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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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  • CapitalHawk

    “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.”

    People thought something along these lines with respect to Japan in the 1930s. They also recognized that oil (along with other raw materials) was a pressure point for Japan and it was thought that placing embargoes on those raw materials would force Japan to behave in the manner that was desired by the USA and European powers.

    It didn’t work out that way.

    • Kevin

      My thought exactly – in addition to Japan, Germany (among other reasons) also thought a quick blow against the USSR thought it could secure the oil it needed. I think the evidence points to rising economic and military powers with nationalistic leaderships using force to secure resources they need.

      • f1b0nacc1

        Germany’s motivation to attack Russia had very little to do with oil (Russia was sending it to them by the boatload before they attacked) and everything to do with the ideological leanings of the Nazis. Now they WERE interested in the British-controlled Middle East for that reason, but Russia…not so much. That was their motivation for the strike south in 1942, on the other hand…

  • Dale Fayda

    The obstinate obtuseness of the political commentariat never ceases to amaze me. How can these people be so galactically wrong about everything that has happened in the last 100+ years and still find someone to pay them for their opinions?

  • Dhako

    Only the fevered imaginations of those who are deluded enough to think that China wants war against America, could only think that Chinese oil production moratorium is good for peace. After all, its the self-serving agenda of those who always assumed the worst of China to keep thinking that anything China does it, must come at the cost to US.

    Hence, its one of those absurdities that one has come to accept from those who thinks like this. Furthermore, its China interest to allow America to keep chasing “Jihadi’s shadows” in the Middle-East for a couple of more years, as they have been doing ever since 9/11. Which is what our Walter Russell Meade and his Neo-Con’s brethren in the Belt-way would dearly love to do, under a biddable GOP’s president (i.e., like Dubya-the-dimwit) after Obama leave office next year. And China would really prefer that for the US, while on the other hand she goes to attend to her economical transformation.

    So, its win-win outcome for all concern. In other words, US keep endlessly expending a real treasure and blood in chasing up – from pillar to post, and back again – a various Jihadi misfits in an endless local Sunni vs. Shiite wars in the greater Middle-East. While in the meantime, the China’s state proceed to perfect, or at least work to straighten out the economical contradiction of her continental size-economy.

    Hence, its China’s core interest for the world to be at peace for the foreseeable future. Provided, of course, that the US is in the grips of her delusion “monomaniacal assumption” in thinking that the errand’s fool that is the Middle-East’s political and religious mess is something that the US can fix it.

    Moreover, China is convince that the US may decides to act in a manner that is commensurate with her legendary delusion of thinking she should call the shots of what China should do in her own region, and therefore its best to have “options” on the table of what China should do in that eventuality. And, of course, one of those options was the recently concluded oil deal with Russia. This deal is essentially, an “insurance policy” in the form of long-over-land-pipelines that connects Russia to China, whereby China could bypass the US’s choke-hold in the high-seas with her navy, particularly when it comes China’s need to import sufficient oil for her economy.

    So, as its apparent in here, the Chinese strategists are head of the game, when it comes to whatever delusion the US’s side could get up to. But in any case, China in convince that its her interest for a peace to remain through out the world. For if that were to happen, then China’s days under the sun will be much closer to hand than you can imagine. For China knows that in the economical competition terms, she is likely to eat the US’s lunch money, given the fact that she is the largest trading partners for the bulk of the world.

    Hence, as power follows in the heels of trade, just as it had follow the US, when the US was the largest trading nation after the end of the WWII, then, from this reading, its US who is anxious about her slipping from her pole position, which account for the haste in which US wants to “leverage-up” her military power against China, while she still has the edge in the mean-time. Moreover, US knows that the bulk of the Asia are essentially a path of economical dependency towards China in not too distant future. And therefore she keep ginning up this local difficulties some of the nations there have with China, so that she can opportunistically make a use of it.

    After all, no nation in the region has any larger hope of thinking that their future economy well-being is dependent on US. While on the other hand, they can see their growing dependency on China; which in turn makes the US a “Nervous Nellie” when she surveys the region and realize how the Geo-economical facts that invariably shape each nation’s future directions and their “Geo-political posture”, are tilting away from her column.

    Consequently, its understandable why the US is really trying to work up a “Geo-political fuss” in the region call a “pivot” so that even when she loses the economical competition against China where the regions’s Geo-Economical future is concern, she will still have a chance to “leverage up” her preponderance Navy in the region, as a factor that can act as an “equalizer” (or force multiplier) to Chinese preponderance in the economical terrain.

    And its that opportunistic agenda on the part of the US, which in turn necessitate the need for the US’s Geo-strategical tacticians (like Walter in here) to keep harping on about these China’s South-China-Sea and East-China-Sea. But then I suppose instead of talking about the “real fear” of US’s Belt-way Strategists, which is their foreboding sense of knowing that China is on course to eclipse the US in economical competition where the region future is concern, it seems its better angle for them to “project” a “nefarious agenda” on to China and say: that China is building up for War against US. Or at any rate, assume absurdly, without any evidence, that the fluctuation of the oil production within China is indicative of China’s inability to start a war in the near future against the US; as if that sheer unmitigated stupidity was the intention of China in the first place.

    Pity, really. Perhaps, as I should have said it earlier, its the indication of the level of intelligence we are dealing with in here for a nation contemplating electing the likes of Donald Trump into their highest office in the land, to assume that other nations are also predisposed to act in such stupid manner as to start a war that serves none of their interest. In other words, its says more about them than it says anything about China. Or to put it, another way, a man’s judgement is always a reflection of his delusion. Hence, the proposition that hold that China is actively courting a war in her region, is essentially, a measured reflection of those who are so deluded as to think that way in the first place.

    • ImperiumVita

      The lady doth protest too much.

    • LA_Bob

      While I agree with a good deal of your post, I think you spilled too much ink (or rather spun too many electrons) making your point.

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