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Falling Down Stairs

Permanent Linkby wisconsin_cur on Mon Jul 26, 2010 7:49 pm

In the last week many news sources made hay over the observation that China has surpassed the United States in gross energy consumption.

American journalist Matt Taibbi employed a grotesque analogy last summer to describe the Wall Street titan Goldman Sachs as a "great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money".

In the energy industry, a similar phenomenon has arisen to invite respect, admiration and fear - China's appetite for oil. No survey of the oil sector's present and future can now afford to omit the China factor and its multiple ramifications.

This major new reality in geo-economics has just been underscored by a report from the International Energy Agency


The Asia Times

Lets assume for a minute that if $147 a barrel oil did not result in a net increase in oil production and that the fact that we are looking for oil miles beneath the ocean is a sign that we are not going to be able to meaningfully expand production.

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Secondly lets keep in mind the observation that every increase in efficiency over the last five decades has resulted in the United States not even standing still in oil consumption and not a net decrease, though we have seen decreases during economic recessions (more on that later).

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Of course China still uses a lot less energy per capita than the United States but this is more an issue of fairness than the effect on supply and demand on the world market and it is the latter that concerns me at this moment.

The wealth of the United States was built on cheap energy; first from the Texas oil fields and then, after 1972, from the light sweet sold to us by other nations. We may have taken this for granted but it is a fact not lost on those nations aspiring to be wealthy; among this group China is first in line.

To date China's expansion of energy usage has been coal. Coal to produce electricity to power the coastline factories to produce goods to sell to Europe and the United States. But analysts inside and outside the Eastern Kingdom recognize that, moving forward, China needs to move it's prosperity inland to the provinces which have, to this point, been exporters of people and have not shared in benefit of the China miracle.

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It also is said that it must turn its own people into consumers as well as producers.

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This will require that future increases in China's energy consumption come in the form of transportation fuels. Moving production to the interior will require more transportation fuel to move those goods either to the coastline for export or around the country for interior consumption. Lets not forget, like Americans, the homo sapiens who live in China also like their cars.

To fuel this growth and expansion of wealth China has, to this point, competed with other economies to guarantee supply of energy imports. China has also made sounds of increasing the efficiency of some of it most energy intensive industries. If trends remain unchanged, however, the IEA reports that China is expected to import as much oil as the United States by 2030. But if the oil pie is no longer growing where is it going to come from?

As we learned in 2008, when oil demand outstrips supply, or when the oil markets believe that oil demand is about to outstrip supply, prices can rise (and then fall) quickly. Oil prices must squeeze out the marginal user but the task is not smooth. The marginal user turns out to be a large piece of the consumption pie and the high price of the market squeezes out too many marginal users. The economy contracts, supply than overtake demand as demand crashes and the price falls in fear.

China, and to a less extent Europe have, to date, proven more resilient in the face of these price gyrations than the United States. While it could be that China has only proven better at hiding the effect of the current crisis in its economy, it appears for the moment that China continues to grow at its habituated pace while the United States stalls. The energy we are not using, primarily oil but some coal, is still being used. While oil did drop to $30 after its $147 spike, it quickly rose back up to $70 a barrel where it has remained despite good or bad news. When growth (now redistributed away from the United States) again catches up with plateaued (or falling) supply, we can expect another spike in prices. This can happen sooner in the case of a political or military crisis in one of the world's exporters or later as the trends of energy uses continue unabated but it will occur.

At the beginning of the 20th century, the so-called "American Century," the United States was the world's largest creditor nation and by the end of the first world war the Empires of Europe were the world's largest debtors. At the beginning of the 21st century the United States is the largest debtor nation and China is the largest creditor. I do not believe that history repeats itself but China is starting the century with many of the same advantages that the United States started the 20th. The challenges of this century will be different, and China's ascent will not necessarily look like ours or continue uninterrupted by her own challenges but unless we in the United States own up and face our challenges with faces cut like flint our future will look a lot like the recent past: like falling down a flight of stairs.

Another way to think about it is that the sooner we take the hole we have dug seriously, the less the impact of falling into it.

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Last edited by wisconsin_cur on Mon Jul 26, 2010 8:33 pm, edited 1 time in total.

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Re: Falling Down Stairs

Permanent Linkby Jack on Mon Jul 26, 2010 11:13 pm

Outstanding blog entry. It may be awhile - perhaps even years - before the crunch hits. But it will hit. Thanks for the great charts.
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Re: Falling Down Stairs

Permanent Linkby Cog on Tue Jul 27, 2010 5:26 pm

Excellent blog wisconsin_cur

China has spent a great deal of time making deals for access to oil that do not involve the use of their military. Nations hostile to the West, openly embrace China's approach of non-interference. Although China is developing military potential, at least for now, they are more interested in playing the game of economic warfare and not the military one.

China's economic picture is a good deal better then the US, in that massive debt is not something they have engaged in so far to fund unsustainable lifestyles.

As Jack stated above, the big crunch will happen. I think we are not far off from that time of reckoning.

I do believe if we see another oil price spike in oil, China will weather it. The USA not so much.
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