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China’s Growing Oil Demand Has Created A Geopolitical Dilemma

Consumption

China has become the world’s largest oil importer, and despite establishing the largely successful yuan-denominated oil futures, Beijing will have to grapple with an overlooked geopolitical and economic consequence as it seeks to quench its thirst for oil and gas.

As China relies more on both foreign crude oil imports and imported gas in the form of LNG and piped gas from neighboring countries, the outflow of petro-dollars or in this case petro-yuan will see the country contend with the decades-long dilemma that the U.S. faced; a massive transfer of capital to foreign oil producers.

Worse yet, for the U.S. at the time of its foreign oil import dependence, the transfer of funds was often to less-than-friendly Middle Eastern oil producers, including Saudi Arabia who in the 1970s and 80s could arguably have been called a quasi-friend or at least an ally of convenience. The U.S. needed Saudi oil as American oil production continued to decline while U.S. oil consumption spiked to unprecedented levels. For their part, the Saudis needed, and still do, the U.S. Navy’s 5th to keep open vital shipping lanes including the world’s most important maritime chokepoint, the Strait of Hormuz, to allow the export of massive cargoes of crude to foreign markets.

China’s insatiable oil thirst

China surpassed the U.S. in annual gross crude oil imports in 2017 by importing 8.4 million barrels per day bpd compared with 7.9 million bpd of U.S. crude oil imports. China had become the world’s largest net importer (imports less exports) of total petroleum and other liquid fuels in 2013. New refinery capacity and strategic inventory stockpiling, combined with declining domestic production, were the major factors contributing to its recent increase in imports.

In 2017, an average 56 percent of China’s crude oil imports came from OPEC producing members. This declined from a peak of 67 percent in 2012, while Russia and Brazil increased their market share of Chinese imports more than any other country, from nine to 14 percent and from two to five percent respectively.

Moreover, imports from Russia, which passed Saudi Arabia as China’s largest source of foreign crude oil in 2016, totaled 1.2 million bpd last year, while Saudi Arabia accounted for 1.0 million bpd. OPEC countries, and some non-OPEC countries, including Russia, agreed to reduce crude oil production through the end of 2018, which allowed other countries to capture Chinese market share in 2017.

Of course, in the past decade, U.S. overreliance on Saudi and OPEC oil has been offset in large part due to the wonders of the U.S. shale oil and gas boom that has seen Saudi oil imports to the States reduced recently to multi-decade lows, not seen since the 1980s.

The question now is: Will China find itself in the same foreign oil dependence quandary as the U.S. did from the early 1970s until the past decade? All signs indicate that the answer to this question is a resounding yes.

The sheer size of China’s economy, its prolonged run of economic growth, its massive population and its own oil and gas production problems create a scenario that will not only make Beijing more reliant on oil from unstable or geopolitically volatile regions, including Iran, Nigeria, Saudi Arabia, and other OPEC producers, but also from Russia, particularly pipeline oil and gas imports from that country.

China needs U.S. oil & gas

These dynamics also point to the advantage that U.S. oil exports offer for not only China but the entire Asia-Pacific region. Security of supply must be implemented into Beijing’s oil import mix strategy, even if it is a tough pill to swallow for the country as it exchanges trade war barbs with Washington.

Not only do U.S. shale oil and LNG production offer enhanced security of supply, as well as a sophisticated regulatory system and developed pipeline infrastructure, there are also price incentives that are competitive over its oil and gas exporting rivals.

For starters, the price spread between West Texas Intermediate (WTI) crude oil and Brent crude and other global benchmarks presents an incentive for China and others to procure more U.S. light, sweet crude for its refineries. Even if some of those refiners are not configured to process light grades, it can be used as a blend with other crude types, yielding higher profitable finished products like jet fuel, gasoline, kerosene and others.

