What I’m Going to Tell the Chinese Tonight
Sometime around 9 PM this evening Eastern time I’ll be live via satellite on Chinese national television from Beijing.
Given the time difference, I’ll be appearing in the slot before the markets open in Shanghai and Hong Kong.
The point of departure for my appearance is what we just discussed in Tuesday’s issue: Namely, that the Asian need for crude oil is accelerating and solving the problem may require $11.7 trillion in new investments.
That fact hasn’t been lost on the Chinese who are coming to the realization that the energy balance demanded in Asia is rapidly changing.
Of course, those changes will have consequences – some of which are going to be very profitable.
So I thought I’d fill you in first on what I’ll be telling the Chinese tonight…
Trying to Quench a Very Thirsty Dragon
For Beijing, these new demands will mean an energetic mix of upstream acquisitions worldwide, an increasing dependence on imports, and belated attention to possible unconventional tight (or shale) oil reserves at home.
Despite an attempt to move from coal for power production, China is going to become even more increasingly reliant on crude oil between now and at least 2035.
And the options abroad are becoming more limited.
Of course, large acquisitions are possible for a nation with more than $10 trillion available hard currency reserves, especially when the government has instructed national oil companies to hasten asset purchase in other countries.
But the sheer size of China’s domestic needs will make it increasingly difficult to find enough available crude in new fields they can control. That means the Chinese will come to have a greater reliance on sources beyond their direct control.
This is one of the two forces likely to have a major impact on crude oil availability and pricing.
The other is the suddenly more optimistic view of a rapprochement between Washington and the Iranians. As it stands, Chinese demand means more competition for available crude, accentuated by similar increases in demand from other Asian countries, especially India.
However, should Tehran agree to change its nuclear ambitions that would mean substantially more oil will be coming onto the market. This volume of “new” crude would comprise a pricing pressure in the other direction.
Well, the simple answer to all of that is this: Expected demand increases will be kicking in – and are already in evidence in other parts of the world – that will put a strain on supply even if the sanctions against Iran are lifted.
Now such a move is not going to be happening anytime soon. There is simply too much in the way of diplomatic, monitoring, and verification agreements required between two long-time adversaries.
But by the time it does happen (if it happens), the global supply-demand dynamic will have already compensated for it. And absent a geopolitical crisis someplace else, we will not be experiencing major spikes in oil prices.
My Advice to the Chinese is Simple…
However, that is not where the profits will be made in oil investments moving forward.
I’ll be telling the Chinese this evening that the real opportunities will be found in the mix.
As the development of a genuinely new energy mix expands worldwide – encompassing a range of energy types and sourcing – even in a world increasingly reliant on crude oil, there will be several enticing ways to profit from a broader energy range.
Here, China is already rapidly moving into a dominant position…
It is already the world’s largest importer of oil. But it is also a leader in renewables (solar and wind), has started an energetic campaign in shale gas production, and is investing heavily toward becoming a world leader in smart grid and energy efficiency technology.
Aside from the obvious recognized by everybody – the expansion of domestic demand and overall industrial/economic — there are two keys to the Chinese energy picture moving forward.
Both are decisively directed toward larger trade issues.
First, as its energy needs increase, China will become an even bigger import giant for an array of energy sources, including crude oil, pipelined natural gas, and liquefied natural gas (LNG). On the other hand, the negative impact that normally has on trade imbalances and balance of payments concerns in most countries will be offset by the second key.
In this case, Beijing will be able to pay for oil and gas largely through exports of its own goods and services to those sources abroad not controlled by Chinese companies.
And by having a trade surplus with virtually everyone on the globe, the usual negative consequences associated with an increasing reliance on energy imports will be much milder in China.
Opening the Door to New Opportunities
The final element of note is one that could only happen with an economy on the scale of China’s.
It involves a new way of looking at transfer pricing which has become a staple in the planning of transnational companies and has been a major element in the cross-border expansion of mega-nationals.
Transfer pricing simply boils down to this: If a company controls major distinguishable stages in an industrial process, they can save money (and thereby increase profitability) by not having to pay market prices for goods and services.
Rather, the transfer price/cost from one entity to another is calculated on the corporate level to the effect that bottom line is necessary for the entire sequence. This has been one of the driving forces in the move to establish vertically integrated corporate structures that include assets in several stages of a process.
Certainly, this is a primary consideration in field and production acquisitions abroad. Simply put, if China already owns the oil being imported, China does not have to pay market prices for it.
Yet I will suggest this evening that the orchestration of transfer pricing and payments for imports in kind will not be enough. To design an energy plan that allows for the consolidation of domestic and international components, one other ingredient is essential.
China needs to develop a massive in-country base for energy technology and equipment design, development, and production.
And that is going to open the door for a range of outside companies…and increase the profits for people like us.
PS. Here’s the scoop on a $43 trillion oil find you could make big money on right now. Bar none, it’s one of the biggest discoveries ever recorded. And here’s the key: Every drop of oil it produces hinges on a small Western company that is about to go ballistic. I have all the details right here.