China Pays Too Much for Oil in Iraq at $16 a Barrel

How much smarter is China than the US?

Well let’s see - The US has spent $1,000,000,000,000 fighting in Iraq and thousands of our soldiers have died and we have secured ZERO barrels of oil for ourselves. China was not part of the coalition of the willing but, for just $8.8Bn, they are getting 550 Million barrels of oil, almost the size of the US’s entire strategic petroleum reserve, through the purchase of Addax Petroleum, and 20% of those reserves are in Iraq . While Bush filled our reserve up "at any price" and became the single largest buyer of crude in the world, filling our SPR at a rate of 2-3Mb a week at times, China simply waited patiently on the sidelines and is now coming in and buying wholesale. That’s pretty smart!

Of course patience is a renowned virtue of the Chinese and just one year after the US was paying over $100 a barrel to fill our own reserves, China’s Sinopec is doubling the country’s oil reserves with a single purchase at 1/6th the price. Sure they have to pump it ($4 per barrel) and ship it ($3 per barrel) as it’s not local but sometimes you have to travel a little to find bargains.

Earlier this year, Iraqi Oil Minister Hussain al-Shahristani gave approval for foreign companies developing oil fields in the Kurdish region to export their crude directly to international markets. Addax was a beneficiary of the change and has been shipping oil since the start of this month. Addax is one of the largest independent oil producers in West Africa and the Middle East by volume. Aside from Kurdistan, it operates off Nigeria, an area that has seen huge exploration success in recent years. The company produced 136,500 barrels a day on average last year, or about 1.7% of China’s daily consumption.

So why is China still paying too much for oil? Sinopec is paying about $16 a barrel of proven and probable reserves. The average for African and Middle Eastern deals in 2008 — a year with triple-digit crude prices — was under $5 a barrel, according to consultants IHS Herold and Harrison Lovegrove & Co. Throw in Addax’s possible reserves and contingent natural-gas reserves and the multiple drops to just over $7 a barrel of oil equivalent. Your average buyer would never factor in such rosy assumptions. But then Sinopec, 66%-owned by the Chinese government, isn’t your average buyer.

The purchase also demonstrates growing confidence among Chinese energy companies. In the past, they have preferred to strike government-to-government deals and offer loans for oil. Over the past half-year, China has proffered more than $45 billion in loans to Russia, Brazil, Venezuela and Kazakhstan in exchange for long-term crude supplies. Even if they paid retail for the oil ($70 a barrel) China has secured over 1Bn additional barrels of oil for its people through just those loans and this one deal with Addax. The US is still spending $15Bn PER MONTH in Iraq and has secured not one drop of oil for our citizens.

Wouldn’t it make sense for the US to purchase reserves? Why even stop there, even at $15 a barrel, $15Bn a month spent in Iraq could be used to acquire 1Bn barrels of oil per month - that’s 100 days worth of imports (10Mbd) added to US reserves per month. If we buy reserves in Canada, Mexico, South America, Europe, the Mideast, even Russia, we will have ready reserves all around the world to offset any global upheaval. One year of buying oil instead of stomping around Iraq and we will secure 3 years worth of imports in reserves and the US government can set prices by being a swing producer able to tap 10Bn barrels of crude with about 2Mbd of aggregate production capacity.

Wake up America, that’s what China’s doing for their own people - what are we doing to secure our own future, rather than the future of the US oil cartel, who turn around and charge us $70 a barrel and then tell us they need tax breaks to support themselves? America needs to wake up and start using what’s left of its economic might before we become an also-ran in what is becoming the arms race of the 21st century.

This time it’s not guns were fighting for, it’s the proverbial butter - commodities. It’s a war that does not need to be fought on battlefields but it’s a war that China is already winning in the boardrooms as they outmanoevre us in securing prime assets while we are asleep at the wheel. While we argue back and forth about offshore drilling and opening Alaskan reserves, projects that take years to come on-line, China is simply going shopping and picking up proven, existing. productive sources of oil in the global marketplace - what can be more "American" than that?