As far as U.S. LNG goes, the fact that exported American LNG is indexed to Henry Hub pricing is an also attractive selling point for U.S. supplies of the super-cooled fuel. Despite a recent pivot from longer tem LNG contracts to shorter contracts and pure spot trading, the fact remains that the bulk of LNG volumes sold in the Asia- Pacific region, which accounts for two-thirds of all global LNG demand, is still predominately tied to an oil-indexation pricing formula.

In November, China imported a record amount of crude oil from the U.S., some 289,999 bpd; admittedly a small market share in light of the 9.01 million bpd of crude which the Middle East imported that month.

Yet, U.S. crude’s discount to Brent will continue to drive more American oil imports., particularly since that price spread is based on more barrels being pumped in the U.S., (amid higher global oil prices) which is projected to soon overtake Russia as the world’s top oil producer at 11 million bpd. Russia and OPEC members’ output, for their part, will likely hold steady or dip further if the OPEC/non-OPEC production cut is extended past 2018.

U.S. oil production rose to a record 10.264 million bpd in February, the U.S. Energy Information Administration (EIA) said on Monday.

Growing Brent/WTI price spread

On Friday, the Brent-WTI price spread neared $7, widening further to encourage U.S. producers to export crude to customers overseas. In March, the spread stood at only $3 per barrel. Some of the price divergence not only comes from more U.S. output, but geopolitical worries, mostly from tensions in Syria, Yemen and the ongoing jockeying for position in the region between Riyadh and Tehran, even causing the Saudis to consider a pro-Israeli pivot in bilateral relations, also putting upward pressure on Brent and other benchmark prices.

Michal Meidan, head analyst for Asian energy policies and geopolitics at research consultancy Energy Aspects told CNBC late last year, “I think the U.S. certainly is poised to capture a lot of that growth. “There is a huge amount of interest in U.S. crude to Asia broadly but to China specifically.”

All of this comes full circle as Beijing sends massive amounts of wealth to fill the coffers of foreign oil producers, in essence helping (in time) to offset the trade imbalances with the U.S. and others and in effect helping these producers wrest by geopolitical and economic leverage away from Beijing.

By Tim Daiss for Oilprice.com



17 Comments on "China’s Growing Oil Demand Has Created A Geopolitical Dilemma"

  1. makati1 on Thu, 3rd May 2018 6:37 am 

    Another oily ad full of shit.

  2. makati1 on Thu, 3rd May 2018 6:48 am 

    In other news: “Arnold Isaacs, In Present American Wars, Repeating Past Mistakes” OR “Why Can’t the World’s Best Military Win Its Wars?”

    “In Vietnam, as in subsequent American wars, the United States and its local allies had staggering advantages in all the conventional measures of military strength, yet failed to win.t makes me wonder: If U.S. political and military leaders and the American public remembered Vietnam more honestly, if painful truths hadn’t been cloaked in comforting mythologies, …

    If U.S. troops couldn’t win — or leave our ally in a position to win — after fighting for seven years with an almost unimaginable edge in firepower, technology, and mobility, the much more logical conclusion is that U.S. military doctrine and Washington’s concept of military strength simply did not apply to that conflict….

    Nine-tenths of the way to the year 2020, U.S. soldiers, with all of their firepower and technology, have not achieved anything close to total dominance on the battlefields where they have been engaged. They have not dominated poorly armed fighters. Or insurgents planting low-tech, low-cost explosive devices…

    To put it bluntly, the experience of the last nearly 17 years makes “full spectrum dominance” sound like a delusional fantasy….

    Washington’s and the Pentagon’s thinking surely also reflected the sugar coating Americans tend to spray over painful memories …

    As is almost always the case, describing the problem is easier — much easier — than solving it. This one will take a big and wrenching change in deeply rooted structures and beliefs, and in personal and institutional perceptions of self-interest. (Can we really stop telling ourselves that the United States has the best military in the world?) We have already paid a monumental price for our faulty understanding of war and of the real world. Failing to learn those lessons, even at this late date, will only drive that price tragically higher.”

    http://www.tomdispatch.com/post/176417/tomgram%3A_arnold_isaacs%2C_in_present_american_wars%2C_repeating_past_mistakes/#more

    AMEN!

