China Makes Real Energy Moves

If one is looking for some of the most tell-tale signs of a changing world order, the size and scope of recent Chinese moves in the energy field should serve the purpose.

 It was only a few years ago that the United States and its oil companies, in their quest to secure vital oil and gas, were accused of everything from imperialistic exploitation to coddling corrupt regimes to finding pretexts to initiate wars such as Iraq, twice. In retrospect it is not quite clear how much of “always blame the Americans: even if you are wrong you are right” was justified but one thing is certain. The insinuations implied that the United States government and its foreign policy understood the importance of energy supply to its economy.

 This is no longer the case, with the American national debate (and that in several other developed countries) consumed by climate change, emissions and the preposterous idea that solar and wind energies can substitute for carbon-based or nuclear energy sources. While any realistic and even charitable estimate puts solar and wind as contributing less than 1 percent of world energy demand for the next 20 years, more than  85 percent will still derive from oil, gas and coal; this while world energy demand will increase by more than 40 percent. The lion’s share of the latter will go to China.

 The concern for the 1 percent solution, while ignoring the 85 percent question, is tantamount to economic hara-kiri for the United States. It also presents a huge opportunity for China to expand its energy interests worldwide and diversify its supply sources.

 The evidence of China’s exploding oil demand is quite clear. After phenomenal economic growth in the first seven years of this decade, oil demand was growing by annual double digits. A short-lived slowdown lasted for a few months after the dire headlines of last year’s economic crisis. But Chinese economic growth has bounced back to more than 8 percent. So did oil demand which just came in with vengeance.

 Last January and February, Chinese oil imports stood at 3.1 million barrels per day, compared to an average of 3.87 million barrels per day in 2008. But from March to June oil imports averaged over 4 million barrels per day and in July they jumped to an unprecedented 4.6 million barrels per day, close to a 20% increase over the average of 2008. (Source: China Customs, August 2009.) This level of imports inch towards the two-thirds of the United States’ total demand.

 Chinese oil companies, the press and international business newspapers are rife with stories and discussions about blockbuster international oil and gas deals to take advantage of “the relatively low prices of overseas assets” as a senior company executive was quoted by China Daily on August 12. The most obvious and practically certain deal is the purchase of Spain’s Repsol’s stake in Argentina’s YPF for at least $17 billion. Buyers are the largest and third largest Chinese oil companies, CNPC and CNOOC, in what shapes out to be the largest deal in Chinese oil acquisitions. (CNOOC’s failed attempt to take over Unocal almost four years ago to the day would have been slightly larger.)

 The deal is one made in oil heaven for both. Repsol unloads an economically questionable asset, one that became so because of burdensome political troubles in Argentina. For the Chinese, expanding in South America on a grand scale is both a psychological milestone and key to diversification outside of their current assets in Asia Pacific, Middle East and much-criticized projects in Africa, headed by their Sudanese venture.

 It is certain that with a huge surplus in foreign currency, large Chinese oil acquisitions will become commonplace. The likely next target will be in Venezuela, where an eager Hugo Ch??┬ívez is waiting, and in the periphery of Russia, in particular Kazakhstan and Turkmenistan.   

 Almost overnight, the United States and the European Union will be reduced to mere bystanders while China moves into the big geopolitical leagues. Massive Chinese acquisition of energy assets, while the West is philosophizing on the future of the “planet” and carbon cap-and-trade schemes, will lead to a transfer of political and economic power that the modern world has rarely seen. Why the United States would be willing to give up competing for what has arguably been the world’s most vital commodity — and for which there is no credible alternative even on the far horizon — is mystifying if not bizarre.