Profiting from China's Oil Imports

Brian Hicks

Written By Brian Hicks

Posted August 14, 2013

China was once called the Middle Kingdom because its rulers and inhabitants believed China was the center of the universe. In a way, the Chinese who lived thousands of years ago would become right.

China is gaining so much influence abroad, the semi-Communist/state capitalist country is becoming the center of trade, energy consumption, and geo-politics.

russia china shakeLet’s face it; U.S. influence abroad is waning, and China is becoming king. In one form or another, China has gained a foothold on virtually every continent.

The Chinese has even gained leverage over the U.S., since they own most of our debt.

And now China is set to surpass the U.S. in net oil imports by October of this year.

Chinese demand for oil is expected to increase 13 percent to 11 million barrels per day from 2011 to 2014. Chinese production itself will only increase 6 percent in that time. By the same token, total U.S. production will rise by 28 percent to 13 million barrels per day between 2011 and 2014, the EIA reported.

The shale oil boom in North America can be credited to lowering import demand in the U.S., along with decreased gasoline consumption

We knew the surging of Chinese imports was going to happen, and the signs were there.

At the moment, China has no choice but to rely on more imports from the Middle East to feed its ever-evolving economy and auto sector. But the fact that China is becoming more reliant on oil imports is not good for its economy in the long-haul.

For one thing, the Middle East has been plagued with social and political upheaval in form of the Arab Spring, political instability, and outright civil war – factors which could cause (and have caused) drastic spikes in energy prices.

China is becoming powerful, but it is still an emerging economy. Middle East oil only makes the nation more vulnerable to rising energy prices – something that could hurt China’s growing middle class in the coming years.

Increasing domestic production in China be top-priority and a long-term goal.

There may come a time when China will develop its own shale resources, and various Chinese companies have been looking into commercial domestic production.

China still has obstacles to overcome, such as water shortages and lagging drilling technology, but if it is going to reach long-term vitality, it must eventually follow the U.S. model of production.

World Energy Makeup

Energy-wise, China and the U.S. will no longer compete head to head because the two nations are in different leagues.

But geo-politically speaking, China will be more dependent on Middle East stability than before.

We’re already seeing China extend its vast tentacles across the Middle East, Latin America, and into Russia when it comes to reaping oil resources.

We heard the no-blood-for-oil protests when it came to the Iraq war, but the primary nation that has benefited from the removal of Saddam Hussein has been China.

China National Petroleum Corporation and PetroChina (NYSE: PTR) have gained a solid position in Iraq, managing to curry favor with the al-Maliki regime.

China will eventually step in to fill the void as U.S. oil demand decreases, which is good news for OPEC to an extent.

But we must also remember that the Chinese economy has not expanded as fast as analysts had hoped. And while China is a behemoth in industrial and economic might, Wall Street, economists, and oil companies are expecting a little too much from the Middle Kingdom in such a short time frame.

I would still give the edge to the U.S., as the nation is on the right track in decreasing foreign dependence.

According to projections from the International Energy Agency, the U.S. is set to become fully independent of OPEC imports by 2030. There is no guarantee this will happen, but the U.S. is in the best position it’s ever been to do so.

And there is even talk of the U.S. becoming an oil-exporting nation, which may be necessary in order to relieve future supply gluts.

We can very well see a scenario where the U.S. could one day export oil to China.

Exports to China

Russian state company Rosneft (MM: ROSN) recently secured a $270 billion crude-export deal – making Russia the largest exporter of oil to China. If you’re on the prowl for companies that ship oil to China, look no further than Rosneft and other Russian companies as they gear up to ship more energy commodities to Asia.

In Africa, China’s trade and business ties are also apparent, with one-third of Chinese imports coming from such nations as Angola, Nigeria, Gabon, Kenya, and Liberia, among others.

China has also done business with nations the U.S. is not particularly fond of, including Venezuela, Sudan, and Iran.

In the Middle East, Iraq will be a primary contributor of oil to China, with Royal Dutch Shell (NYSE: RDS-A) acting as a major exporter from the Majnoon oil field in southern Iraq. However, Shell has not done the best when it comes to jumping on the shale oil bandwagon, placing too much focus on natural gas. We’ll see if Shell can make a turnaround in future quarters by exporting more oil to China.

Kuwait has also been a primary exporter to China, accounting for 13 percent of imports in the month of June.

In Mexico, state-run oil company Pemex will increase oil exports to China by 30,000 bpd. Mexico may not be the best when it comes to infrastructure and drilling technology, but the nation has placed a strong focus on crude oil. Mexico has also been exploring proposals to open Pemex to foreign partnerships and the sharing of profits.

Whether state-run or independent, oil companies around the world are lining up to do business with China.

If you’re still banking on oil, then listen to this.

Renewable and nuclear energy will have the most excitement and growth, but oil will still account for 80 percent of energy consumption by 2040.

Energy consumption is expected to grow 56 percent by 2040, and much of this can be attributed to developing economies like China.

To get the most out of your oil investments, follow the shale oil boom in North America and any company that is exporting oil to China or fostering oil deals with the Middle Kingdom.


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