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China's oil grab

An amazing thing has happened. According to the International Energy Agency (IEA), China has now surpassed the United States as the world's biggest energy consumer. The Wall Street Journal reports the story in China Tops U.S. In Energy Use

China has passed the U.S. to become the world's biggest energy consumer, according to new data from the International Energy Agency, a milestone that reflects both China's decades-long burst of economic growth and its rapidly expanding clout as an industrial giant

China's ascent marks "a new age in the history of energy," IEA chief economist Fatih Birol said in an interview. The country's surging appetite has transformed global energy markets and propped up prices of oil and coal in recent years, and its continued growth stands to have long-term implications for U.S. energy security...

The U.S. had been the globe's biggest overall energy user since the early 1900s, Mr. Birol said.

China overtook it at breakneck pace. China's total energy consumption was just half that of the U.S. 10 years ago, but in many of the years since, China saw annual double-digit growth rates. It had been expected to pass the U.S. about five years from now, but took the top position earlier because the global recession hit the U.S. more severely, slowing American industrial activity and energy use.

This "new age in the history of energy" is likely to be extremely turbulent. Let's talk oil. Casual talk about future Oil Wars may not be too far off the mark. For many years now, China has moved aggressively to secure supplies in various producing regions—Angola (West Africa), Sudan (East Africa), Russia, Iran, Iraq, Kazakhstan, Venezuela, et. al. The Chinese have also tried to step up domestic production in the Tarim Basin, the South & East China Seas, and Bohai Bay even as its biggest fields Daqing & Shengli have tipped over into permanent decline.

Like the United States, China must import most of the oil it consumes. The Chinese have never produced 4 million barrels-per-day, although they have gotten close this year. Yet in June, China consumed approximately 9.4 million barrels each and every day. Of this total, they imported 5.44 million barrels (as reported by the Xinhua News Agency).

China knows—unless they are deluding themselves—that we have entered the Peak Oil Era. One can think of it as a zero-sum-game and not be far wrong: every barrel the United States does not consume will be used in China. Between them, these two countries now consume about 28 million barrels-per-day, which is nearly 33% of the world total. The Wall Street Journal gets it all wrong—

The U.S. also remains the biggest oil consumer by a wide margin, going through roughly 19 million barrels a day on average. China, at about 9.2 million barrels a day, runs a distant second. But many oil analysts believe U.S. crude demand has peaked or is unlikely to grow very much in coming years, because of improved energy efficiency and more stringent vehicle fuel-efficiency regulations.

This is utter bullshit. Oil consumption has likely peaked in the United States because our economy is in the dumper, and it is likely to remain in the dumper for a long time to come. In 2007, the last year before the crash, American oil consumption occasionally exceeded 21 million barrels-per-day. Those days are over, and improved efficiency has nothing to do with it.

Thus China has a limited window of opportunity (aided by the slowdown in the Eurozone) to grab more oil for itself. That is what's been going on since early 2009, and in the medium-term, it will continue until geological & economic constraints on oil production put a stop to it. Sometime before 2015, demand will outstrip the available supply again as it did in 2007-2008, and we will have another oil price shock.

In the shorter term, China's economy is slowing down, and may hit a very rough patch if the collapse of their property bubbles is not managed correctly. This will likely cause a contraction in China's oil demand, or at least slow the rate of consumption growth. We'll know the outcome by the end of this year.

Any future oil price dislocation itself will probably help the wealthy Chinese, who will then gobble up the oil made available by the recession caused by the shock. The Chinese will likely subsidize their oil consumption even when prices get too high to handle in the OECD countries, or risk losing market share. Now and in the future, maintaining or increasing oil market share will be China's paramount energy concern.

While you contemplate the implications of all this, watch this interview of Neil King, an energy reporter for the Wall Street Journal. I know for a fact that King has been thoroughly briefed about peak oil, so remember that he knows about it as he answers the questions of his uninformed interviewer. Apparently King has talked to some (unnamed) Administration officials. If he is reporting their "thinking" correctly, they lost all contact with the Real World a long time ago. But that's not really news, is it?

What do you think? Leave a comment below.

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