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Dependence on commodity may harm China's security and national economy

Wood Mackenzie -- an analyst firm who claims to be the "most comprehensive source of knowledge about the world's energy and metals industries" -- has just released a new report analyzing the growth in Chinese oil imports, and it suggests that by 2017 China will import more barrels of oil per year than the U.S.

I. Hungry for Oil

According to Enerdata, another industry research firm, in 2012 the U.S. consumed 739 million tons (Mt) of oil -- or about 5 billion barrels -- while China consumed 427 million tons.  Japan came in a distant third, consuming 198 million tons.  Per capita, the U.S. is much more oil hungry than China consuming nearly 16.5 barrels of oil per person, per year in 2012, versus about 2.2 barrels per person for China.

But the U.S.'s thirst for oil is offset by a domestic bounty.  In recent years oil shale exploration and extraction has been booming in America, despite the environmental concerns that at time have slowed development.  According to the Institute of Energy Research (IER) the U.S. has been blessed with nearly 140 billion tons of extractable oil in shale sediments (roughly a trillion barrels) -- about 190 years worth of fuel at the current pace of energy consumption.  
 
Crude Oil
China is importing more foreign oil than ever before. [Image Source: AP]

By contrast, China only has about 36 billion tons of proven extractable oil -- about a fourth of the U.S.'s bounty.  And while some believe China's oil shales may ultimately hold more oil than U.S. deposits, China's energy industry has been more sluggish at exploration and extraction.

China oil imports
Chinese oil consumption (pictured) is growing fast. [Image Source: Early Warn]

Overall, the U.S. produces roughly 8.5 million barrels (1.2 million tons) of oil a day, versus China's output of 4.1 million barrels (~590,000 tons) per day [source].  The U.S. and China are ranked third and fifth, respectively in terms of oil consumption.

II. Growth -- Good for GDP, Bad for Fuel Production Deficit

Feeding China's demand for oil is a growing economy, which leads the world in greenhouse gas emissions.  Ironically, the report comes after growth hit relative lows -- 7.5 percent year-to-year gross domestic product (GDP) growth in Q2 2013.  Still that growth compares favorably to an anemic 1.7 percent growth by the U.S.  

Shenzhen downtown
The city of Shenzhen and China as a whole have experienced rampant growth, but are growing increasingly dependent on foreign commodity resources -- including foreign oil.
[Image Source: Beijing Torch Relay]

While there's still debate about when exactly China's GDP will surpass the U.S.'s (some say as soon as 2018, others argue it won't happen this decade), most expect China -- currently the second largest economy by GDP -- to pass the U.S.  (China, however, is expected to continue to trail the U.S. and Japan for the foreseeable future in per capita GDP for at least the next decade and a half).

Thus it's perhaps not surprising that China -- soon to be the larger GDP -- may be the larger energy consumer, particularly given the disparity in domestic oil production.  he nations are otherwise somewhat similar with China and the U.S. both losing about 6 percent of their power in grid transmission [source].  Both nations have growing renewable energy efforts, but these efforts still comprise a relatively small percent of the overall energy demand in each nation.

III. China Grows Reliant on the Volatile Middle East

Overall Chinese foreign oil reliance is growing, even as the U.S. trims its reliance on foreign oil.  In 2004 China imported $20B from the Organization of the Petroleum Exporting Countries (OPEC) cartel -- a coalition of a dozen countries in oil rich regions in the Middle East and South America.  In 2012 it purchased $140B USD in oil from OPEC.

Roubini Global Economics commodities analyst Gary Clark told NBC News, "China is a big importer of crude.  At same time domestic (Chinese) production is plateauing. It requires them to go offshore if they want to make up that depleted oil."

Iran protests
Much foreign oil comes from politically unstable countries in the war-torn Middle East
[Image Source: Wired]

All of this spells trouble ahead for a nation who has built a rosy "trade surplus" cushion and has fueled GDP growth with heavy production and sparing consumption.  China may soon find itself vulnerable to the same kinds of commodity price pressures that it's today subjecting the rest of the world to, with its chokehold on rare earth metal production.

Also reliance on OPEC raises the danger of supply shortages due to political unrest.  In recent years the U.S. has struggled to maintain peace in the Middle East out of fear of what impact oil supply disruptions might have on the economy.  This will become a growing concern for China in years to come, and it would not be surprising to see China increasingly play the role of watchdog in the politically charged region, even as the U.S.'s security needs in the region decrease.

Sources: Wood Mackenzie, CNBC



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RE: That's all?
By aurareturn on 8/26/2013 6:20:01 PM , Rating: 3
I hope we'll have $20,000 200-mile range EV cars by 2017. I think we will.


RE: That's all?
By Master Kenobi (blog) on 8/26/2013 6:29:14 PM , Rating: 3
This isn't really news anyway. China's energy demands have been rising quickly in the past 10 years, oil has been predicted as their next problem for years now.


