China Changes Calculus for Petro-Rulers

This is yet another attempt to set the stage for new speculation to increase the price of oil. The current war conditions, Iran, and the Middle East have failed to keep the inflated oil prices high as that was the reasoning before the economy shank. If oil gets back up to $70 a barrel, you will see the economies give back any gains they might have made. There is an inverse correlation between high oil prices and economic growth. To think that the oil companies do not have the money to continue exploration because of the current price of oil is stoking unwarranted fear into the marketplace to give speculators one more reason to drive up the oil prices.

The question remain, why the resources rich countries decides to deal with China instead of the Western countries? The answer is simply because in the past the West has taken advantage of these resources rich countries and now they decide to deal with China instead.

In my opinion, the sudden drop in oil prices was due to delevraging whereby firms entangled in the toxic mortgage derivitive assets needed cash quickly, dumping gold, and oil to make up the difference. I highly doubt that there has been a significant decline in oil demand by consumers, my consumption aswell as everybody elses that I know of has remianed the same. The real problem in my opinion is that these same firms that had to dump their holdings of oil now don't have that same amount of cash as before and certainly not the credt to lever up in oil again due to the credit crunch that followed the mortgage fallout. Thus we now see the market finding the more "real" prices with these firms out of the way. But the story doesn't end here.... the reason China is buying up a bunch of oil is because they are cash heave due to being the single largest global exporter for the past couple of decades, and wanting to protect themselves from potential future spikes if they want to manitain the single fastest growing economy in the world. Why are the big oil producing nations going along with it? Well, as I see it it's because they got all too comfortable with high prices and short-sightedly took on too many ambitious projects on the home front. They NEED to try and drive prices back up now or in the future!. Since they can't do it in the short run then they can just sell to China for the time being to fund their deficits, but when the rest of the worlds economies straighten themselves out again and credit loosens we can expect the price of oil to rise once again as it did in the recent past and due to similar circumstances. Oil producing nations are not dumb, they know very well that they can produce and explore but why would they want to.... The current credit crunch means that there is less speculation on prices because nobody can lever up and make the gamble. Thus if they forgo the exploration now (which would cost them money when they can't quite afford it) and fall far behind, along with selling China some claims to oil, they can cover their current deficits and ensure a huge spike in the future as economies upturn.

The Opposite is true. The Russian and Brazilian companies benefits from these deals because they can continue funding their projects to develop their properties which takes multiple years to complete. By the time global economies, they hope to have new oil/gas to sell. This increases future energy supplies.

China benefits by reducing risk for access to energy they need in the future which has been a potential bottleneck that could strangle their future growth.

Before the global economic crisis, China's urgent need and insecurity of energy access is the main driver of speculative activities in natural resources markets. With China able to lock down significant amounts of future supplies, even as glogal energy demand recovers later, the urgent demand that drives speculative activities will be much more subdued, leading to much more fundamentals-driven energy market.

China is currently securing their strategic oil supply since they realize that oil will not last forever. The politicians in Washington are too stupid to realize what is going on, just as they were too stupid to realize that free trade with China was never going to be free. The Chinese have and will continue to take advantage of us. The US better get used to being a poorer 2nd world country. All of Obama's grandiose plans will fail without sufficient access to affordable energy. I'm a US based petroleum engineer who currently has little to do since oil and Nat gas prices are now at our breakeven point. You are correct we are shutting in fields and drastically decreasing activity. This will lead to the next oil boom IF the economy ever recovers fully.

If the Chinese think they are going to get 8% growth in 2009, then they are smoking their former largest import, Opium. I think they are totally unaware of the ton of bricks that is about to land on them in the form of the extinct American consumer. China has spent 30 years building a giant export machine, for which there are currently no buyers. Take a look at Japan’s statistics, which are far more reliable than China’s, which show exports falling off a cliff, machine tool orders evaporating, and once a half century losses for leading exporters like Toyota. These are numbers far worse than we saw during the depths of their lost decade. Of course, China has the money, and certainly the need, for a massive domestic infrastructure build out that can offset the disappearing exports. But this is not an economy that can exactly turn on a dime, and the transition will be painful. China can always report 8% GDP growth this year. Another problem is that modern China has never faced a recession, and defensive business strategies are essentially unknown. One of the advantages of a centrally planned totalitarian economy is that if you don’t like the economic numbers you are getting, just make up some better ones. Personally, I think 5% growth is more realistic, but then you have always known me as a shrinking, subdued, conservative kind of guy. If I wanted headlines I would be shouting 2% growth, or perish the thought, negative growth, from the rooftops, as some China watchers are. The implications for the global economy are huge. www.madhedgefundtrader.com

Indeed. If Western governments thought that the economic crisis would cause the Russian government to loosen its grip on the Russian energy sector they were mistaken. About a great many things.

You see, the Russian government already spent about a decade thoroughly exploring Western intentions concerning Russia, and correctly concluded that the West is concerned only to loot Russia, and fact that privatization left Russians to die matters little in Washington or New York or London.

They will not be given any such opportunity again, no matter how they bleat about Democracy, Human Rights, and Russia's "energy weapon".