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I bought a Toyota Prius last Saturday.
The signs are everywhere that oil is headed for stratospheric highs - $200, $250 or even $300 a barrel. Some of these signs are just plain obvious. But even the subtle indicators are telling us that some very expensive energy costs headed our way.
Let me tell you about one such indicator that I came across over the New Year holiday. A tiny news item said that Saudi Arabian oil concern Aramco is abandoning a lease on Caribbean oil storage, and further reported that PetroChina Co. Ltd. (NYSE ADR: PTR) is moving in to take Aramco's place.
Most investors here in the West - if they even read the item - would've dismissed it as just another minor business transaction, one among the thousands that take place each day. But this particular deal was much more than that. It's another indication of China's continued global emergence. And it also underscores this country's relegation to the growing legion of "former" world powers that have been eviscerated by the financial crisis that they created.
In case you missed the story, let me share the details, and then explain what I believe those details actually mean.
On the last day of the year, the state-owned Saudi Aramco walked away from a 5 million barrel storage capacity lease at the Statia Terminals Group NV facility on St. Eustatius Island in the Caribbean. Ordinarily that wouldn't be significant. After all, oil leases come and go - change is a normal part of doing business.
But two facts make this transaction different:
- First, Aramco had renewed this lease - which accounts for 38% of the total storage capacity on the island - since 1995 as a means of staging oil near its primary market: The United States.
- And, second, with Aramco's departure, PetroChina, China's state-run oil company, has opted to move in.
From a strict numbers standpoint, I grant you that a 5-million-barrel facility doesn't appear significant. That much oil will meet U.S. energy needs for all of about five hours. And it equates to less than 1% of the U.S. Strategic Petroleum Reserve, which holds about 726.6 million barrels of oil. So it's not like China will suddenly have a lock on the U.S. oil market.
So what gives?
The Saudis know that U.S. has peaked. The Prius - and hybrid vehicles in general - are no longer a novelty on U.S. highways. And though still inadequate, alternative-energy policies are finally gaining traction in Washington. Finally, U.S. consumers are getting smart: They aren't just going to stand passively by and just "take it" when oil reaches the $150-a-barrel level. They'll find additional ways to conserve, pushing demand down even more.
So Aramco is shifting its focus elsewhere.
In fact, the company is targeting China and India, the first and second-fastest-growing oil markets in the world, as measured by petroleum consumption. Aramco is actually using free-storage capacity that it recently acquired from Japan.
Now I grant you that the high growth rates from China and India are partly due to the fact that they are both starting from a small base. Even so, if you take the time to do a little bit of simple forecasting, a dramatic picture emerges. China's oil consumption is growing 12% a year. At that rate, China's annual oil use will equal or surpass that of its U.S. counterpart by 2018.
We're talking less than a decade from now.
U.S. energy demand peaked in 2005, according to Department of Energy statistics, and most recent forecasts say it's unlikely to ever return to those levels.
Saudi Arabia's oil shipments to the United States hit 22-year lows in 2009. And that situation is unlikely to reverse itself even if the U.S. economy bounces back this year and beyond. It seems as if a financial-crisis-induced recession and all rhetoric about reducing our dependence on foreign oil combined to do just that.
What this deal really signals is a global changing of the guard.
For its part, Aramco is making a calculated decision to "follow the money" (the same mantra we follow here at Money Morning, and at our monthly advisory service, The Money Map Report). In that company's view, the money trail leads to China. The facilities it snapped up in Japan are a mere three days sailing distance from Shanghai's busy ports.
Charles K. Ebinger, director of the Energy Security Initiative at the Brookings Institute, said the move is "purely a reflection that the world market is changing... [and the] Saudis want to make sure they don't lose those markets."
PetroChina, on the other hand, isn't buying a pig in a poke. The Beijing-based player is taking over what seems to be a somewhat insignificant storage lease in the Caribbean as part of a strategy that includes more than just serving the U.S. market. Indeed, China intends to increase its presence in South America, and is building a base for more oil deals south of the equator.
Mark my words: We will see additional Chinese oil firms headed for South America, and can expect some headline-making deals.
Not that China is planning to ignore, or even forget, the U.S. market. Just the opposite, in fact.
