How China is Beating the United States in the Global Oil Game
Source:http://www.moneymorning.com/2008/10/16/iraq-oil-deal/Thursday, October 16th, 2008
By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report
Iraq recently signed its first oil deal in 35 years with a foreign company.
And – quite surprisingly to many observers – the company wasn’t one of ours.
Not surprisingly, the U.S. news media barely acknowledged the deal – even though the agreement was major news throughout the rest of the world.
According to reports from Baghdad, the 22-year deal between the Iraqi government and the China National Petroleum Co. involves $55 billion, or 87% of Iraq’s current total revenue at a conservative long-term estimate of $100 a barrel.
The deal is actually a renegotiated version of a 1997 agreement between China and a Saddam Hussein-led Iraq. That original deal included production-sharing rights, but under the new contract China will be paid for its services, but will not share in profits,
The New York Times reported. The payments will be made in cash – and won’t be “in kind” payments of crude oil, the newspaper said.
While this deal, on its face, appears to be just another global oil-services contract, it’s actually a very significant development in the hunt for long-term energy supplies. In fact, it actually demonstrates that – when it comes to nailing down those long-term oil supplies – China is an expert, and is playing a very deep game. And the outcome of that game will certainly have substantial long-term implications for consumers and investors both here in the United States, and in markets abroad. Here’s why:
China’s Shrewd Long-Term Oil Plan
- With estimated reserves of 115 billion barrels, Iraq is tied with Iran for the world’s No. 2 position, trailing Saudi Arabia, which has estimated reserves of 264 billion barrels, according to estimates from the Energy Information Administration.
- In a country where electricity is in short supply, the oil produced from the Ahdab Oil Field will help fuel a planned power plant that would be one of the largest in Iraq. By helping Iraq with this key initiative, China can expect to gain a solid foothold in one of the most oil-rich nations in the world, analysts say.
- At the end of the day, the deal clearly highlights something that most U.S. investors haven’t focused on yet – namely that the eventual winners in this game may not be such well-known giants as Chevron Corp. (CVX), ExxonMobil Corp. (XOM), or other household names. Deals like this one and the host of others that are undoubtedly close behind suggest that tomorrow’s winners may have names most English-speaking investors can’t ****ounce, since they’ll be distinctly Arabic or Chinese in nature.
The important thing for investors to understand now is that oil ownership, as I have said for many years, is an illusion. It does not guarantee price, nor profit. What really matters in the end is having secure supply lines and sources from the Middle East (and other parts of the world).
Under this new contract, CNPC will provide technical advisors, oil workers and equipment to help develop the Ahdab oil field southeast of Baghdad, said Assim Jihad, a spokesman for Iraq’s Oil Ministry.
While China won’t participate in the profits from the oil it helps pump, it is shrewd enough to realize there will be long-term benefits. Analysts who see the bigger picture here agree with our view.
“There are some political profits for China,” Ibrahim Bahr al-Ulum, a former Iraqi oil minister, told The Times. “They need access to Iraq, and when they need oil, at least the Iraqi people will feel that China has done something for them.”
And that’s not all. Before 2003, Iraq had oil agreements with China, Russia, Indonesia, India and Vietnam – three of which included production-sharing agreements, The Times reported. But the big jump in oil prices, the new government and a myriad of other changes that have taken place since that time prompted Iraq to reconsider the terms of those deals, Iraqi officials said.
Iraq continues to negotiate other service contracts with ExxonMobil, Royal Dutch Shell PLC (ADR: RDS.A, RDS.B), Total SA (ADR: TOT), BP PLC (ADR: BP), Chevron, and some smaller oil companies. The deals have been reduced in length from two years to one after Iraq took a lot of flak for not putting the contracts out for competitive bidding.
But China’s contract was the first major one to be completed – and for one simple reason, Jihad, the Iraqi Oil Ministry spokesman, said. CNPC had “wide experience in this field,” and because many foreign oil companies were not willing to come to Iraq.
China has apparently learned how to play the global oil game with a pro’s touch. Ironically, it was the United States that crystallized this vision.
By invading Iraq, the United States dealt China’s central planning commission an embarrassing wakeup call when the second Gulf War summarily wiped out China’s oil interests in Iraq.
When that happened, China’s central planners realized two things:
What China fears most is that there will not be enough oil to go around in the very near future and that a U.S.-dominated supply chain could effectively “strangle” China’s growth.
- The status quo in the global oil game had changed.
- And China’s double-digit economic miracle could not be sustained with only a few oil suppliers.
So, it has done what the United States and other great powers have done at other times in history and gone on a buying spree from Darfur to Peru that’s turned heads and ruffled feathers all across the world.
