Thanks for the Oil Boom

It seems as though the unthinkable is happening – the world’s supply of oil is rapidly decreasing. John Myers takes a look at the world’s escalating demand for oil…and wonders where we’ll get the supply.

As America has entered an age of extreme dependence on oil, the appetite in the rest of the world is growing each and every year.

China is burning oil at a record rate, much of it from the Middle East. This year, China will import as much as 120 million tonnes of crude. That is up from 2003, when China imported 91 million tonnes.

Chinese crude buyers have been scouring the world for new sources of oil to fuel the country’s runaway economy, buying from nontraditional suppliers such as Canada and Australia.

Operating from offices in major oil trading centers like London, New York, Hong Kong, Singapore, and Beijing, Chinese oil companies are using a wide range of mechanisms to secure supplies from the international markets. These include spot purchases, term contracts, and even barter deals.

At the same time, Chinese companies have been eager to invest in existing and new oil fields to ensure future supplies.

"We need to power the fast-growing economy," said a trading official with China’s second-largest oil-importing company, China National United Oil Co., the trading arm of PetroChina Co.

Chinese Oil Imports: More Cars

A major driving force for higher oil demand has been a sharp increase in the number of private cars used in China. In the two-month period of June-July 2003, the number of private cars in Beijing alone rose by 200,000 units.

The Middle East continued to be China’s largest crude supplier, importer, followed by Africa. Currently, the Middle East supplies 50% of China’s crude oil imports.

Chinese oil demand has been soaring since 2000. But it is still only a fraction of the size that it will eventually reach.

Currently, all of Asia consumes just less than 20 million barrels of oil per day. Not much when you consider that Asia has a population of 3 billion people. Meanwhile, the United States, with a population of less than 300 million people, consumes 22 million barrels of oil per day. U.S. per capita consumption of oil is 10 times greater than Asia’s. But as China and its neighbors continue to industrialize, that consumption gap will close. Just how far it can tighten before incredible price resistance happens is difficult to say, but consider this – if Asia’s per capita consumption of oil were one-fifth of America’s, the region would consume 40 billion barrels of oil, or more than 50% of the world’s total production.

Meanwhile, Chinese petroleum reserves currently provide only a seven-day supply, compared with 60 days for the United States. There is a growing gap between Chinese crude production and supply. More and more, Beijing will rely on Middle East imports to make up this difference.

According to Dr. Marc Faber, "Asia will revolutionize the geopolitics surrounding the oil-producing regions of the world."

Again, the focus comes back to the Middle East. And a picture of that region is downright ugly. Iraq is a mess, Iran is an avowed enemy of the United States and Saudi Arabia? Nobody knows for sure where on the fence Saudi Arabia sits, but one thing is for sure – it isn’t on Washington’s side.

Chinese Oil Imports: Invading the Wrong country

On the Canadian Broadcasting Co. documentary TV show, The Passionate Eye, noted historian Joseph Trento, said: "We invaded the wrong country. If we wanted to stop terrorism, we should have invaded Saudi Arabia."

The fact is that Saudi Arabia and its 8,000 princes have been playing both sides against the middle. The Saudi government has one of the largest foreign lobbies in Washington and spends tens of millions of dollars a year to influence the federal government. It even went so far as to bail out President George W. Bush’s Texas oil company before he was president. Yet at the same time, the Saudis have paid hundreds of billions of dollars in protection money to al Qaeda.

But let’s put all the politics aside and look just at the economics. Even if the royal family turns out to be a bunch of nice people who want peace and democracy in the Middle East, the question remains – does the kingdom have the oil necessary to supply the world’s burgeoning demand for crude? The answer: probably not.

"We don’t see us as the ones making sure the oil is there for the rest of the world," one senior executive told The New York Times. The newspaper reported that an official of state-owned Saudi Aramco cautioned that even the attempt to get up to 12 million barrels a day would "wreak havoc within a decade" by causing permanent damage to the oil fields.

Meanwhile, Sadad al-Husseini, Saudi Aramco’s second-ranking executive and the company’s No. 1 geologist, has warned that global "natural declines in existing capacity are real and must be replaced."

Chinese Oil Imports: Surging Global Demand

In other words, the once unthinkable is happening – even the rich oceans of oil in Saudi Arabia are being severely taxed by surging global demand.

Saudi Arabia’s reported proven reserves, more than 250 billion barrels, are one-fourth of the world’s total. The Big Daddy field in that equation is Ghawar. Discovered in 1948, the 300-mile-long sliver near the Persian Gulf is the world’s largest oil field. In fact, it accounts for half of the nation’s 9.8 million-barrel-per-day production.

According to Aramco, production practices at Ghawar and other giant fields are sustainable. But some North American oil insiders wonder if Ghawar hasn’t been worked over.

