Peak Oil: China vs. USA

 |  Includes: BP, COP, CVX, DO, OXY, PBR, RIG, SLB, STO, XOM
by: Michael Fitzsimmons
Anyone catch Steven Kopits’ article in Barron’s this weekend titled “A Global Portrait of Peak Oil”? In it, Kopits echoes thoughts I have written recently on how badly the US is being outmaneuvered by China with respect to energy policy. While US politicians and policymakers continue to hold meetings in Washington, DC in an attempt to solve a commodity problem (oil) with financial tom-foolery (it simply will not work), let’s look at what China has been up to:
  • China lent Petrobras (NYSE:PBR) $10 billion to fund the company’s offshore exploration in Brazil’s pre-salt oil fields. In return, China locks up long term oil deliveries from Petrobras amounting to 160,000 barrels per day.
  • China lent money to Russian oil companies Rosneft ($15 billion) and Transneft ($10 billion) in return for oil supplies and a new pipeline spur to China. For China, the agreement locks up 15 million tons of oil (300,000 bpd) every year for the next 20 years.
  • China and Venezuela have signed agreements and invested in a $12 billion fund to finance and develop oil projects, infrastructure and agriculture with a goal to boost Venezuelan oil exports to China from 330,000 bpd to 1 million bpd by 2015.
In each case, Chinese President Jintao met in person with the leaders of Russia, Brazil, and Venezuela to underscore the strategic significance of these deals.
What a contrast to the United States’ “strategy”. Brazil’s President Lula is often vilified on CNBC as being a “socialist and former lathe operator” (the tools on CNBC apparently dislike anyone who actually produces something tangible). With respect to Russia, the US supports a puppet on Russia’s Georgian underbelly and threatens to place a “missile shield” on Russia’s border. No foreign leader in the world has been as vilified in the US press like Venezuelan President Hugo Chavez.
Now, one could argue the reasons and merits behind these US foreign policy initiatives and US media reporting. That said, it cannot be argued which policy has been more successful in locking up future oil supplies: China is winning. For a country that imports 65% of its oil, this is certainly bad news for the future of the United States. The US government uses money it doesn’t have to reward financial fraudsters with huge bonuses while China uses money it does have to buy oil. You tell me – which country is thinking logically and strategically about the future?
Despite US oil inventories at near 20-year highs and an economic contraction that can at best be described as “serious”, oil was recently trading over $50/barrel. Why?
Well, unlike the American people and US politicians and policymakers, oil traders have not forgotten the supply/demand fundamentals that led to $145/barrel oil prices last year. Total US crude oil inventories in March (excluding the SPR) amounted to 359,427,000 barrels (NYSEMKT:EIA). US consumption is currently running a little less than 20,000,000 bpd. So, as impressive as these large inventories are oil traders are well aware that they amount to a mere 20 days of US supply. At the same time, geopolitical risks have not disappeared and even a whisper of positive economic data causes oil prices to rise rapidly.
The onset of a summer driving season in which economically stressed Americans will be trading in their European vacations and world travel plans for trips in the family car could rapidly eat into US gasoline stocks. Does any rational person actually believe that low oil prices are anything but a temporary short term reaction to the extreme energy demand destruction caused by the current economic turmoil?
I have written so often about peak oil realities and my support for the natural gas transportation solution most of my SeekingAlpha followers must surely be convinced I am OCD. Guilty as charged. In my defense, I simply can’t find anything more important to write about! Until American policymakers address peak oil and our foreign oil addiction with rational policy initiatives, I probably won’t stop. Peak oil is the biggest threat to the American economy, our democracy, and ultimately the freedom of its citizens.
Rather than list all the facts and statistics of peak oil (again), this time I will refer the reader to an excellent peak oil summary sent to me by an old middle school acquaintance (whom I had a big crush on) who recently rediscovered me on Seeking Alpha.

This is a pretty comprehensive summary of the crisis we find ourselves in today. It also clearly shows why current cheap oil and gasoline prices are so dangerous for the United States. Cheap gasoline prevents good energy policy from being enacted.

