Crude Economics
Is China Hitting Peak Oil?

China pumps more than 4 million barrels of oil a day (only Saudi Arabia, the United States, Russia, and on a good day Canada produce more), but output is expected to decline this year as the country’s oil fields mature and operations become more expensive. The WSJ reports:

China is among the world’s top five oil producers, but its fields are growing depleted and are increasingly expensive to pump. The country’s leading companies are choosing to leave more of their oil in the ground and some analysts now say Chinese oil output may have peaked. […]

As China’s production starts to decline, demand for oil from overseas should remain firm, which would be good news for prices, which have been languishing near multiyear lows amid a global supply glut and weak demand in the rest of the world. […]

This news will be welcomed by oil producers elsewhere, who will be crossing their fingers that China’s tapering output will help offset the global crude glut and help bring prices back up.

But this decline has strategic as well as market implications. As China’s domestic oil production becomes more expensive, it will be forced to produce less at home and import more from abroad. The more dependent China is on foreign oil, the less likely it is to think that war with the United States is a good idea. Without the oil that comes from overseas, across waters where the U.S. Navy is supreme, China’s economy would grind to a halt.

This poses a problem that China will have a hard time solving. Coal is abundant in China, but the environmental consequences of reliance on that energy source are devastating. Renewables are part of the solution, but won’t make the kind of difference China needs. Fracking might someday unleash new supplies of oil and gas, but China’s geology and geography are unfavorable—much of its reserves are in geological formations that remain hard to tap, and many of the most promising fields are in arid areas where water-intensive fracking methods are difficult and expensive.

With the Middle East mess getting worse all the time, China faces energy insecurity apart from the threat of conflict with the United States. Expect this to be a continued focus of Chinese foreign and economic policy. China’s dependence on foreign oil is one of the strongest pillars of world peace.

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