If you're looking for the next "Big Oil" play, bet on Beijing.
As we've been reporting for the past several years, China has been on a global commodities shopping spree, which includes locking up every source of oil that it can. The Red Dragon has cut deals in Africa, South America Russia and the Middle East - and won't stop there. Even the mainstream news media is finally becoming aware of this crucial trend.
But here's the thing. It's not enough just to know that this is happening. In order to profit, an investor really needs to understand why it's happening - and to invest accordingly. Investors who lack this insight may make the strategic misstep of betting heavily (or exclusively) on the Western heavyweights - Exxon Mobil Corp. (NYSE: XOM), BP PLC (NYSE ADR: BP) or Royal Dutch Shell (NYSE ADR: RDS.A, RDS.B) - while ignoring the oil sector's real growth story, which is China.
Just this year alone:
This flurry of deals hasn't been a surprise to Money Morning readers. Even so, it's worth taking a moment to look at some of the key catalysts behind many of these deals. Let's look at the Top Three:
Bamboozled by the Western media - which has perpetuated the "global-recession-means-lower-demand" story - it simply hasn't dawned on most people here in the West that China doesn't care about the major long-term impact this global buying spree will have on our economy. Besides, this whole story thesis is flat out wrong. While the recession is definitely dampening our use of oil and gasoline, China's oil demand is growing by more than 20% a year. And of the 8 million barrels a day that China already uses, half comes from imports. Beijing sees those as troubling statistics, which means that China:
Nor is this a static situation. China's auto market is growing by 50% a year. It's already the world's largest, having passed the United States earlier this year. In fact, according to some estimates, China will have more cars on its roads in the next 20 years than all those we currently have in this country - even if you include the engine-less "restoration project" your next-door neighbor's son has sitting under an oak tree in their back yard.
China's never known high prices and its consumers haven't either. So they don't care like we do about what "price" is posted at the pump. Sure, you can argue as many Western analysts do, that China's fuel is highly subsidized, but so what? That's a moot point. Consumers who remember what it was like back when gasoline was 99 cents a gallon aren't going to grouse about how it now costs $6 a gallon - these newly minted motorists will merely see gasoline as just part of the cost of having a car.
Because it understands its need for continual economic progress - as well as the role oil has to play to make that a reality - China is doing whatever it takes to guarantee future supplies, including structuring deals in ways that have caught Western companies by surprise. For instance, China's companies are looking at how they can get a deal done by giving the other party something it actually needs. Moreover, in a move that's as frustrating to Western leaders as it is surprising, many of these deals come with no strings attached. I suppose you could call it the "Red Dragon Option" - although Western firms would do well to embrace these as potential Harvard Business Review case studies.
After reading this overview, a U.S investor might want to conclude that China's already got this one wrapped up and that "any resistance is futile." But that's not necessarily true. While China's grown by leaps and bounds in terms of its financial sophistication when it comes to these deals, the country still lacks the relative exploration-and-production technology to go after the deep-water reserves and complicated fields where most of the still-undiscovered oil remains. Those are also the same kinds of locations where natural gas may be the better bet.
And that suggests that investments in both sectors - including deep-water drillers and companies that specialize in natural-gas liquification -may pay off for investors anxious to dine with the Red Dragon, instead of being listed as an entrée on the menu.
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