China and Venezuela New Crude Oil Bedfellows

Here’s a story far larger than Goldman’s legal woes: China just struck a $20 billion oil deal with Venezuela. In exchange for some hefty financing, China will eventually gain access to roughly 400,000 barrels of oil per day. That’s roughly 5% of China’s daily consumption…almost enough crude to satisfy all of Greece’s daily needs.

The icing on the cake: Half the deal with be conducted in Chinese yuan.

“The Chinese will build you what you want or loan you money, but you’ve got to pay them with crude oil,” summarizes Chris Mayer.

“This deal is one of the biggest deals China has ever done. It’s also more-expensive oil, given the distance it has to travel to get to China. Much of Venezuelan oil is also heavy oil, which is a lower grade. You have to have special refineries to handle it. Most of them happen to be in the US – much to Hugo Chavez’s irritation, I am sure.

“But last year, China approved the construction of a large refinery in Guangdong province. We know that there are a number of new refinery projects under way, with more planned. Most of them are in Asia and the Middle East.

“I won’t say China’s move smacks of desperation. It just shows you how valuable quality oil reserves are. China doesn’t make this deal unless there aren’t any better alternatives. So it would seem that the case for oil – particularly high-quality, low-cost oil – is still a good one.”

Addison Wiggin
for The Daily Reckoning

The Daily Reckoning