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

As Sunday-evening after hours trading resumed on NYMEX, the near-term crude oil futures contract traded as high as US$70.80 per barrel, up US$4.67, or 7.1%, versus Friday's settle of US$66.13.  (The near-term unleaded gasoline futures contact has traded as high US$2.15 per gallon, up US$0.2231, or 11.6%, versus the Friday settle of US$1.9269.)

Energy prices are being driven up currently on uncertainties regarding the impact that Hurricane Katrina (category five) might be having on Gulf of Mexico-based oil drilling rigs combined with fears that the Hurricane will make landfall in the area of the Port of Southern Louisiana (PSL), a region critical to the US economy in general and to the US energy industry in particular.  Here are the details.

PSL stretches 54 miles along the lower Mississippi River.

PSL is the largest tonnage port district in the Western Hemisphere. It ranks as the fourth largest port in the world.

PSL handles an estimated 15.0% of all US exports.

Crude oil imports handled by PSL in 2004 were up an estimated 15.0% to 49.9 million tons.  PSL's crude oil imports increased a powerful 27.0% during Q1:05 to 16.5 million tons.

As of late Sunday evening, London-based Reuters reports that more than 40.0% of US Gulf of Mexico crude oil production is estimated by industry sources to be closed down as a result of Katrina.  Our review of individual company press releases supports this estimate.

Further, reports Reuters, estimates of Katrina's impact on Gulf production could rise significantly as data becomes more complete on Monday.

In general, the Gulf of Mexico region is estimated by industry sources to account for approximately 25.0% of US crude oil production and roughly 2.0% of global crude oil production. 

In our 2005.04.14 "Crisis on the China Rim..." (CCR) analysis, Laguna Research Partners indicated that projections calling for crude oil prices of US$100 per barrel within three years appeared reasonable.  In the meantime, though, even when we discount transient factors such as weekly swings in US energy inventory data or aberrant weather patterns that have caused "spikes" in crude oil prices, the upward bias of crude oil prices has exceeded our expectations.

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

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