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Saturday
Jun162012

The New Cold War

Contributed by Marin Katusa.

Few would argue that the overthrow of Libya's Muammar Qaddafi was a bad thing… except the Chinese. As NATO-aided rebels overwhelmed Qaddafi's forces last summer, 36,000 Chinese engineers, tradesmen, and technicians fled Libya, leaving $20 billion in infrastructure and oil development projects behind in disarray.

China's refusal to support the NATO attacks – and rumors that they offered to sell Qaddafi weapons to squash the revolt – didn't sit well with the Libyan rebels. Yet, less than one year later, China managed to get itself back in the good graces of the new Libyan leadership by offering to take a major role in the country's post-war reconstruction – clearing the way for Chinese buyers to receive preferential treatment for access to Libyan oil.

But China wants much more than Libya's crude. They see the country as the perfect springboard to a far bigger prize – control of Africa's massive untapped oil reserves, estimated at 200 to 210 billion barrels. It's all part of their "grand plan" to buy up all available energy resources, which they're doing at an alarming rate...

 

The high-stakes game of economic survival

 

The current situation is much like the US-Soviet Union Cold War that loomed over the world for decades. Now we have two superpowers with conflicting interests battling it out on the world stage again. Only this time it's not about ideologies… it's about survival.

The US and China are vying for the world's ever-dwindling energy resources… and the US appears to be losing the battle.

With approximately $1.5 trillion dollars on hand, China can afford a blank-check policy when it comes to snapping up worldwide energy deposits. Since 2005, China has closed no fewer than 45 deals in the oil sector alone, in 21 countries. Thirty-two of these were each worth at least $500 million, and eight carried price tags of $3 billion or more. Over the last five years, China spent $75 billion.

These acquisitions give China ownership of oil resources in countries from all four corners of the globe – from oil sands projects in Canada and Columbia, to petroleum projects in Angola and Nigeria, to outright purchases of oil companies in Australia. They've even bought 33% of Chesapeake's Eagle Ford Shale project in southwest Texas.

 

No US-Canadian oil pipeline? No problem – China's happy to snap up Canada's crude

 

You've probably heard about the controversy around the 1,700-mile Keystone XL pipeline project that was meant to transport crude oil from Alberta to Gulf Coast refineries in Texas. Make no mistake: The US government's refusal to let that pipeline be built could hand China another easy victory.

"I am very serious about selling our oil off this continent, selling our energy products off to Asia. I think we have to do that."

– Canadian Prime Minister Stephen Harper in a 12-19-11 interview with Canada's CTV National News.

As soon as President Obama nixed Keystone on January 18, 2012, the Canadians panicked, and Prime Minister Stephen Harper began to openly talk about diversifying their oil market. It's not hard to see why. In 2010, Canada's oil sales to the US comprised a whopping 99% of the country's worldwide exports… approximately 1.9 million barrels of oil a day. On top of that, Canada's resources account for more than 90% of all proven reserves outside of OPEC.

If the Keystone pipeline is not built, Canada's oil sands will still be developed – but instead of the oil being shipped to the US, it will be sent overseas. And China is more than happy to take as much oil off the Canadians' hands as they can deliver… quite possibly at premium prices.

 

Other hot zones in the Cold War over energy: MENA

 

The Middle East and North Africa (MENA) are without doubt the fiercest battlegrounds in this clandestine war. Despite American and European clamoring for a worldwide embargo of Iranian oil, China is not about to stop importing crude from this oil-rich Middle-Eastern nation. The reason is simple – Iran is the third-largest supplier of oil to China. Imports rose by 30% in 2011 from the previous year, to 557,000 barrels of oil a day.

So it's no surprise that the Chinese are snubbing the US and Europe. And as a result of their refusal to back the embargo, Iran is quickly becoming the latest hot zone in the New Cold War. But it's not the only one…

Determined to maintain a strong presence in Africa, in 2006 the US established military relations with 54 African nations. Dubbed AFRICOM (or USAFRICOM), it's the newest of nine unified combatant commands the US armed forces have set up worldwide. AFRICOM was established as a not-so-subtle message to China that America would not simply lie back and allow the Chinese to gain control over the continent's abundant natural resources.

And with good reason: In 2004 – for the first time ever – US oil imports from West Africa exceeded those from Saudi Arabia. By 2010, America was importing 1.8 billion barrels of oil from Nigeria, Angola, Algeria, Congo, Gabon, and Cameroon… while only receiving 1.1 billion barrels from the Saudis. Now China is competing directly with the US for African oil.

By 2009, Chinese trade with Africa surpassed America's – and now one million Chinese experts are spread out over 40 African countries to facilitate the exploration of resources. Clearly, China means business in Africa, which poses a major threat to America's energy interests.

This has frightening implications for the rest of the world. Crude prices are likely to skyrocket as China locks up more and more of the world's untapped conventional oil. At the same time though, the specter of rising oil prices is opening up exceptional profit opportunities for investors who know where to look and are willing to act now. We're still in the early stages – the perfect time to join this up-and-coming bull run because…

 

China's ravenous appetite for oil will only get worse

 

You really can't really blame China for trying to secure as much energy as possible.