  3. Davy on Thu, 3rd May 2018 7:30 am 

    “Another oily ad full of shit.”…..Then 3rd world shifts a very important peak oil dynamics article to his favorite topic anti-American military drivel.

    3rd world you are going off your rocker you senile old man. You can’t stand the above article because of the issues it revels. These issues torpedo you agenda. You love words like torpedo so maybe that got your attention. LMFAO

  4. jonno on Thu, 3rd May 2018 7:51 am 

    you both fuckin suck dogs cock

  5. joe on Thu, 3rd May 2018 9:33 am 

    Good article MKat. The writer missed the fact that between Vietnam and the illegal invasion of Iraq and perfectly legal and justified invasion of Afghanistan there was the expulsion of Iraq from Kuwait (by total politcal and logistical help from most of the world), then collapse of the Soviet Union, then the false sense of security that the bombing of Serbians and helping Balkan Jihadists gave to the US before 9-11.
    Somalia should have been a wake up call but the US didn’t learn from it.
    Of course the whole point of the ‘war on terror’ is in the pnac plan to turn the US into an imperialist power policing the world, so the war isn’t supposed to end, ever, except by imperial atrophy and collapse, like all empires collapse.

  6. BobInget on Thu, 3rd May 2018 10:10 am 

    WHEN ChIndia takes every barrel, on export offer, what then?
    Do YOU have a plan?

  7. JuanP on Thu, 3rd May 2018 10:12 am 

    I just glance over shit like this article because I enjoy seeing the intellectual contortions of the writer. Reading crap like this helps me to better understand American exceptionalism. Delusions of increasing oil exports in the country with almost the highest net imports in the world! LOL! And of course the price advantage is all that matters. That US oil and gas will transport itself free of cost halfway around the world. I wish we were keeping that oil in the ground for later use here in the USA. I have no doubt that we will need it in the not too distant future.

    This is not good for the USA!

  8. BobInget on Thu, 3rd May 2018 10:33 am 

    The US is exporting your children’s future.
    Instead of slowing down on drilling like Norway, Saudi Arabia and others, we are selling crude at a $6 loss on every barrel. Selling off SPR to raise cash and cranked up printing presses.
    Current Brent price: 73.71
    Current WTI $67.49
    $6.22 arb or tradable diference.

    Most E&P’s are selling for less today than when oil sold for $45. USD

    The Canadian government, Alberta, BC, are all in turmoil getting a larger export terminal to China.
    WHEN that pipeline does go through, Canada will be able to sell it’s oil at fair (Brent) prices.

  9. Dredd on Thu, 3rd May 2018 10:39 am 

    The strong man of Jaina is admired by the wannabe strong man of Bullshitistan (Security: Familyland, Fatherland, or Homeland? – 6).

  10. Duncan Idaho on Thu, 3rd May 2018 1:18 pm 

    “WHEN that pipeline does go through”
    When BC backs down, if ever.
    Going to The Gulf isn’t working out for China.
    We shall see, a blockage of years will put this nightmare on back burner.

  11. Plantagenet on Thu, 3rd May 2018 3:13 pm 

    China is no more immune to peak oil then the US is. The supply of oil is limited. The US can’t keep itself supplied with oil, much less be a supplier to China as well.

    Cheers!

  12. makati1 on Thu, 3rd May 2018 8:21 pm 

    Plant,the Us does not supply China’s oil, many other nations do. What does the US oil production have to do with China? Not much other than China is pushing the Us into bankruptcy one day at a time.

  13. Sissyfuss on Thu, 3rd May 2018 8:49 pm 

    Mak, Plant has been lost ever since Obama vacated the scene. It’s too soon to start excoriating the Trumpster so Plantapuss just whiles away his time in a drifting purgatory.

