China President Hu Jintao is in Washington today to chat with President Bush about matters large and small. Firmly entrenched in the former category is oil, the mother of all strategic topics for the countries at the top of the world’s energy feeding chain.
China, as everyone on the planet surely knows, has a large and growing thirst for crude. That thirst arguably will be quenched only by way of a dramatic shakeup in the market for the world’s most valuable commodity and more than a little turmoil on the world’s geopolitical and military stages. The Bush White House expects no less. Reflecting that sentiment is the observation (warning?) to China that it can’t stay on a “peaceful path while holding on to old ways of thinking and acting that exacerbate concerns throughout the region and the world,” according to the National Security Report issued last month by the Bush administration. The “old ways” are defined in the report as follows:
* Continuing China’s military expansion in a non-transparent way;
* Expanding trade, but acting as if they can somehow “lock up” energy supplies around the world or seek to direct markets rather than opening them up – as if they can follow a mercantilism borrowed from a discredited era; and
* Supporting resource-rich countries without regard to the misrule at home or misbehavior abroad of those regimes.
Repricing oil upward to reflect such tensions, in other words, is the order of the day. The 21st century’s version of the Great Game, and it’s being played out around the world. One recent skirmish unfolds as we speak in Central Asia, the site of the original Great Game.
Given this backdrop, it’s not exactly shocking to learn that the price of crude was trading above $72 a barrel this morning in New York futures trading–yet another all-time high. That’s a fitting greeting for President Hu’s arrival in Washington. The increase in oil consumption in the Middle Kingdom far exceeds the pace of domestic production, as the chart below shows. That’s a big deal for the world’s fastest-growing major economy, which is second only to the United States in petroleum consumption.
As China’s wealth grows, so too will its oil demand. Among the key factors powering that upward demand will be an explosion in the number cars on the road. From Beijing to Shanghai, the appetite for personal mobility has taken wing, in line with the elevation of wealth. Those who can are buying cars, and there are more who can with each passing year in China.
As a new report on China and oil from the Congressional Budget Office relates, the country’s economy has been growing at sizzling 9.2% pace (based on real GDP) since 1990, but the per capita incomes of urban households has been advancing even faster, rising by 13.3%. No wonder that the number of licensed drivers in China exploded by 90 million during 1990-2003. That’s something on the order of another California population coming on line with new drivers every five years.
The Chinese government is responding by spending some $29 billion a year on new highways. The population is responding by buying cars for the first time and doing what any self-respecting car owner does: drive.
Annual sales of new cars in China were 4.3 million in 2003. That’s extraordinary, considering that the country’s entire stock of cars was roughly four million in 1995. More recently, that amount of autos is being added every year–and those stats are three years old!
It’s a safe bet that China’s top priority is keeping its increasingly wealthy and arguably restive population happy. Oil is an integral part of the political calculus. As a result, a major focus of China’s strategy on the world stage for the foreseeable future will revolve around the acquisition of oil, which is to say: importing ever larger quantities of the stuff to slake domestic demand.
The United States fears the trend, in part because America has intimate knowledge of the trend. China is roughly at a similar moment in its energy history as the U.S. was in the 1950s. China today, like American then, was on the cusp of a dramatic rise in the use of automobiles, a surge fueled by robust economic growth and expanding wealth. One of the differences between then and now is that in the 1950s the U.S. didn’t have a large and increasingly thirsty competitor for oil.
Another difference: from the vantage of the 1950s, many of the world’s biggest oil fields had yet to be discovered or were still being developed to materially increase output. Today, there are two large economies on the world stage vying to secure oil supplies. But there’s a growing consensus that the low-hanging fruit of super big oil-field discoveries are behind us.
What does it all mean? The future is always debatable, of course, although the present is sprinkled with clues. The front line for guesses starts with the futures market for oil.