What’s been especially frustrating for hapless Western leaders who do not understand that their actions caused this in the first place, is that China’s not afraid to do business with rogue nations like Iran, Sudan and Burma. It has even gotten chummy with Venezuela and Russia – much to the consternation of our present administration.
It’s a virtual certainty that China will maintain this policy going forward. My contacts in China and Africa have told me point blank that China’s leaders “don’t care about human rights or nukes or hostile governments. What matters is anyone who provides oil to China no matter what the rest of the world thinks.”
So, in as much as the U.S. media has dismissed this deal as only one in a long string of recent Chinese oil purchases, it’s arguably the most important deal yet. The reason: It suggests that China will go to extraordinary lengths to obtain the oil it wants and needs.
To add to its stable of captive oil suppliers, China will pay far more money, endure limitless criticism for ignoring human-rights issues and endure harsher business conditions than our companies can or will undertake. While U.S. firms must worry about sanctions, bad publicity or simply security, China worries about one thing, and one thing only – getting oil.
It’s a lesson initially learned from us. Then they refined it. Perhaps it’s time we re-learned this lesson from China.
Japan went around the world buying up sh!t in the 80's.....then due to hubris, stupidity, and unsustainable economic conditions......Japan got their clock cleaned and sold their "assets" back for pennies on the dollar.
The same MAY happen to China...to a greater, or lesser degree.
China may be the historical cradle of commerce......but big boy capitalism may result in some hard lessons being learned in the coming years.
IRONY:
While China is increasing its dependency on oil, its also supplying the world with bicycles as an alternative to cars.
Source:http://afp.google.com/article/ALeqM5...TtaCTmjdPNRzOATaiwan's bicycle makers riding high on global crisis
Oct 19, 2008
TAIPEI (AFP) — For the past six months Wayne Hsu has been cycling 45 minutes to his office every day, which he says gets him off to an energetic start and, more importantly, slashes his monthly petrol bill.
Hsu, an airline sales representative in Taiwan's northern Taoyuan county, is among a growing number of people here opting for bikes over cars amid rising inflation and a slowing economy.
"Cycling is an inexpensive way to exercise and I've encouraged my colleagues and even my boss to follow my lead," he said.
The new-found devotion to cycling is a great boon for bicycle manufacturers on the island, which was once the world's leading exporter but has watched business fall since the mid-1990s due to dumping charges and relocations of factories to China where production costs are much lower.
China now is the world's major supplier of low-cost bicycles, while Taiwan retains its edge in high-end products such as racing-style, mountain and folding bikes with an average price tag of 222 US dollars, according to the economics ministry.
Exports reached a record high in 2007 of 1.05 billion US dollars with 4.75 million bikes sold abroad, while 2008 looks set to break that record with the export of 2.76 million bikes totalling 635 million US dollars in the first six months, government figures showed.
There is no official data on how many bicycles are sold locally but industry watchers estimate around one million were sold in 2007 on the island of 23 million people.
"Business was booming in 2007 and this year looks to be the best," said Jeffrey Sheu, spokesman for the world's leading bicycle maker Giant Inc.
"Our monthly revenue hit a historical high in August and September looks like setting a new record."
Giant's August and September group revenue rose 27 percent and 35 percent year-on-year to 3.91 billion and 4.12 billion Taiwan dollars (120 million US and 126 million US) respectively while 2008 revenue is projected to increase by at least 25 percent to 40 billion.
"Our staff are constantly working overtime to meet the ever-growing demand," said Sheu.
Orders have poured in for Giant products until mid-2009, prompting the addition of a new assembly line at its central Taichung base to boost annual production to one million bikes from the current 600,000. It is expected to be completed by year-end.
As inflation soars and financial markets tumble, Taiwan's bicycle manufacturers and other businesses catering to the thrifty are thriving as the public becomes increasingly eager to economise.
Pacific Cycles, a Taoyuan-based exporter, began selling its signature folding bikes at home in 2005, and since then they have become popular with city dwellers for their lightweight and convenient features.
"Our domestic sales are estimated to increase by 100 percent this year, compared with 10-30 percent in the past," despite a 66 percent price hike to 50,000 Taiwan dollars per bike, said marketing manager Max Yeh.
The folding bike, fondly dubbed "xiao che" in Mandarin or "little foldable" by fans, weighs around 10 kilograms (22 pounds).
The company, which produces 40,000 folding bikes annually in Taiwan, will soon unveil a second plant here to upgrade its product line, Yeh said.
Ed Lu, an avid fan of the folding bike in Taipei, said cycling to work helps him relax but he added that he'd prefer cleaner air for the ride.
"If more people start cycling instead of driving, we would be able to improve the air quality while reducing traffic jams," he said.