Comments

[Prudent Man...:]

Drilling in Alaska was proposed in 1994. We would have had it a the latest in 2004 if it wasn't opposed by the Clinton Administration and the Non-Term-Limited Congress. If it wasn't for our corrupt politicians and legal system, where the laws and judges are approved, our standard of living would be improved and our national debt would be massively decreased.

If the voters would quit voting for rock stars rather than leaders we wouldn't be in the situation hat businessmen, not political economists or effete academics, predicted fifteen years ago.

Our elections are the result of Left Wing organizations violating the Election Laws and the beneficiaries are now in power positions they neither deserve nor are effective.

Jun 25 09:35 AM

[JeffDB:]

The Chinese are sitting in the catbird's seat now. We're trillions in debt and borrowing more to buy gas guzzlers so we can crush them. The Chinese are sitting on mounds of cash and realize that all those U.S. bank notes are likely to be dropping like rock in value and already announced their intentions to start divesting themselves of them. Might as well trade them in for something of value before everyone else recognizes that The King Has No Clothes.

seekingalpha.com/artic...

No wonder they're buying up commodities like oil, copper, steel, natural gas and who knows what else, while the gettin's good. At this rate it may not take long for a regime change at the world leadership level.

Jun 25 10:44 AM

[greg weitzner:]

"This time it’s not guns were fighting for, it’s the proverbial butter - commodities"

Clearly that isn't true if we haven't secured any oil. Sorry Michael Moore conspiracy theorists America but America did not go into Iraq for oil, and if America were to do as China is doing it would be seen as exploitive. That is the hypocrisy in it.

Jun 25 11:17 AM

[SSALarry:]

I agree with general thesis the writer presents. As China goes around the world locking up oil and other commodities for their future use, our administration seems bent on tying the hands of our oil companies and over regulating the rest of industry. The idea that green energy will be our savior is laughable, it just isn't possible.

The administration likes to say they are going to create green jobs, but as they are doing that, they seem intent on destroying the oil gas jobs already out there. I am all for development of green/renewable energies, but we will need oil and gas for a long time and I wish the folks in power would realize that.

Jun 25 12:00 PM

[one eye:]

Well put. The Chinese are doing what we should have started doing last November, or at the very least, as soon as the Stimulus Package was passed. Buying and stockpiling the Materials we will use in the 2010 Infrastrucure build.

The Chinese are keeping their own resources while gobbling up as much as they can at depressed prices. Go figure.

Jun 25 12:19 PM

[Smart Dog:]

Don't you forget Iraqi royalties in your equation? Or are they giving away their resources for free?

Jun 25 01:20 PM

[Exporting r...:]

"The US has spent ...", plus 100,000 lives of Iraqi civilians.

Many have said the War in Iraq is all about Iraqi's oil....Hmmm.

Jun 25 01:41 PM

[J. Crighton:]

My two cents:

Before / During the war we were bombarded with the whole: "No War for Cheap Oil" slogan (and a few variations) relentlessly.

Personally, I would simply have said "ok" there will be "No War," so long as you give us "cheap oil." Sound's a bit cynical I know, but economically profitable.

I think maybe the Chinese had the same thought and are picking up some of the fruits of our labor.

Jun 25 02:46 PM

[User 357705:]

China smart. US dumb.

Jun 25 03:07 PM

[Moon Kil Woong:]

The sooner the US gets a viable energy source that can replace oil the better. Our future depends on it unless we enjoy being embroiled in useless Middle East brawls forever.

As for securing more oil reserves. Exxon isn't interested in it so naturally the US government isn't. Exxon has not been replacing their oil reserves they tap every year for the past decade. Maybe they know something we don't like: Oil companies rip off people in controlling the processing of fuel and overcharging for it, not in the pumping of it. The strategic reserve is basically a subsidy for oil keeping prices up even when demand declines (we even added to it when we were paying over $100 per barrel. I guess that price was still too low. Clinton not Bush Jr. was smart enough to stop adding to it when oil prices rose.). If we burned all the oil we have already discovered all the cities bordering the Oceans would be akin to Atlantis. Perhaps the Iraq war was more to pull oil supply off the market more than to secure or increase supply (if it was for the later we failed miserably).

