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Safeguarding one's access to vital
natural resources such as oil and gas is crucial
to nation's long-term prosperity. But telling
soldiers and their families that they are fighting
in part to protect against the threat of $10.00/gallon
gasoline is not exactly good for morale or public
relations. Protestors chanting "No blood
for oil" would have a field day if the White
House press secretary made an announcement such
as, "Good news, the Baghdad Museum has been
looted, 1,000 American troops have been killed,
but we have secured 90% of Basra's oil fields."
Skeptics would tell you that part of the reason
why American and NATO troops remain in Afghanistan
after overthrowing the terrorist-harboring Taliban
is to get a foothold in the game for Caspian Sea
oil. Whether or not you believe these skeptics,
it is a fact that multinational energy companies
have developed a renewed interest in building
gas and oil pipelines linking the Caspian region
with the lucrative international market of the
Arabian Sea. This activity has worried the three
large powers in the Central Asian region: Iran,
Russia and China. All three of these countries
have indirectly (or sometimes directly) supported
America's enemies over the last three years with
either military or financial assistance. While
Iran and Russia have long supplied America's adversaries
with arms, the fact that China has stepped up
its efforts in this arena marks a disturbing trend.
China, which President Bush has
called a "strategic competitor", will
see its demand for industrial energy more than
double over the next 15 years. China's electricity
demand has doubled within the last decade and
is likely to quadruple by 2019. Could China's
recent shenanigans in the region be a small baby
step for an energy-hungry power getting restless?
As can be seen from the chart above, China was
a net exporter of oil until about ten years ago.
Today, China is the world's #3 consumer of oil
behind the United States and Japan. Given its
population and need for infrastructure, we can
confidently predict that China will sooner or
later overtake both nations and become the world's
leading importer of oil, bringing it into conflict
with the developed world.
China has already invested billions of dollars
into pipeline projects in Central Asia and the
Middle East and has strengthened its relationships
with governments from energy-rich states. For
example, China is Sudan's largest trading partner
and the most important foreign investor in Sudan's
oil industry. China National Petroleum Corporation
has a 40% stake in the international consortium
extracting oil in Sudan, and it is constructing
refineries and pipelines, enabling Sudan to benefit
from oil export revenue over the last five years.
Recently, China deployed thousands of troops to
Southern Sudan to protect its pipeline interests
while Western oil companies have been withdrawing
from the war-torn African nation. Sudan has been
accused of using its oil revenue to purchase arms
for its wars against its black African population
in its Darfur region. In a classic example of
realpolitik, China has threatened to veto a resolution
that would consider U.N. sanctions against Sudan's
oil industry if Khartoum does not stop the genocide.
Could Chinese PLA troops in Sudan be a first step
in China's growing expansionism throughout Eurasia?
Like Britain a century ago, the United States
has greatly over-borrowed in an effort to control
access to the world's energy supply and at the
same keep its domestic economy firing on all cylinders.
As competition for diminishing oil resources threatens
U.S. dollar hegemony over world oil transactions,
expect to see increased Chinese political and
military presence in the Middle East. The presence
of Chinese PLA troops in Sudan, in our opinion,
marks the middle kingdom's entrance into the great
game. China's next move could come in the form
of massive dollar devaluation when they decide
to unload their supply of accumulated greenbacks.
China just recently released six billion of those
greenbacks for its purchase of Noranda Mining
- Canada's biggest mining company. Keep your eyes
open for stepped-up greenback dumping by China
in exchange for natural resources such as oil-bearing
properties or perhaps more mines. We predict that
in the near future, Saudi princes will decide
to denominate some of their oil transactions in
Yuan (or at least something other than dollars)
and invest their profits into shares of China
Mobile or PetroChina instead of Citigroup.
October 19, 2004
Todd Stein & Steven McIntyre
Texas Hedge Report
Todd Stein & Steven McIntyre are internationally
known analysts and editors of The Texas Hedge
Report, a market newsletter that highlights under
and overvalued securities in the equity, bond,
currency, and commodity markets
For more information, go to http://www.texashedge.com
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