2010 February 08 Monday
China Outbids US For Saudi Oil

Move over and make room for China in the oil market.

Jan. 28 (Bloomberg) -- Saudi Arabian Oil Co., the world’s biggest crude producer, is exporting about 1 million barrels a day to China, more than to the U.S., Chief Executive Officer Khalid al-Falih said.

“We are already exporting more to China than to the U.S.,” he said today in an interview in Davos, Switzerland. “We are prudent and careful about where to invest but our eyes are focused on China and we will continue to look for all opportunities.”

China's growing buying power means it is displacing the United States as oil buyer on the international market. The day will come when China becomes top oil importer. US oil imports will decline sharply because we won't be able to afford to buy at the prices China will be able to afford. The US runs a big trade deficit. China runs a trade surplus. The Chinese economy has been growing faster than the US economy for decades and will continue to do so (leaving aside periods of possible deep recessions in China).

US energy policy ought to be aimed at reducing our need for oil. We ought to shift to pluggable hybrids and pure electric cars for most transportation uses. We can afford to generate as much electricity as we need at prices not much higher than we are paying today. Electric power from nukes and wind can keep our cars and trains moving.

Share |      By Randall Parker at 2010 February 08 09:24 AM  Economics Energy


Comments
James Bowery said at February 8, 2010 10:07 AM:

This merely proves that we need more centralization. As long as young men think they can raise families outside the military, it saps the US of the vital strength it needs to turn towelheads into hamburger for oil. And just imagine how many young men we'll need when we have to start turning slanties into hamburger to lower the bidding price for oil!

Advocating a strong middle class is treason.

Bob Badour said at February 8, 2010 1:20 PM:

Strictly speaking, your title is not true. Some Chinese outbid some Americans and some Americans outbid some Chinese. If China outbid the US, no oil would flow to the US.

Black Death said at February 8, 2010 1:22 PM:

Oil is the ultimate fungible commodity, so, if it's imported, it doesn't matter too much where it comes from. The US has access to Canadian and Mexican exports, which are not readily available to China, so it's not surprising that China gets more from the Saudis. Parenthetically, it's amusing to note that the Muslim theocratic government of Saudi Arabia has no problem at all dealing with the atheistic Chinese, who regularly stomp hard on their Muslim Uighur minority, but, hey, what's religion when there's a buck to be made. Anyway, oil is fungible, so if China doesn't get it from Saudi Arabia, it will come from somewhere else.

Oil prices have been falling recently, but if the economy should recover and peak oil start to take hold, it will still be available to those who can afford to pay for it. China does indeed have massive foreign currency reserves but also needs them to deal with some pressing problems. China may not be as prosperous as she seems - it appears that the Chinese government has been cooking the books:

http://www.washingtontimes.com/news/2010/feb/05/china-obscures-economy-in-great-wall-of-statistics/?feat=home_top5_read

Problems that China faces:

1. A corrupt, authoritarian, repressive government. The same centralizing forces that hold China together may one day tear it apart. The only way that the Chinese people have of expressing their discontent is by revolution. This may or may not happen, but you can bet the Beijing autocrats worry about it.

2. Rural poverty, and a big disparity between the rich cities and the poor countryside.

3. Bad denmographics, with an excess of males in the younger age groups. Also, the population is really too large for the land mass it occupies.

4. Hostile neighbors. In the last century, China has invaded or fought wars with most of its neighbors. As American military power in Asia wanes, topics such as Japanese remilitarization, Korean reunification, expansion of Vietnamese and Indian naval power and the growth of militant Islam in central Asia will be of great concern to China's leadership. A potential clash with Russia over the growing Chinese population in resource-rich Siberia is also a possibility.

5. Economic collapse. The Chinese currency is probably greatly overvalued and may one day collapse, leading to economic catastrophe. In a democratic country, this would lead to an abrupt change of government, but in China, change of covernment comes by revolution.

That said, I mostly agree with your post. The US, EU, Japan and the other western-style democracies don't need to worry about what's going on in China - there's precious little they can do about it anyway. China may pull it off and emerge as a superpower. Or not. It doesn't change what we should do, which is to get our economic house in order by reducing debt and public spending and developing alternative energy sources.

dk said at February 9, 2010 6:59 AM:

"5. Economic collapse. The Chinese currency is probably greatly overvalued and may one day collapse, leading to economic catastrophe."

This is contrary to everything I have heard. Most people think chinas currency is undervalued. They have a trade surplus and huge forex reserves. China's currency is pegged to the dollar anyway(I think 8:1 last I heard). Even if so china does all of their own manufacturing and is a contiental power with a wide resource base. So a collapse wouldn't be that inflationary anyway.

Black Death said at February 9, 2010 12:23 PM:

If you think the Chinese currency is undervalued, try this, from the Asia Times:

With a 6% inflation rate, China will be forced to pay currency traders massive sums to defend an overvalued yuan dictated by US trade policy in contradiction of US Treasury policy of a strong dollar. That was how the Bank of England allowed itself to be broken by George Soros on Black Wednesday, September 16, 1992, when the British central bank attempted in vain to defend an overvalued pound sterling out of sync with its interest rate regime. It was also how the Hong Kong government was forced to execute its "incursion" into the equity market in August 1998 to defend the Hong Kong dollar's peg to the US dollar against market fundamentals.

Read the whole thing:

http://74.6.146.127/search/cache?ei=UTF-8&p=china+currency+overvalued&xa=sldddrSbnLFyMCQCCujywQ--%2C1265832680&fr=yfp-t-701&u=www.atimes.com/atimes/China_Business/JG30Cb02.html&w=china+chinese+currency+overvalued&d=Xq8dDam4UP96&icp=1&.intl=us&sig=FEaQel9nENdWJpq17qyn

Nobody really knows the true value of the Chinese currency, because the beijing government won't allow it to float against other currencies. But a lot of people do feel that it is overvalued.

Daniel said at February 9, 2010 1:11 PM:

>> With a 6% inflation rate, China will be forced to pay currency traders massive sums

Last year some Chinese state companies came out on the wrong side of an oil derivatives bet with American investment banks. Instead of paying up they told the American banks to go efffff themselves. As far as I know the Chinese haven't paid the American banks.

If China comes out on the wrong end of a fx derivatives bet they will also probably tell the American banks to go efff themselves. You are not going to win against these people. Gonna learn a hard lesson.

not anon or anonymous said at February 9, 2010 3:28 PM:

Nobody really knows the true value of the Chinese currency, because the beijing government won't allow it to float against other currencies. But a lot of people do feel that it is overvalued.

If China is trying to defend an overvalued yuan, why do they impose strict capital controls which limit foreign investment into the country? If anything, the currency appears to be undervalued relative to market fundamentals.

Truth(er) said at February 11, 2010 1:57 PM:

I don't understand. How can the Chinese currency be worth anything if it neither trades on the open market nor is backed by a government that honors agreements that are transacted in it?


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