China and peak oil

HellKaiserRyo · Coal Joined: Jun 18, 2008 Posts: 4

What do you think China will do during the era of peak oil. I remember reading posts from about four years ago and Jack claimed that China will experience a harder landing. Right now, I think China will do quite well (relative to most countries) during the first few years of peak oil since they have a trade surplus which would strengthen their currency so their purchasing power in foreign markets (so they can buy oil) is quite strong. I do not expect most African countries, Indonesia, and India to do quite well.

Micki · Posted: Fri Jul 18, 2008 12:35 am Post subject: Re: China and peak oil

Not sure what anyone will do to really mitigate the impact.
But like you said, with stronger yuan they can keep buying as long as there is oil on the market.
They are however building quite a few mega cities.
It may be a preparation for a time when 1) people are dependent on public transport (or perhaps public transport based on electricity like subways, monorails etc.) or 2) go back to bicycle based transportation.

Even if I expect them to do relatively well the coming years I doubt it would be the kind of place where I would like to live.
For one water and air quality is already big problems.
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MrBill · Expert Joined: Sep 15, 2005 Posts: 5642 Location: Eurasia

Don't forget that China's $1.8 trillion in foreign exchange reserves is NOT cash on hand.

First of all their FX reserves are ASSETS that are offset with an equivalent amount of LIABILITIES in the form of yuan that they have sold by buying US dollars (and euros). They still have to redeem those yuan on demand.

Secondly, those FX reserves are not sitting around in a vault somewhere. They have been re-invested in global capital markets. They are invested in US government and Agency bonds like Fannie and Freddie, for example. As those bonds lose value, so do China's FX reserves shrink.

Any attempt to sell bonds and repatriate US dollars to sell to buy yuan just sends the value of its remain bond position lower in price and value.

In order to buy oil China needs to use its future production. Specifically its exports to pay for imports of oil. If there is a severe shortage of oil on world markets then importing countries will be using their currency reserves to buy oil and not Chinese imports of merchandize. Reduced export earnings for China.

So in this respect seeing that the Chinese economy is only one-quarter the size of the US economy, for example, and Japan and Germany, also oil importers, are larger in absolute size than China, I really see no inside Chinese advantage in outbidding these other users in open markets.

By other means perhaps? Inside deals. Oil for soft-loans. Kick-backs. Etc. Maybe?

Not too mention the trillions of yuan that China needs to put into environmental clean-up, etc.
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KingM · Posted: Fri Jul 18, 2008 8:29 am Post subject: Re: China and peak oil

Monster pollution problems, four times the US population with less arable land than either the US or India, a history of horrific famines, and a population that is still largely poor.

No, I would not want to be in China during a collapse of the world economic order.

ROCKMAN · Posted: Fri Jul 18, 2008 9:27 am Post subject: Re: China and peak oil

As you say Mr. Bill: "I really see no inside Chinese advantage in outbidding these other users in open markets."

I've tried with little success to document the magnitude of Chinese oil field purchases and capital investments. As you point out, it would eliminate a certain amount of price competition. There have been a few press release, such as China's buying into a fair chunk of Angola, but I can't estimate if these potential future production lockups represent a small or large portion of their future demand. Of course, I wouldn't think they would care for the world to know if they were being very aggressive in this area.

misterno · Posted: Fri Jul 18, 2008 10:23 am Post subject: Re: China and peak oil

China loves coal and they don't care about the pollution it comes with it. So the higher the oil goes up the more coal they will use thus there will be an environmental disaster.

Twilight · Expert Joined: Mar 02, 2007 Posts: 3076 Location: UK

MrBill · Expert Joined: Sep 15, 2005 Posts: 5642 Location: Eurasia

The way I see it is that first of all we will see high oil prices and regional shortages. Then in phase II we will see wider spread physical shortages when availability and not price is the issue.

In phase I it does not really matter if China locks-in production from Angola or Sudan, for example, as they get their supply, while other users buy elsewhere. However, in phase II then this could be a bigger issue.

But my own pet theory is that China's neo-colonialism in Africa will prove ultimately to be no more successful than any other multinationals' on the Black Continent. At the moment they may be able to grease the right palms, but as problems in the Nigerian Delta show the locals will only stand for this for so long before they take matters into their own hands.

That leaves a military option for China to enforce their 'contracts'. Maybe they have the manpower, but it would soon get messy. Then it is not really out of sight from the world anymore either. There is already a back-lash in Africa where China has attempted to bring in their own labor instead of hiring locally. Understandably the natives would at least like employment if the Chinese get their minerals and their leaders get rich. Not to mention that cheap Chinese products are already under-cutting locally made goods creating resentment on that front as well.

UPDATE: the curse of oil - BIC Syndrome African-style