China, Oil and Money

Here is a part of a financial newsletter that deals with oil and China,
just to give you a different perspective regarding the oil crisis. The
world authorities know that we are in some rather perilous times,
although they have not let the average person on the street in on the
situation.

What is the Chinese saying? (proverb?, curse?): May you live in
interesting times.

We do.

I guess it is good to be young and to be oblivious to these things.

AK

Financial newsletter article about China:

We have been considering China and its emerging role in the world in
these updates for quite sometime now, and have come to the conclusion
that from the perspective of The West nothing good will come of it.
Clearly we are not alone in these fears and the Saudis are also hedging
their bets. We must thank Lynn for making both of the following articles
available for us to share with our readership. They are

http://english.peopledaily.com.cn/print20040206_134117.html

and

http://www.dailystar.com.lb/opinion/07_02_04_b.asp

The former reference is, of all things, the People's Daily from Peking,
and the latter is a Lebanese newspaper out of Beirut. The Chinese tell
us, quite frankly and with remarkable clarity, what they are looking at
doing with the world's oil supplies through their exploration company
Sinopec, and the Lebanese (from their position as the intelligence
crossroads of the Middle East) tell us how the Saudis are looking at
things.

 
China seems to be unfolding its wings throughout the world. They have
their eye on massive industrial expansion and to do this they need oil.
This is clear. They know it; Washington obviously is concerned; and
Peking has been aware of its needs for sometime. We have seen comments
from Washington that China cannot keep going at the pace that they have
been if they do not want to risk a bubble and a subsequent implosion. We
have also heard vague stories that China cannot keep spending on raw
materials as they have been or else they will run out of money. The past
weekend saw the US patience with China continue to wear thin as the G-7
meeting in Florida (see elsewhere in this letter) saw a call for China
to allow its currency to appreciate. The fact that China has rebuffed
the US on numerous occasions on this matter seems not to have penetrated
Washington's collective consciousness. However, Washington is now
becoming concerned about the grand objectives of the Chinese government.

The above cited articles make this quite clear. The Lebanese story makes
reference to some oil and gas leases that were put up for auction by the
Saudis quite recently. Russia, China, and Europe won them all and the
American companies were shut out. This is a direct message to Washington
that henceforth the Saudis will not be American lapdogs, but will decide
what they want to do in their own interests. Their de facto king, Prince
Abdullah, has visited Moscow and signed several agreements with the
Russians. China (through Sinopec and other agencies) has been talking
with Riyadh about bi-lateral contracts to supply oil to China. Europe
has a great interest in obtaining the Saudis consent to use, in some
fashion, the Euro as a pricing mechanism for its crude oil.

What is happening to this area of the world then? The Chinese (in their
above article) are referring to a Pentagon report that if Saudi Arabia
and China "got close" it would affect the National Security of the
United States. The translation of this means that the US will simply not
permit what it views as its own backyard to be sullied by forces that
are not under its control. The US apparently is trying a policy of
dissuasion to get the Chinese (and we can assume that this policy is
responsible behind the scenes for the "China is going broke" idea as
well as the G-7 communiqué over the weekend) out of the oil business. It
seems that the US has tried to dissuade Sinopec from drilling in Iran.
The Chairman of Sinopec, in an uncharacteristically blunt reply, said
that "Sinopec pays no attention to the US request".
 

The Chinese are masters of the art of "face" and being polite and
diplomatic at all times. For this sort of reply to be made to a US
"request" (and to be reported as such in a Chinese newspaper of record)
tells us that the Chinese have lost a great deal of respect for the US.
The hidden message (using the opaque rules of "face") is that China
doesn't really worry about what the US thinks any more, and as such they
have no interest in leaving a possible face saving "out" for the US
State Department. This is a serious development in our view. The Saudis
have also realised this and are hedging their bets.

No more will the Saudis be content with doing what Washington wants,
either in the functioning of their society or in the pricing of their
only real asset: oil. They smell a possible change in world power coming
down the road, and they wish to be in the forefront of this change. They
have witnessed (as have the Chinese and Russians) the appalling
performance of the US military command structure in Iraq, and may
realise that the days of unlimited American military protection for
their royal family is rapidly drawing to an end. They may also be
considering that America may be looking to have one final military spasm
over the oil issue and as such they may need protection in one form or
another from someone else. Yes, we are aware that these latter two
statements may appear contradictory, but such is often the case in how
international leaders think and believe. Their head tells them one
thing, and their heart another!
 

What is the bottom line here? Immediately, we think the Saudis (as a
probable proxy for OPEC) are testing the waters as regards oil pricing
and even possible oil availability. Yes, if the Peak Oil crowd is right
(and we count ourselves among their number), then it WILL be a question
of availability. The critical factor for many American companies would
be that they may have to bid for oil in Euros or a basket of currencies
going forward. Currently, if a scramble for supplies develops, the US
has a great advantage in that the Fed can print unlimited amounts of USD
for use by the oil majors through the banking system. If the US has to
compete with Europeans, and the Europeans have the printing presses
available, then the world's leading economy which regards cheap energy
as its birthright may be in severe difficulties.

The US has a policy of containment on Iran. Ever since the days when the
US supported its preferred leader (if I can put it that way!) in Tehran,
and saw him deposed rather forcefully, the Ayatollahs have never been
forgiven. The excuse of the embassy attack in November 1979 has provided
the cover for Iran to be embargoed. A few years ago the Kazakhs wanted
to ship their oil down the Caspian Sea and use the existing pipelines
through Iran to get it to market. Nazarbayev (Kazakhstan's effective
President for Life) was cowed into not doing this, but rather waiting
for a new pipeline across Georgia to Turkey. The US is not happy about
Iran and is now trying to pressure China into following Washington's
lead (the People's Daily headline in the article referred to above). The
Chinese, possibly after having viewed the US military these days
(especially in Iraq), have spurned this threat in favour of getting as
much oil out of the ground as possible.

So, what does Washington do? A reader (Jeff) made us aware of an
excellent story in the Houston Chronicle (effectively Oil Town, USA).
See

http://www.chron.com/cs/CDA/story.hts/editorial/outlook/2390977

Thank you for this Jeff and we note that the central theme of the
article is about a possible cold war between the US and China over oil.
We believe this article represents the continual evolution of
Washington's irritation with China over that country's rather unsubtle
purchasing of oil. Oil is the lifeblood of US policy overseas we feel,
and the fact that Sinopec (presumably with the approval of very high
Chinese authorities) is willing to thumb its nose at Washington shows
that China is willing to push the US. The possibility of "competition"
for this dwindling reserve spells "Cold War" for ourselves, and also the
editorial board at the Houston Chronicle.
 
Do not underestimate the potential for this to wreak havoc on US
financial markets as time goes by. We aren't and neither are the major
players. Where there is smoke there is fire, and oil fires tend to be
very smoky indeed!
 
Best Wishes

Gerry Agnew
Received on Wed Feb 11 12:32:30 2004