Crisis on the China Rim: An Economic, Crude Oil, and Military Analysis

"There is a crisis rising on the China Rim, a crisis made of economic imbalances, energy insecurities, ancient hatreds, and unsettled scores. The catalyst for this crisis is success itself, the success of the People’s Republic of China in its de facto rejection of a failed experiment in communism and its rapid transformation into a thriving market economy. The inseparable companion of this success, though, is an insatiable hunger and thirst for precious resources... most important among these, crude oil."

2005.04.14 | 85 pages | download

In our 2005.04.14 "Crisis on the China Rim..." (CCR) analysis, Laguna Research Partners we discussed the importance of both China and India to the on-going surge in energy demand in Asia.   Here's an excerpt from page 2 of CCR:

"The simultaneous economic rise of China and India will have a huge impact on worldwide crude oil markets.  Specifically, an increase of only "one barrel" in per capita crude oil consumption in China and India combined will boost annual worldwide consumption by 2.4 billion barrels, or 8.6%.   This incremental demand, we feel, is likely to provide considerable support for a sustained increase in crude oil prices.  Our calculations indicate that, as of mid-2004, China and India had a combined population of 2,363,918,231 and average per capita crude oil consumption of 1.2 barrels, just 17.4% of the world per capita consumption level of 4.3 barrels annually.  This also compares with annual per capita consumption of 25.4 barrels in the US, 15.9 barrels in Japan, and 10.3 barrels in the UK."

In addition to a sharp expansion in their current energy consumption, both China and India are are simultaneously filling their newly-created Strategic Petroleum Reserves.  This, we expect, will add further upward pressure to world oil prices.

In an excellent article in yesterday's Oil & Gas Journal, OGJ Editors updated readers on China's current SPR plans.  Here are several excerpts from that article:

"China's first storage base in Ningbo (Zhenhai), with a capacity of 29 million bbl of crude oil, is to be complete in August and hold crude oil before yearend [2005].

"At current crude prices, the Chinese government remains cautious about filling the Ningbo base storage.  Chinese government officials expect other storage bases in Dalian, Zhoushan, and Quingdao to be completed by 2007.

"The four bases together will represent total storage capacity of 102 million bbl of crude, representing about 40 days of oil imports.

"The [Chinese] government has said it plans to increase its strategic storage capacity to 55 days of imports by 2015 and 90 days by 2020."

In India, meanwhile, a specially-created oil ministry panel strongly recommended in a statement issued yesterday, that the Indian government not only accelerate its efforts to search for foreign petroleum assets, but also make plans for a larger Indian SPR than had been originally envisioned.  Here are some of the relevant details:

India imports approximately 70.0% of the crude oil that it consumes.

The blue ribbon panel was established in 2004 in response to increased energy security competition between China and India.

The Indian government expects that domestic oil demand will grow at an annual rate of 4.0% to 5.0% during the next 20 years, but no significant Indian oil discovery has been made in recent years.

The panel recommended that India establish an SPR containing 10 million tons (73.0 million barrels) of crude oil.

The Indian government had already approved the construction of a five million ton (36.5 million barrel) SPR, but that project has yet to be implemented.  This would equate to approximately 15 days of domestic consumption.

As a matter of perspective, the US SPR holds nearly 700.0 million barrels.   According to the US Department of Energy, the US currently consumes an estimated 20.5 to 20.9 million barrels of crude oil daily, implying that the US SPR holds the equivalent of an estimated 33 to 34 days of US domestic consumption.  Energy legislation currently being considered by the US Congress calls for SPR capacity to be expanded to one billion barrels, or the rough equivalent of 48 to 49 days of consumption.  Such an expansion, in addition to the SPR build-ups planned by China and India, would apply further upward pressure to global crude oil prices.

Posted by:
Kevin B. Skislock
Partner and CEO
Laguna Research Partners
[bio] [disclaimer]

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