RE: That's all?
By Mitch101 on 8/26/2013 8:47:05 PM , Rating: 2
China could be in a lot of trouble they overbuilt and have tons of housing I mean cities worth of empty high rises and residential areas. They are trying to prevent a lot of bankruptcy through a housing bubble collapse.

Analysis: China risks following Japan into economic coma
http://www.reuters.com/article/2013/07/29/us-china...

I.M.F. Tells China of Urgent Need for Economic Change
http://www.nytimes.com/2013/07/18/business/global/...

China's Empty Cities: These Satellite Images Will Shock You
http://realestate.aol.com/blog/2013/03/05/china-em...


RE: That's all?
By sorry dog on 8/26/2013 11:34:26 PM , Rating: 2
For sure they have people to live in them...

This is where the lack of transparency bites them in the ass as the quasi government run banks are better able to hide the bad loans... which further distorts capital allocation.

... Not that we've done a lot better lately but at least some of our problems are in public view....


RE: That's all?
By seraphim1982 on 8/27/2013 10:57:03 AM , Rating: 1
All China has to do is call the recall the debts from the US.


RE: That's all?
By ClownPuncher on 8/27/2013 11:45:43 AM , Rating: 2
That would be a sound economic plan. I don't see how anything could go wrong.


RE: That's all?
By topkill on 8/27/2013 5:10:24 PM , Rating: 2
LOL Nice :-)


RE: That's all?
By BRB29 on 8/28/2013 12:36:43 PM , Rating: 2
this is not some loan shark on the street. China buy US bonds. If they bought a 10 year bond, they must wait for it to mature or sell it to someone else if they need the money.


RE: That's all?
By Samus on 8/27/2013 3:39:47 AM , Rating: 2
Oil has been the source of the last 2-3 conflicts (at least dating back to Desert Storm when Iraq invaded Kuwait)


RE: That's all?
By marvdmartian on 8/27/2013 7:29:59 AM , Rating: 2
Wouldn't it be ironic, if the USA was self-sufficient in its energy needs in the future, and was able to export oil to China, to pay down the public debt??

The irony would be doubled if our energy independence was based on Chinese made solar cells. ;)


RE: That's all?
By Master Kenobi (blog) on 8/28/2013 5:51:08 PM , Rating: 2
We are already exporting a great deal of coal to China. Oil and/or natural gas would be next on that list. Provided of course we build enough nuclear power plants to satisfy our own power generating needs.


RE: That's all?
By NellyFromMA on 8/27/2013 4:02:02 PM , Rating: 2
LOL at a DT mod basically indicating the article isn't really news.


RE: That's all?
By Master Kenobi (blog) on 8/28/2013 5:53:32 PM , Rating: 2
The report the article is referencing is "recent news". The problem is really with the people who wrote the report. The report is reporting on a problem that has already been widely known for years and is thus rather pointless to report on except to give some new estimates and revised figures.

Blame the think tanks and universities that continually produce these "Yea, no shit Sherlock" reports and studies constantly. I think it would be interesting to know how much was paid to who to produce this report.


RE: That's all?
By toffty on 8/26/2013 6:30:44 PM , Rating: 2
Can get a Leaf for $20k (US) or less (depending on state rebates) now though it's about 80 miles/charge. (In Colorado for example can get a base model leaf for about 18k)

If Tesla can make its 3rd gen sedan a reality it should be very close to that mark, probably closer to $25k (US) for 200 mile range in 2016.


RE: That's all?
By CaedenV on 8/27/2013 7:56:17 AM , Rating: 2
That may well help, but it is no overnight fix. When cheap high mileage electric cars hit market I will be one of the first in line to buy one, but most people will wait for a 2nd gen car before considering a purchase, and many are oddly brand loyal and will wait until their manufacturer of choice has a similar offering (which could take years). But the bigger issue is that most people do not buy a new car every few years. Most people buy cars that are a few years old, and then they drive them into the ground for the next 8-10 years.

All of this means that while we will very likely have a good cheap high mileage electric car within the next 5 years, it will not see mass adaptation until some 20+ years after initial availability.

On top of that, only 44% of our oil comes in the form of gasoline (this is as of 2005, could not find newer numbers). Lets assume that 2/3rds of that number is gas for general public car transportation, while the rest if for trucks and other work use that will still rely on gas for a long while yet. That means that if everyone converted to gas then our best case scenario is a 30% overall reduction is oil use. Sure, that is a decent sized decline, but it is a decline that is going to happen so gradually while the other parts of demand slowly grow, that it will only really serve to level off oil use, not decrease it by any meaningful amount.

The rest of the oil is used in diesel, jet fuel, heating, and military use. Heating may go away as homes update, but the rest of those have no proper electric replacement in the immediate pipeline, and will grow in time. The problem with oil is a lot bigger than car transportation. It is kind of like how people talk about how residential recycling and composting will somehow save the planet when only 2% of all waste is of consumer goods. It is still a good thing to do, but let's not think that it is going to do more good than is possible.


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