The horizon is not so far as we can see, but as far as we can imagine

Clueless About Oil: It isn’t going to stay fungible

China’s been grabbing up resources as fast as they can with all their export earnings:

Since becoming a net oil importer in 1993, China has rapidly overtaken everyone but the US in its thirst for the world’s crude. If one could quantify a country’s eagerness to control this vital resource, though, China would surely be number one. Aggressive investments in Africa’s resource sector have led some to dub its policies there the “Great Chinese Takeout”. Its latest move, a $20bn loans-for-oil deal with Venezuela, coming on top of an existing $8bn commitment, is its largest. This follows last year’s $25bn loans-for-oil deal with Russia and separate agreements for $10bn each with Brazil and Kazakhstan.

On face value, China’s energy grab appears naive. Extending below market rate loans and investing in areas like Venezuela’s Orinoco Belt, recently eschewed by many multinationals, mean that it may earn a low risk-weighted return. Even if these projects are ultimately successful, procuring actual barrels halfway around the globe is inefficient and unnecessary. Oil is a fungible commodity so buying a distant barrel simply frees up a nearer one for someone else. Financially speaking, China is in effect entering massive, long-dated commodities futures contracts.

Ok, oil is only partially fungible even now.  Oil has to be refined, and refineries are built to handle specific types oil.  Asphalt-quality oil from the Canadian tar sands, which powers much of the western US, for example, simply cannot be refined in refineries not set up for it.

More to the point, if there are absolute shortages of oil which can be refined by the current crop of refineries coming up, and there are, and if it takes years to build new refineries, and if cheap oil is or has come to and end (if it hasn’t, which depends on your definition, it is going to, and soon) then oil is not fungible.

Any country which does not have enough domestic supply of oil for its own needs should definitely be locking in oil supplies.  Because there just isn’t going to be enough of it, and soon.

China has done relatively well these past 30 odd years because they tend to think ahead.  Oh, they say, we’re near peak oil, we should lock in supplies.  Oh, they say, we don’t need a big army, we should put that money into the economy so that if or when we do need a big army our economy can afford one.  Oh, we’ve got a population problem, we should cut back on population growth.  Oh, we’re choking on smog, we should invest in green technology in such a way that in 10 to 20 years we’ll probably be the biggest producers.

That’s not to say they’re forward thinking on everything (for example, they aren’t handling water well at all, or desertification) but compared to most other countries, they’re cracker jack.

And folks like the FT’s Lex team are living, not just in the present, but in the past.  Maybe it’s time that the West’s “intellectual” class started staring the future, or even the present, in the eyes?


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  1. Lex

    Jeez, having a name that’s also a Latin word is liable to give you a moment of pause while thinking that Ian’s calling you out for being an idiot…

    Maybe i’m wrong with this, but the investments on China’s part look even better in the bigger picture. To me it looks like China’s divesting itself of dollars while getting something for them. Am i wrong?

  2. Cloud

    I wonder if, in an oil-scarce near future, the U.S. will perhaps have characteristically decided that it wants South American oil all to itself, prior agreements be damned. And considering the existence of other suppliers and the riskiness of a direct confrontation which needs no elaboration, perhaps China will concede it.

    Then again, by that time, China may not have to. The U.S. is the decidedly weaker party in the economic relationship, and won’t be able to go against China; unless suicidal loose cannons of the Right gain the White House. Which they may.

  3. S Brennan

    The Anglo Disease short version;

    The best near sightedness money can buy, FT whistles in the dark, while shadows move in the dark forest they’ve led the US to. The forlorn hope of US/UK is that they can financially manipulate instability into Chinese society should it be necessary. In 1989? Sure. Today? Keep whistling boys, Hong Kong Chinese are as good at the game as anyone and they know what side their bread is buttered on.

    De vesting yourself of over valued dollars to a set of commodities that, over the long term, must rise as surely as the dollar must fall when China slowly dumps dollars. Good post Ian.

  4. And folks like the FT’s Lex team are living, not just in the present, but in the past. Maybe it’s time that the West’s “intellectual” class started staring the future, or even the present, in the eyes?

    To do this, they have to give up a fundamental dogma: that finance is as productive as production. The belief that finance is productive as production is a consequence of “free” “market” ideology.

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