As one Canadian oil executive said to me, "The Saudis have done to Ghawar just what was done in East Texas – they drilled it too hard, too fast."

That is a frightening thought when you consider that today some of the pump jacks in East Texas manage to harvest just five barrels per day.

So the truth of the matter, oil rose to $55 per barrel because of one fundamental fact – it is becoming a scarce resource. This fundamental may be ignored for a while. But as oil supplies are taxed more and more each year, and new demand rises out of Asia, you have to wonder not if oil will reach $100 a barrel, but when.


John Myers
for the Daily Reckoning
November 30, 2004

P.S. Demand for oil is soaring – as is demand for all commodities. In fact, in the past two years, commodities have done eight times better than traditional stocks.

What a shabby spectacle!

On the front page of today’s papers in London, is the sordid story of a sluttish American woman who cheated on her husband…married another man…and then cheated on him, too. The poor second husband discovered that his children were really those of another man – David Blunkett.

You might expect such things among the lower classes in Britain, where gin flows like mothers’ milk. But it just shows to what depths English society has sunk…when the best a Yankee hussy can do is the Home Secretary. Isabelle Patterson hooked Napoleon’s own brother. Wallis Simpson snatched the biggest prize of all – the king himself. But everything seems to be going downhill – even harlotry.

We only mention it because we are cut off from the financial news and have to make do with disgraceful affairs in other sectors.

All we have to go on for financial information is a copy of The Economist that we picked up at the Gare du Nord before boarding the train to London.

"The most striking thing since the election," says the magazine, "has been the dollar’s slide."

Well, tell us something we didn’t know.

The dollar’s been going down ever since George Bush II came to office. Then, it would cost you less than 90 cents to buy a euro. Today, it will cost more than $1.30

But no one seems especially worried about it.

"Can this continue?" asks The Economist.

"Economic theory suggests not," it answers, with rather classic understatement.

As we’ve been saying for many months, at some point the circumstances that brought about the dollar’s decline must become the circumstances that cause people do the opposite of what they’ve been doing. Instead of buying dollar assets, they will sell them. Instead of increasing consumer spending, consumers will have to cut back. Instead of expanding credit, they will contract it. Instead of boosting stock, bond and house prices, they will collapse them.

But we’ve been saying this for a long time and have probably spent all our credibility long ago. It would be nice to see it come to pass, if only so we’d have some pocket change again…and another reputation to lose.

When it will happen is anyone’s guess. The Economist, wisely, keeps quiet.

But no matter what happens, it is not likely to be as bad as Zimbabwe, one of the few countries with a weaker currency than the U.S. Zimbabwe was almost a paradise when it was still called Rhodesia and still ruled by British colonials. Now, under corrupt democrats, it is such a hellhole that as many as one in six people has left or died. A used tractor cost 800,000 Zimbabwean dollars two years ago. The same machine would cost more than Z$70 million today. No one bothers to collect the trash anymore in Bulawayo…life expectancy has been cut nearly in half, from 64 in 1990, down to 34 today…and social security pensions have fallen to just $2 per month.

The U.S. currency is not expected to fall as much – nor to cause as much misery. But you never know.


Eric Fry, reporting from Wall Street…

"Lucky for us, we individual investors don’t posses hundreds of billions of dollars, like the Bank of Japan or Bill Gates. How on earth would we sell them all? And lucky for us, we may exchange the dollars we DO have for assets of more enduring value…without roiling the dollar exchange rate."


Bill Bonner, back in London:

*** An FBI manhunt has ended in a little town in Shropshire. Wanted were an American couple, Howard Welsh and Lee Hope Thrasher, who had gone on the run in Britain after fleecing $29 million from Americans hoping to get something for nothing. The something they hoped for were gains as high as 12% per month in a Ponzi scheme the couple had set up. How was it possible to make so much? Well, it wasn’t. But when you could put your money in an account called "Dominion of Heaven on Planet Earth," you have to expect to get something out of the ordinary. What investors got was not so unusual, under the circumstances, but something far different from what they expected. They got ripped off.

The scamsters were accused of taking money from as many as 1,000 investors, one of whom lost $8 million. Well, dear reader, you’ve heard the old expression, "a fool and his money are soon parted." What puzzles us is how the investor and his money ever got together in the first place.

*** The population of Europe is expected to fall by 100 million people in 50 years, says a headline in today’s TIMES. Without immigration, the drop would be even greater – 139 million. The paper tells the story with alarm. We, on the other hand, look forward to empty parking spaces.

*** Americans are doing the smart thing by borrowing as much as they can at today’s low interest rates, says Anatole Kaletsky in the TIMES: "President Bush is doing U.S. citizens a favor by borrowing as much as he can at just 4% from gullible foreign investors and then devaluing the dollar…" Hmmmm…

The Daily Reckoning