China - Now Number 1 and Number 2! Part Two

Update - January 18th, 2011


The International Energy Agency reported today that China's oil demand reached the 10.2 million BOPD level for the first time in November 2010.  Oil demand growth was estimated at 15.1 percent year-over-year from November to November.  China imported an average of 4.8 million BOPD, up 17.5 percent from 2009.  Looks like the predictions in my original posting are falling into place.


Original Article:


Back in July, I posted an examination of China's energy needs now that they are the world's largest energy consumer. On Monday, the mainstream media covered the revelation that China has now become the world's second largest economy behind the United States, surpassing that of Japan. This should not be a surprise to anyone, especially in light of Japan's lost decades and the rapid double digit growth in the Chinese economy, however, China's growth as a world leading producing and consuming nation is a game changer for the United States in particular.

In the first part of the posting about the changes to China's energy use, I noted that China has gone from using half of the total energy used by the United States at the turn of the new millennium to surpassing American consumption in 2009. China is proposing to meet their energy challenges through increased use of hydroelectricity, nuclear power and coal. Oil obviously plays an important part in the overall growth of their energy consumption as I will outline below.

First, let's take a look at some oil consumption and production numbers for both the United States and China.

According to the BP 2010 Statistical Review of World Energy, in 2009, the United States consumed 18.686 million BOPD, produced 7.196 million BOPD resulting in net imports of 11.49 million BOPD. In contrast, China consumed 8.625 million BOPD, produced 3.790 million BOPD resulting in net imports of 4.835 million BOPD. The EIA projects that domestic United States oil production will fall to 5.37 million BOPD in 2011 based partially on the recent drilling moratorium in the Gulf of Mexico. Total world production reached 79.948 million BOPD in 2009 and consumption was 84.077 million BOPD.

From this chart captured from the BP report, you can see that world oil production has not grown meaningfully since 2004. As a geoscientist, this tells me that if we haven't reached world peak production capability, we are very, very close.  One could also argue that production grows only to meet demand so a levelling off of production could just mean that demand has levelled off.

Here's an even more interesting chart from the report.  This chart shows the total reserves-to-production (R/P) ratio in years.  As the ratio rises, the reserves of oil added increase faster than the production consumed on an annual basis.  At the time of the report, if no more oil was discovered, the world would have a 45.7 year supply at current consumption rates.  The most interesting observation from the chart shows that since the late 1980s, the R/P ratio has experienced minor fluctuations but despite drilling in more and more hostile environments, it has not moved outside of it 40 to 45 year range.  To me, this could well indicate the advent of peak oil or, at the very least, its proximity.

China's oil consumption in the 5 years from 2004 to 2009 has grown from 6.772 million BOPD to 8.625 million BOPD, a 27% increase in just 5 years. In that same time frame, their oil imports have grown from 3.291 million BOPD to 4.835 million BOPD, a 45 percent increase. Over that same 5 year time frame, the United States' oil consumption has declined from 20.732 million BOPD to 18.686 million BOPD (the decline in consumption for 2009 was likely due to the economic downturn). While United States oil production changed very little over the 5 year period, it is also important to note that 2009 was an anomalous year as production in the United States had declined from 7.731 million BOPD in 1999 to 6.734 million BOPD in 2008, a 15 percent decline. If the EIA is correct in its assumptions as noted above, the production/consumption gap will markedly increase in part because of the moratorium in the Gulf. If we ignore the 2009 data because it is off the long term trend, over the 4 years from 2004 to 2008, net imports decreased from 13.504 million BOPD to 12.764 million BOPD. Despite the decline in imports and minor drop in consumption, the United States is still the world's largest importer of oil.

In the first part of this posting, I noted that on a per capita basis, China's resident use only 1.7 tons of oil equivalent per year compared to 7.07 tons of oil equivalent per year for residents of the United States. Holding all else equal, if China were to raise their standard of energy consumption to that of the United States, they would consume nearly 45 percent of the world's current daily oil production compared to the 11 percent that they now consume. China's consumption would rise to 35.87 million barrels per day; assuming that world oil production levels are most likely to drop over the next decade, the supply/demand gap becomes even larger. This can mean only one thing; competition for finite oil resources will become more and more intense. That energy gap projection alone is what is going to affect the world's political scene for the coming generation.

It is becoming quite apparent that China is already well aware that they will be competing for finite energy resources around the world, where ever they can get them. Canada is already feeling the effects of China's new investment policy. Recent investments by PetroChina in the Athabasca oil sands telegraph their intent as did China Petrochemical Corporation's purchase of Conoco-Phillips interest in Syncrude for $4.65 billion in April 2010. With that purchase, Sinopec will have a say in whether or not raw bitumen is exported for upgrading. According to a report by Bloomberg, China spent $32 billion in 2009 to acquire interests in mining and energy companies. We must also remember that China has huge foreign currency reserves (particularly United States Treasuries) totalling over 2.45 trillion USD that allow them to invest to secure their own future without taking on any debt, unlike nearly every other nation in the world.

I might be wrong, but I think that it is important that investors err on the side of caution and manage their portfolios with China's emergence as the world's most powerful nation in mind. China is already planning for its future and so should we.