Oil: China and the Shifting Landscape

Without the economic rise of India and China in recent years, the energy crunch that we're now experiencing might not have come for a few years yet but it's a crunch that could have been anticipated thirty years ago when we began to look more closely at the nature of oil supply and oil demand. In fact, with a few changes here or there, the economic rise of India and China might have happened ten or twenty years earlier.

It is natural that the economic rise of India and China is being followed by a global rise in oil consumption. But the consequences of today's oil crunch is changing the landscape in ways that are not that easy to foresee at the moment. However, one of the lessons of the 1970s, when there were two artificial energy crunches, is that there are winners and losers and often it's the poorest nations who are one category of loser and the poor in more industrialized nations who are another category of loser (if one can use such blunt terms; but we are after all talking about real world consequences for the losers that can be compared to conditions similar to an economic depression in some areas or, at the very least, economic stagnation in other areas). But even the winners have to do their share of adapting and to some extent even the United States had to adapt to changing condition in the 1970s; some of the changes from those years were permanent and are still in place, but unfortunately, when oil prices fell in the 80s and 90s, some of the changes were reversed, eventually leading to a false sense of security when US consumption began rising again in an era of higher speed limits and SUVs.

The US still has the economic resources and innovative skills to adapt, at least for now. What's becoming more clear with time is that the energy landscape throughout the world is shifting and involves most countries one way or the other. In the middle of the shifting landscape is China. I don't mean to single out China but it is an economic powerhouse on the hunt for oil to meet its present needs as well as to meet its future needs. Here's an article to remind us of China's situation:

China, formerly Asia's biggest gasoline exporter, plans to cut shipments of the fuel for a fourth consecutive month to meet domestic demand, contributing to a shortage that boosted prices in the region.

PetroChina and China Petroleum & Chemical Corp, which exported an average of 466,386 tonnes a month last year, may cut shipments to as little as 130,000 tonnes this month, according to three traders involved in the transactions who asked not to be named.

Reduced supplies from China helped to drive benchmark 92-RON gasoline to a record US$90.55 (HK$706.29) a barrel in Singapore on May 15. Soaring demand in the world's third-biggest vehicle market is trimming its gasoline surplus, prompting Beijing to impose restrictions on exports.

The number of civilian vehicles on China's roads rose 21 percent last year to 43.29 million, the National Bureau of Statistics said in February.

As China exports less and less gasoline in order to service its own growing economy, the consequences are affecting a number of its neighbors, including, as the article mentions, Singapore. The longer the energy crunch lasts, the more we will be seeing other countries scrambling to adapt, or falling into economic decline.

At the moment, the US government is dominated by Republicans who don't believe we need an energy policy; or rather they believe that magical market forces will somehow solve our energy problems or if that doesn't quite succeed, perhaps a vague but muscular foreign policy will at least protect our sources of oil. Now the other side of Republican philosophy is that when things start going wrong, there is a tendency for Republican leaders to start pointing fingers. It will be a tragedy and missed opportunity if they start pointing their fingers at China when what we need is a rational energy policy.

We are at the moment increasingly tied to the economic fate of China. Although to some extent China and the US are economic competitors in the sense that we are economic competitors with most industrialized nations, it is more important to understand that China has become an economic partner. If China's economy does well, we do well. If China's economy falters, our economy falters. Our tied economies are very much a function of size and economic strength. If the economy of a small African country falters, the consequences for our economy are likely to be slight. But if the economy of China falters, it will have a significant impact on our economy (of course, the reverse is true as well).

Here's an article that talks hypothetically about the growing interdependence and perceived problems of China and the US:

American strategists get alarmed: China's emergence is in the process of undermining the foundations of the United States' power; it is projecting a challenge that risks ending badly. Chinese strategists worry also: America conspires to hobble the Middle Kingdom's take-off. Its "containment" strategy smells like bad breath from an ill-omened Cold War. If you listen to the paranoids on either side, their countries are launched on a "collision" course.

(snip)

The Chinese-American link, coupled with the solidification of intra-Asiatic trade on the basis of Chinese technological backwardness provide a measure of what the cost to Beijing would be of the outbreak of a conflict with the United States, and, by extension, with the regional environment. If one aggregates Chinese exports to the United States, Japan and South Korea - two Washington allies - a crisis would cost Beijing the closing of 37% of its markets ... and more if one integrates what transits via Hong Kong. Deprived of its markets, the "Chinese workshop" would be amputated from its components supplies, these precious ingredients incorporated into the "made in China." If one aggregates the imports from Japan, South Korea, Taiwan and the United States, a crisis would cost China 45.5% of its supplies. Attacked downstream (markets) and upstream (components), the Chinese workshop would be more than destabilized.

Of course, China would not be the only one to suffer from the collapse of this structure. Asians would be heavily penalized, since their growth has been re-oxygenated thanks to the Chinese workshop. But above all, Americans would be hit hard. That's Beijing's weapon: its nuisance ability frightens the anti-Chinese lobby in Washington. For China has become the American economy's banker.

(snip)

But the paranoid in the United States should reassure themselves: China does not want to break American growth ... which feeds its own. All the same, it doesn't displease China that people should worry about the strategic role it now plays in the American economy. It's a way to caution: "If you hold me up, I'll hold you up too."

When it comes to oil, the most important thing to keep in mind is that sooner or later oil crunches come. One kind of crunch comes when demands simply outstrips production. But the ultimate oil crunch will come when worldwide production of oil begins to decline because the supply of oil that can be pumped out of the ground is a finite quantity. No one knows exactly what kind of crunch we're in at the moment. Russia, China, India, Japan and Europe are taking no chances; they are either developing new energy policies or are very quickly moving in that direction. But the US, led by a political party and president who are uncomfortable with acknowledging facts that disturb their preconceptions, has no energy policy worthy of the name. It would be a profound mistake to blame China to cover up the fact that we have no policy.