Jun 25 11:02 PM

[mkreisel:]

It's time to get off oil when there is still enough left.

You don't want to wait until you are tapping the last few drops.


As for the global warming debate, I think it's more like the Pascal's Wager:

If it's not true and we don't do anything about it, we don't gain anything either.
But if it's true and we don't do anything about it, we are SCREWED!

Jun 25 11:34 PM

[Tony Petroski:]

It's not that the Chinese are so smart (they are) and the Americans are so dumb. If we were bent on securing commodities around the world (much like the Japanese did prior to WW2) we (I is one of those dumb Americans) would go about it much like the Chinese are even though we don't possess their vaunted patience.

On the subject of patience, Americans give their leaders 4 years and then kick them out ala Jimmy Carter if they don't produce. The Chinese kowtow to their leaders for generations until the skin on their knees gets sore. I like the American way better.

American elites, America haters to the core, admire the Europeans and want oil to be very expensive so that we can build choo-choo trains and sustainable urban areas like the French have. Thus, what appears to be stupid in the obtaining of oil supplies is actually a savvy move and surprisingly long-term in its vision.

I don't think the effort in Iraq was stupid or a waste, and someday, the "practice" learned in taking Baghdad in two weeks against the Iraqi "Saladin" will be good training for taking Peking should it prove necessary.

Jun 26 12:24 AM

[User 357705:]

But they hate us for our freedoms.


On Jun 26 12:24 AM Tony Petroski wrote:

> It's not that the Chinese are so smart (they are) and the Americans
> are so dumb. If we were bent on securing commodities around the
> world (much like the Japanese did prior to WW2) we (I is one of those
> dumb Americans) would go about it much like the Chinese are even
> though we don't possess their vaunted patience.
>
> On the subject of patience, Americans give their leaders 4 years
> and then kick them out ala Jimmy Carter if they don't produce. The
> Chinese kowtow to their leaders for generations until the skin on
> their knees gets sore. I like the American way better.
>
> American elites, America haters to the core, admire the Europeans
> and want oil to be very expensive so that we can build choo-choo
> trains and sustainable urban areas like the French have. Thus, what
> appears to be stupid in the obtaining of oil supplies is actually
> a savvy move and surprisingly long-term in its vision.
>
> I don't think the effort in Iraq was stupid or a waste, and someday,
> the "practice" learned in taking Baghdad in two weeks against the
> Iraqi "Saladin" will be good training for taking Peking should it
> prove necessary.

Jun 26 01:48 AM

[fairguy:]

Wrong. The chinese have been practicing capitalism for decades already. Hong Kong is quite free. China doesn't hate US, they afraid of what freedom can do to their people. It can turn them into vegetables.

US is too occuppied with OJ Simpson, Britney Spears, American Idols, America's Got Talent (lol), Miley Cyrus, Madonna, Lindsay Lohan, Jennifer Lopez, Paris Hilton, Christina Aguilera, Brad Pitt, Justin Timberlake and now Michael Jackson's death and Mark Sanford's sex scandal. It's not hard to out maneuver them when the whole population is only half awake. Look at what freedom had done to your nation's financial health.

On Jun 26 01:48 AM User 357705 wrote:

> But they hate us for our freedoms.

Jun 26 04:34 AM

[User 357705:]

I don't disagree fairguy. I was commenting on Petroski's jingoism and his apparent desire to solve US problems in the tried and true US way - war.


On Jun 26 04:34 AM fairguy wrote:

>
> Wrong. The chinese have been practicing capitalism for decades already.
> Hong Kong is quite free. China doesn't hate US, they afraid of what
> freedom can do to their people. It can turn them into vegetables.
>
>
> US is too occuppied with OJ Simpson, Britney Spears, American Idols,
> America's Got Talent (lol), Miley Cyrus, Madonna, Lindsay Lohan,
> Jennifer Lopez, Paris Hilton, Christina Aguilera, Brad Pitt, Justin
> Timberlake and now Michael Jackson's death and Mark Sanford's sex
> scandal. It's not hard to out maneuver them when the whole population
> is only half awake. Look at what freedom had done to your nation's
> financial health.
>
> On Jun 26 01:48 AM User 357705 wrote:

Jun 26 06:00 AM

[Ferdinand E...:]

Great article from both an energy economics and political point of view. I hope to see more like this.