  14. Cloggie on Fri, 4th May 2018 12:06 am 

    China installing cruise missiles on Spratly islands in South China Sea. America says: don’t or there will be consequences.

    http://www.spiegel.de/politik/ausland/aufruestung-im-suedchinesischen-meer-usa-warnt-china-vor-konsequenzen-a-1206138.html

    Slowly the US and China are locking horns.

    https://www.straitstimes.com/sites/default/files/articles/2018/05/03/online-180203-missiledeploymentsspratlys.jpg

    Islands: Fiery Cross, Subi und Mischief.

    The US claims to be worried about “free shipping”, but it is unlikely that the Chinese will fire cruise missiles at container ships or oil tankers, carrying cargo to and from China.

    Anglo navies are a different matter.

    https://thediplomat.com/2018/04/south-china-sea-australian-navy-vessels-en-route-to-vietnam-received-warnings-from-chinese-navy/

    America loves to “project power” with its 40 mph swimming ducks, essentially 1940’s technology, but you can’t project power from the bottom of the sea. I see America’s point. Not that I sympathize with it.

    Some friendly advice from a country that was at the historic origin of the United States: don’t provoke millennia old countries with 1350 million inhabitants, if you can’t even beat countries of 20 million. America can’t and won’t dominate, let alone own, the entire planet. But it broadcasts the exceptionalist message that it can. As a consequence it mobilizes the entire planet against itself. America has strategically dug itself into a hole, it won’t be able to climb out again. The only way to safe face is to blow up the entire planet.

  15. Cloggie on Fri, 4th May 2018 12:21 am 

    New 2017 SIPRI data about military expenditure:

    https://www.sipri.org/sites/default/files/2018-05/sipri_fs_1805_milex_2017.pdf

    1. US 610
    2. China 228
    3. KSA 70
    4. Russia 66

    NATO keeps insisting that Russia is a “threat”, while outspending that XXL country 15:1.

    That’s how these murderous clubs keep themselves alive, by insisting on their own usefulness, while guaranteeing their own fat salaries and potentially using your kids for their war games.

    But expenditure isn’t the only category of importance. Morale is another. And the location of a future “theater of war” yet another. China is absolutely unable to “storm the beaches of California”. But I don’t think the US is able to defeat China in the South China Sea. China can take casualties in the hundreds of thousands, the US can’t. And I have more faith in the morale of Asians than in mixed-race Americans. Chinese have a millennia old identity and a collectivist mindset. Individualist Americans don’t and in case of a war soon begin to wonder what they are doing in the South China Sea, like they did in “Nam”.

  16. Davy on Fri, 4th May 2018 4:51 am 

    This is part of the reason needer:
    “German Air Force Only Has Four Combat-Ready Jets In Case Of Emergency”
    https://tinyurl.com/yay243tz

    “According to Spiegel, only four of the Luftwaffe’s state-of-the-art Eurofighter jets are currently in good enough shape to be called on in the event of an invasion of German airspace, leaving the German armed forces to once again have to fight off allegations that their forces are not fit for combat.”

    “Earlier this year a damning parliamentary report concluded that the state of the military preparedness had deteriorated further in recent years: “The army’s readiness to deploy has not improved in recent years, but instead has got even worse,” Parliamentary Armed Forces Commissioner Hans-Peter Bartels said as he presented his annual findings at a press conference in February. The lack of a credible German airforce follows a similar involuntary phase out of Germany’s submarine capabilities. By the end of 2017, all Germany’s submarines were in drydock for repairs, while in recent months there have been periods where none of the air force’s 14 A400M transport planes were airworthy. The report also found wider problems in Luftwaffe. Air force pilots are unable to train as their aircraft are grounded for maintenance for much of the year, the report noted.”

  17. Cloggie on Fri, 4th May 2018 12:52 pm 

    “104 Gigawatts of New Global Solar Installations Expected in 2018”

    https://cleantechnica.com/2018/05/02/104-gigawatts-of-new-global-solar-installations-expected-in-2018/

    47% in China.

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