I was reading an article by Seeking Alpha contributor John Peterson wherein he unveiled his “family reunion test” to evaluate cleantech investments. He boils his analysis down to a simple question: “How many of the people who attended our last family reunion is likely to buy this product or service at today’s price”? I grinned when reading this - it is very similar to my stress test with respect to proposed energy policy solutions to solve America’s peak oil crisis: “Will this policy allow me to pull my small Teardrop trailer to Colorado every summer for the rest of my life so that I can travel up and down the mountains and fly fish for trout in my favorite wilderness area waters”?
While America’s energy crisis cannot rely on any single solution, natural gas transportation consistently passes my stress test while most other proposals fail to do so. Does this indicate a bad stress test or a bad policy? You decide.
Rather than regurgitate the facts and statistics of peak oil, today I want to discuss the lack of an American energy policy. I was extremely critical of the Bush administration’s lack of a comprehensive energy policy and strongly supported Obama for President. To his credit, Obama has made some important changes in both tone and action by increasing support and funding for wind, solar and electric grid infrastructures. However, with respect to the vital issue of reducing foreign oil imports, Obama has been an extreme disappointment. He seldom misses an opportunity to mention “clean coal”. This is an oxymoron. Simply mining the coal degrades the environment. Burning coal emits twice the CO2 of natural gas. More importantly, coal’s particulate emissions are very toxic whereas natural gas has 0 (zero) particulate emissions (natural gas, or methane, is simply CH4). Anyone who doubts the hazards of burning coal for electricity simply needs to Google “Kingston coal spill” and read about one of the worst environmental disasters in the history of the US. This didn’t happen in the 1960’s or 70s, this happened in December of last year. “Clean coal”?
Pah-leeeeze. I thought Obama would be a bigger man than to support something like coal simply because his home state of Illinois is a major producer of coal. Apparently this is not the case. At the same time, has anyone heard Obama even utter the words “natural gas transportation”? How can one explain such behavior and policy?
I still cannot fathom why oil company executives have not come out in strong support for natural gas transportation. Not one executive of a major oil company has publicly and strongly supported Boone Pickens’ efforts for robust natural gas transportation policies. However, it’s not because they aren’t aware or don’t acknowledge peak oil. At last year’s World Economic Forum in Davos, ConocoPhillips CEO Jim Mulva said that worldwide oil demand will quite likely outstrip worldwide oil supply by 2015. Executives at Royal Dutch Shell and Amerada Hess have made similar statements. ConocoPhillip’s is one of the top 3 producers of US natural gas, so why hasn’t Mulva come out and fully embraced US natural gas transportation policies? Following COP’s purchase of Burlington Resources and its huge US natural gas reserves, and considering that huge shale supplies combined with an economic contraction have pushed natural gas prices below $4 on the NYMEX, how can one explain Mulva’s silence on natural gas transportation policies?
Meanwhile, Conoco and BP are apparently going full steam ahead with the Denali natural gas pipeline to bring Alaskan natural gas to the lower-48. Wouldn’t it seem logical that COP and BP executives would be pounding the table to support natural gas transportation in the US in order to insure demand and price support for their investments and their product? Yes, of course these companies have large investments in oil exploration and gasoline refining, however, if they really believe worldwide oil supply won’t keep up with worldwide oil demand by 2015, they surely must understand the dire economic and social implications for the US, a country which uses 25% of world’s oil supply and imports 65% of it.
I mean, seriously, these men may well put profits ahead of country, but don’t these oil executives have children and friends living in the US? Do they have enough money to protect themselves in fortress behind barbed wire and security systems? What if they just want to go out and buy a pizza? Or, do they simply have an “escape plan” when the peak oil crisis sinks the US into chaos? If so, someone please tell me - where do they plan to move? Is it rational to think that the US with its huge military machine will go quietly into the night as we run out of oil to fuel our economy and our social institutions?
As I wrote in my last SeekingAlpha article, HR 1835 – The NAT GAS Act of 2009, was introduced on the floor of the House last week. It is exactly what the US needs in order to strategically counter Chinese moves to lock up worldwide oil supplies. This is a bipartisan bill and no, its not just Oklahomans and Texans! There are representatives from Colorado, Georgia, California, New York, Idaho, Hawaii and Florida (among other states) supporting and co-sponsoring this bill. Don’t wait for energy executives, Obama, auto manufacturers, or natural gas utility executives to place ads on TV supporting this bill – although they should be! Write a letter to Obama - demand that he not only support HR 1835, but accelerate its passage through committee to his signing it into law. You might also advise Obama to stop his idiotic support for “clean coal”.
The US’s 2.1 million mile natural gas pipeline grid is our country’s most strategic weapon in the war on peak oil and foreign oil imports. The grid is connected to every major metropolitan area and to 63,000,000 homes where over 100,000,000 cars and trucks could be refueled every night while their owners sleep. It can easily be supplied with America’s most abundant, clean, and cheap fuel: natural gas.
The US is bankrupt, so we can’t go around the world purchasing oil reserves like China is doing. So, we have a choice – we can either:
a) sink into to economic ruin or
b) solve our energy crisis using the only US fuel that is abundant, cheap and clean: natural gas
If energy executives are correct that worldwide oil supply won’t meet worldwide oil demand by 2015, we have no time to waste.
I have worked very hard over the past 5 years or so on developing my own energy policy. I tried (in vain) to get mainstream US financial media to publish it.

Despite the fact that I started this years ago when oil was about the same price it is today before moving to $145/barrel, and despite the wealth destruction of Americans invested in US equities, and despite the economic turmoil we find ourselves in today, not one financial media outlet (WSJ, Barron’s, Business Week, etc) published this energy policy. Sometimes I get the feeling there is a concerted effort by American policymakers, politicians, and media to bring the US middle class to its knees. They are succeeding.
From an investment perspective, it is clear reduced oil company E&P budgets combined with oil and gas reservoir depletion rates, are setting the stage for yet another peak oil price spike. It is quite likely the next spike will make 2008’s look like child’s play. There are a plethora of investment opportunities which will benefit from this peak oil scenario (in no particular order): ExxonMobil (NYSE:XOM), ConocoPhillips (NYSE:COP), Chevron (NYSE:CVX), Schlumberger (NYSE:SLB), Petrobras (PBR), StatOil (NYSE:STO), Sasol (NYSE:SSL), Occidental Petroleum (NYSE:OXY), British Petroleum (NYSE:BP), Transocean (NYSE:RIG), and Diamond Offshore (NYSE:DO). The largest price appreciation could well be seen by the producers off-shore deep-drilling equipment. Any or all of these stocks should be placed on your “watchlist” and bought on price weakness. There have been several opportunities over the past few months, and sure to be more in the near future, when each of these stocks have fallen to extremely low valuations.
Be ready at the next opportunity to jump in.
Full disclosure: the author owns STO, PBR, and COP.