  • They have the world's largest population, 1.34 billion strong.
  • Many of their people are rapidly moving up the economic ladder, which inevitably leads to more energy consumption.
  • In 2011 (the last year data are available), their oil consumption jumped from 8.2 to 9.4 million barrels per day. That's over 14% in just two years.

And it's likely to go much higher. Steven Kipits, an analyst who heads the New York office of energy business consultants Douglas-Westwood, warns that China could consume up to 40 million barrels per day by 2022. (That's roughly double the 19.15 million barrels of oil per day the CIA estimated the US consumed in 2010.) Adding fuel to the fire in this battle for world oil supremacy is another sobering fact…

 

OPEC nations have to subsidize domestic oil and gas… or else

 

Many countries' oil fields are aging, and the oil they hold is extracted using old-fashioned technologies. For harvesting easy-to-get-to light sweet crude, these old technologies are fine. But not for the more challenging deposits. Unfortunately, easily harvested oil is quickly running out. Unless the operator (in most of these countries, that's the state) invests huge sums of money to update infrastructure and implement recovery-enhancement techniques, these old fields will continue to be less and less productive.

And countries like Venezuela, Kuwait, and Saudi Arabia have boxed themselves into a corner by using oil-export profits to heavily subsidize domestic gasoline. In March 2011, government subsidies allowed citizens of these countries to buy gasoline for between 6 and 81 cents per gallon. And – to make sure their people stayed happy – they also used oil-export profits to fund massive social programs. But now – with oil production down and likely to continue dropping – the only way OPEC countries can maintain their government largess is by raising export prices.

In other words, $5+ per gallon gasoline and skyrocketing home heating and cooling bills are baked into America's future. Granted, a sharp increase in crude prices will cost every one of us dearly. But there's also the opposite side of the coin to consider: opportunity. More more, read the complete report from Casey Research.

And dirt cheap natural gas in America? It has done wonders. Beneficiaries are scattered across the country: households with lower heating bills, industrial users, utilities, etc. Yet it's tearing up the very industry that is producing it. Read....  Capital Destruction in Natural Gas.

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Reader Comments (7)

What about how the coming collapse that will curtail consumption in the US? When the dollar exclusively no longer buys oil then what? What does the US need oil for anyways? There is no credible economic development strategy that will grow the middle class purchasing power. I think it's more a bankster strategy of denial of resources. The banksters are also Exxon, BP, Shell etc and they've always used that as another control lever on humanity. They already lost control of Russia's oil.
June 17, 2012 | Unregistered CommenterNick
I always find it humorous when analysts insist that 3d parties can use the first party's currency more effectively than that first party

Get back to me when China starts printing dollars. Right now 90% of China's dollars are safely locked up in US Treasuries. The dollars are repatriated to the US ...not likely to find their way into oil producers' pockets unless they are offered by Americans.

China as US advance-man? Rich ... China is a large version of Greece dependent upon external capital flows. Greece has (some) euros that it uses to buy crude oil. Does that make Greece a superpower? The euro is 'Germany's currency, isn't that impressive?

BTW, China will have zero imports before it has 40 mbpd imports. China isn't a juggernaut, it's a jalopy with a flat tire.
June 18, 2012 | Unregistered Commentersteve from virginia
i think most people do not understand China, it really has 1.4 billion people , , that would be Canada , U.S.A, Japan, Europe, Mexico and Australia and then some together, , i think China uses a little more than the U.S.A. in oil and related products, now just imagion if the Chinese people would use the same on average as those country's mentioned above, the world would use about 150 milion barrels a day in oil and god know how much coal and gas.

for the U.S.A and Russia is just a power play, to protect resourses for so few people , , in a matter of speaking the average bus stop in China handles more people per day that new yorks grand central.
the western world wanted China to join the game. but i guess western leaders did truely NOT understand what 1.4 billion people really means.

now look at Greece , how a few people in the streets can take a country down , now just imagion China, with i guess about 150 X the population and try to take back the progress from the last 30 years.

the Western world had its chance to move green energy forward, even if its losing money but rather waisted its money on petty war's.
the world can say what ever they want but until you live here for a few years , you start to understand the first 5%.
for the worlds future , become oil free or else...............
Wolf , very good article.
June 18, 2012 | Unregistered Commenterlucas
Lucas - thanks. Just a reminder. Marin Katusa, my favorite energy expert, wrote it, not me. I'll have more of his articles from time to time. I don't always 100% agree with him, and I think his predictions, like all our predictions, can be off sometimes, but he does know the ropes of the energy industry.
June 19, 2012 | Registered CommenterWolf Richter
China has severe demographic problems. Too many old people, too few young people. Europe has the same problem, but many countries use euthanasia. If China wants to solve its problems, it should convert to a religion that allows euthanasia in many cases.
June 23, 2012 | Unregistered CommenterColumnist
Euthanasia is such a nice name for murder.
June 25, 2012 | Unregistered CommenterSwampWoman
Columnist, China already subscribes to a religion that permits euthanasia. That religion is called Communism.
July 11, 2012 | Unregistered CommenterAndrew P

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