Lu reflects a growing environmental awareness that bicycle manufacturers say has contributed to the substantial sales growth in Taiwan.
"The public realise that driving less helps reduce air pollution to protect the environment against global warming," said Giant's Sheu.
Taiwan's government has also promised to expand cycling routes and facilities, in a bid to promote cycling as part of its "green policy" aimed at saving energy and reducing carbon emissions.
"The market is likely to peak this year... but cycling requires persistence and it is restricted by weather conditions," he said.
"We hope more people will cycle regularly as a way of life and not just do so because it's trendy."
X2. Oil is already down to what $63/barrel or so? Maybe it's also worth asking exactly where all those billions went, that just essentially purchased oil at $100/barrel. Lastly- in order for deals like this to mean anything in terms of real security - China has to be willing and able to deploy it's military to defend it. If the US continues to be the only one willing/able to do so...welll....Originally Posted by Flagg
I don't know if they have the political will to do so. China's long term 'prime directive' has always been not to interfere with the domestic affairs of other nations and its soverignty.
To deploy the PLA, PLAAF, & PLAAN to secure resources will contradict its policy and may put China in greater risk at home and abroad.
I wonder if we will end up with a sparta / athenian situation. Where the Spartans themselves are not very nice people, but are remembered favorably for allowing people who aligned themselves with them to live however they wanted. Where the Athenians were much more nosy, and although democratic are remembered for running an explotive empire.
Ordie... China is one of the largest arms exporters in the world; and to countries where the arms actually have an impact on "domestic affairs" and national sovereignty. Its trade and FDI relationships have a major domestic impact in African nations and Latin America. But, somehow, you think there is a magic line when it comes to enforcing its contract rights for raw materials abroad?
I can assure you the PLA will not sit on the sidelines if a major trade relationship involving key resources is at stake. They will act and they will likely prevail.
well, alls fair in capitalism right ? lol
How can you assure anyone? Based on what? I am not saying you are wrong, Just want to find out what you know that I don't. Looking at PLA's history and current state, I simply don't see how you can assure anyone. Maybe you do know something I don't.
The issue isn't ultimately if the Chinese have the willpower for an armed excursion halfway across the globe, but whether they have the capability to do so. The PLA is very large and very formidable, there's no denying that, but the problem is that they lack the logistics necessary for any large scale operations that extend beyond their region. Plus, assuming they want the same equivalent power projection of the US, it's going to take a huge amount of time and money to get to that level.
Last edited by BloodyTalon; 10-29-2008 at 01:27 AM.
I would agree that it's likely China would display some muscle if pushed into a corner when it comes to meeting its resource needs.
But in terms of conventional military power projection....China poses little threat outside of it's immediate national AO.
If you are talking about unconventional military capabilities or economic power projection I'd give China a bit more credibility.......
Unless I'm completely wrong about China, military power projection runs along the lines of:
crawl, walk, run, fly
China would be somewhere around practicing with training wheels...while the US is flying in a stealth bomber with lasers and sh!t.
Not trying to take the p!ss, but unless I've been misreading my Jane's I thought China was focusing from inwards to outwards on trade route/sea lane security?
A successful, large scale forced entry 5000+km from Mainland China is a capability only one country on this planet currently possesses....again.....maybe I've been misreading my Jane's.
Just my opinion
That's my way of thinking.
China could surely put together an Air Bridge or Battle Group that could take down a chunk of say East Africa....but only if it possessed the complicit agreement of India and/or the US.
Just my 0.02c
Defining what it means "not to interfere" is a huge first step. Influence over a nation's economy could easily delve into interference at some future point.
Though 2Sheds' has a point, ability to deploy troops or dispatch a naval force with global reach is beyond their current capacity, at least for now.
China is engaged in "Dollar Diplomacy" where mass amount of tangible aid (Public works projects) is used as a leverage in trade or to woo a country away from ROC recognition. It's an indirect way of getting involved with internal policymaking of a soveriegn country. But largely the Chinese don't put conditions (i.e. Human rights, auditing, imposing austerity) on this aid. That's why African leaders are willing takers.
Already the Chinese are being targeted as we have seen the tragic case in Sudan, port workers in SA have refused to unload weapons destined for Zimbabwe from China, and rumblings about Chinese labor practices are starting to show up in Zambia. So China may need to cross the line of non-intervention to protect its citizens in Africa.
I agree with 2 Shed as well, but that may change soon.
The new PLAAN LPD and Hospital Ship gives a hint of what is to come in terms of providing support for China's African commercial and strategic resources ventures.
Everyones going to beat us at the oil game untill we become non dependant on oil as a fuel period. We are too large, and if we can get rid of oil for cleaner burning fuels we will be farrrr ahead of the game and richer than other nations again.
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