Let me also mention (for the 1000th time) that I can't imagine anything crazier than for Uncle Sam to play the fool in Iraq and Afghanistan. What's the point in continuing to fight wars that in reality were won years ago.

And Mr Petroski, even General MacArthur understook the mistake of trying to take Peking, and that man didn't know very much at all - which was why, when he went off the deep end, he had to be relieved. Moreover, President Truman said that his only mistake was in not relieving him earlier.

Jun 26 09:17 AM

[kotika98:]

this is hilarious... western oil companies dominate the world non-government owned oil production. Addax itself was not built by the chinese, there are dozens of other western owned oil exploration and production companies, even while China has none. Moreover there is a reason that these companies have been so successful which is that they take calculated risks while the beauraucrats at Petrochina are completely incompetent in this area. If chinese were so smart, they would drill for their own offshore oil in the East and South China sea.

Jun 26 10:37 AM

[Chris Butler_:]

Did you forget that by the word "freedom" we mean free to be zombies? Free to make bad, costly financial mistakes? Free to be greedy?

Say what you want but I'll take freedom and all the errors and social malaise that comes with it ahead of any alternative. Many free people are intelligent, tuned in, and aware. Many made money off of the mistakes of other free people because they saw the consequences of these mistakes coming. After all, I'm free to short the S&P 500.

As far as oil is concerned, had we *more* freedom, we'd be drilling oil on our own land and we'd not be talking about how the Chinese are kicking butt with their acquisitions.


On Jun 26 04:34 AM fairguy wrote:

>
> Wrong. The chinese have been practicing capitalism for decades already.
> Hong Kong is quite free. China doesn't hate US, they afraid of what
> freedom can do to their people. It can turn them into vegetables.
>
>
> US is too occuppied with OJ Simpson, Britney Spears, American Idols,
> America's Got Talent (lol), Miley Cyrus, Madonna, Lindsay Lohan,
> Jennifer Lopez, Paris Hilton, Christina Aguilera, Brad Pitt, Justin
> Timberlake and now Michael Jackson's death and Mark Sanford's sex
> scandal. It's not hard to out maneuver them when the whole population
> is only half awake. Look at what freedom had done to your nation's
> financial health.
>
> On Jun 26 01:48 AM User 357705 wrote:

Jun 26 11:07 AM

[Shale Gas:]

China doesn't own the reserves, Iraq does, and one day a government will come along and take them back and pay them nothing.

Jun 26 11:22 AM

[Jimbo:]

What JeffDB says may be correct but don't forget how the Chinese accumulated all those billions of dollars. Several million chinese lived in dormitories, ate cafeteria food, and worked for slave wages to create the cheap goods they sold to us and the rest of the world.

Jun 26 11:50 AM

[jmark:]

If it's not true and we stupidly spend trillions of dollars on it, then we will have wasted trillions of dollars that could otherwise have been spent productively to do things that really help people, like providing developing countries with clean water, energy, and anti-malaria measures. What the heck would Pascal know about it?


On Jun 25 11:34 PM mkreisel wrote:

> It's time to get off oil when there is still enough left.
>
> You don't want to wait until you are tapping the last few drops.
>
>
>
> As for the global warming debate, I think it's more like the Pascal's
> Wager:
>
> If it's not true and we don't do anything about it, we don't gain
> anything either.
> But if it's true and we don't do anything about it, we are SCREWED!

Jun 26 12:43 PM

[jerrydd:]

Anyone who doesn't think we are in Iraq for oil isn't real smart. Though it was for oil companies, not the US people.

Those who think we can drill our way out of this don't have a clue.

We need a $1.50/gal oil tax to pay these subsidies to big oil. now we pay it, just it's in our income taxes.

I'm watching Charlie Rose with the GE CEO on just said we need a massive oil, coal tax to become energy independent. Or we can be in oil wars, broke.

Jun 26 12:46 PM

[Gregman2:]

"How much smarter is China than the US?" A lot.

Jun 26 05:18 PM