Tuesday, April 19, 2005

china and the price of energy

Crude oil is now around $50/barrel. There is debate over whether this is a very high price, a low price, or fairly valued. IMO, the reason the price is not high is because of Chinese purchasing. I keep reading that the Chinese have become very aggressive energy bidders in the past few years. Americans seem to react to this shift in trading power with a mixture of outrage, surprise, and disbelief. A few weeks ago, after a day in which oil had risen substantially, NPR interviewd an oil futures trader. He says, with frustration, that oil is way overpriced because Chinese buyers are willing to pay more than market rates for oil. I’m like what planet is he on? Hasn’t he heard of the free market? This is a new era, and the United States will no longer get to pick which oil fields it would like, what grade of oil at what price, etc. China now has the cash to outbid us for the oil that both countries desperately need. This will be even more true for natural gas, which requires gargantuan capitol investments that dwarf even the huge sums spent developing oil fields (mainly because gas is vastly more expensive to transport than oil). Because the balance of trade favors China, they will be more easily able to finance natural gas projects. China will get much of the gas that American utility companies would like to use to generate our electriciy from. I often read that Canada is making long term energy deals with China. This is especially worrisome to America. america has taken it for granted that all the oil in North America would certainly go into our own SUVs. With Canada right on our border, and having a surplus of gas and oil, shouldn't that surplus naturally flow straight down to the United Stares? But it seems that Canadian companies can now make more money selling to the Chinese, even though the gas and oil has to be shipped across the Pacific ocean. So, I don’t think energy prices can drop much.

The biggest question with this scenario is what would happen in a global resession, or depression, one of which is probably going to occur in the next ten years. It seems that China generates most of its wealth and grows its economy by selling manufactured goods to America. But US consumers would not buy as many goods in a recession or depression. At some point China’s rapid exponential growth will have to slow. All rapidly growing economies experience booms and busts. China could have history’s largest bust.

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