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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