumping oil into the Chinese market. China will fund the project with a $25 billion loan to Russian oil companies Transneft and OAO Rosneft Oil Co.

In Africa, two Chinese oil firms are teaming up to buy a $1.3 billion stake in Angolan offshore development rights from U.S.-based Marathon Oil (MRO).

China National Petroleum (CNPC) is interested in buying all or a part of Argentina's YPF SA (YPF) for $14.5 billion.

CNPC is negotiating to take over the majority stake in Iraq's Rumaila oilfield from BP. Rumaila is Iraq's biggest oil field, producing more than a million barrels of crude oil per day.

Beijing has become quite chummy with Brazil's Petroleo Brasileiro (PBR). Petrobras is developing a huge new offshore field — one of the biggest new discoveries in decades.

China has even shown interest in the oil sand of Canada. It is currently very hard to extract the heavy oil from the sands, but there are potentially hundreds of billions of dollars worth of oil to be recovered from the Canadian fields, and China wants to be ready if any major oil production is achieved.

With over $2 trillion in cash, China can easily afford to buy up all of these oil reserves. Having become nervous about the fact that 70 percent of its assets are in dollars, the ownership of oil companies is a good way to diversify its holdings.

The main catalyst behind these deals is China's ability to look past the current global financial crisis. In July of last year, oil reached a record price of $147 per barrel. The spike was attributed to a report from the United States Department of Energy and others showing a decline in global petroleum reserves. When the credit crisis hit, oil prices collapsed along with the downturn in demand.

Once the economy rebounds, so will demand and prices. When prices zoom back up to 2008 levels, the U.S. will find that China controls much of the excess supply. We could easily see the next spike in oil top $200 per barrel. Just this past week, oil hit a new high for 2009 of $74 on news of a promised economic recovery and a potential revival in energy demand.

Soon, it is going to become very obvious that China and the U.S. are energy rivals. China's booming economy is the source of much of the new demand for oil. Chinese oil consumption is expected to grow nearly 20 percent in the next six years, and the country already imports over half of the 8 million barrels a day it uses. Right now, there are more cars in China than in America. With over a billion people, there is no end to the Red Dragon's long-term thirst for oil.

We are quickly headed for “peak oil.” Coined by American geophysicist Marion King Hubbert, the phrase "peak oil" is the point or time frame at which the maximum global petroleum production rate is reached. In five years, demand will be at 87 million barrels per day and supply will be at 85 million per day.

At some point in the near future, I expect Israel to launch an attack on Iran’s nuclear program. The price of crude will certainly be profoundly impacted by the strike, and would make it essential for the world to find a lasting solution to the Arab/Israeli conflict.

It is easy to see petroleum as the catalyst behind much of end-time Bible prophecy. As China continues to grow, it will eventually come into conflict with other major industrial powers. The desire to control the oil wealth of the Middle East could be the reason China musters an army of 200 million soldiers.

“And the sixth angel poured out his vial upon the great river Euphrates; and the water thereof was dried up, that the way of the kings of the east might be prepared” (Revelation 16:12).

Related Links

Oil prices rise to 10-month highs - BBC News
China's July implied oil demand rises for 4th month - Alibaba News Channel
Oil Prices Climb Near $75 - Wall Street Journal