With this deal, PetroChina - and, by extension, China - will actually enjoy a bigger, and more direct, influence on the U.S. oil markets because of the trading leverage that stems from having physical delivery capacity located so close to our borders.
Factor in the futures exchanges in Shanghai, Shenzhen and Dubai that are growing in volume every day, and you can easily see what the next step will be in this evolution of the world energy markets. U.S. exchanges will see a decrease in their influence on oil prices; that influence will shift to exchanges that exist far from our shores - a point that I made repeatedly in my new book, "Fiscal Hangover."
For U.S. lawmakers and the rest of the inside-the-beltway crowd, this changing of the guard - and the fallout that's certain to result - will lead to some challenging times. With China now in the game, there's even a very real chance Washington will discover that it's been maneuvered at least to the sidelines, and perhaps even out of the game.
The bottom line here is that oil prices are headed higher. Much higher. The oil industry itself is likely to be very volatile in the next few years, so the escalation will be in fits and starts, and there will even be some periods of retrenchment.
But don't worry. Investors who accept this new reality will find plenty of opportunities to profit.
[Editor's Note: Twenty picks. Twenty winners. For the past year, Money Morning's Keith Fitz-Gerald has maintained a perfect record with his Geiger Index advisory service. Every trade turned a profit. That's remarkable in any market, but given the current circumstances, the service offers unparalleled security and profit opportunities. To find out what other investors have to say about the service, as well as the secret ingredient that makes the Geiger Index go, read on.]
News and Related Story Links:
- St. Eustatius Island:
Official Web Site - Wikipedia:
Caribbean
- Energy Bulletin:
A rare look at the U.S. strategic oil reserves - How Stuff Works:
What is the Strategic Petroleum Reserve? - Wikiquote:
All the President's Men ("Follow the Money.") - Brookings Institute:
Official Web Site - Brookings Institute:
Official Bio of Charles K. Ebinger - Amazon.com:
Special Offer for "Fiscal Hangover, by Money Morning Chief Investment Strategist Keith Fitz-Gerald
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.
Well yet again China is highlighted as 'The Force To Be Reckoned With' no surprise there then. I have already taken some of your recommendations and bought oil stocks.
I've got to say we are in some very interesting and exciting times!
Can't wait to see what happens next, good or bad!
Maxwell Hill
Unless a viable energy source ( such as biogas, solar, OTEC ) is identified and developed on a commercial scale, the petroleum price will tend to go up , as the OPEC countries are in the sellers market. An optimum energy mix by an innovative energy conversion can change the total story. What were these consumers doing during the camel age ? Last but not the least, there exists a break even buying power for petroleum products also and the transport cost will become dearer, leading to mass transport system and minimum travel . Costly Mogas gives rise to minimum travel , less fuel consumption and less pollution. Inflation level will also shoot up proportionately, unless actions are taken in advance.
Canadian oil stocks are doing well and they are an ally. They yield good dividends also. Some of their money is also spent here in American vacations. It's a double win. High dividends and their vacation money. It's definetly worth your time checking out canadian stocks.
what is MoGas? is it more gasoline?
wait till China has to pay for medical and educational costs for the 900.000.000 people they have that are on the fringes of ther industrial revolution. with no oil reserves of their own they will go down the toilet even faster than the US did. And wait for the news of a new energy development coming out of the backwater of Canada. No, it is not a new tar sands or conventional oil development
Ah, perhaps they have figured out a way to capture escaping methane gas from the thawing tundra?
BACKWATER OF CANADA???? Taken for granted Canada is more like it.
we'll what about all they found in colorado,montano & wyhomi suposlly moore than all others put together. enough for 1000 yrs ?
FINANCIAL FIXES HIDE DEVELOPMENTS FROM PUBLIC
Keith must be in danger of becoming a "Portland, Oregon Liberal". Often, many locals on the left coast display "Obama" Bumper stickers, quite often while driving a hybrid vehicle like a Toyota Prius. Liberals and Prius are often associated, in my observations.
Now, all that aside, I have been hearing about the financial demise of the U.S. Dollar and the United States financial system ever since the days of President Jimmy Carter (1970's). It is almost folklore that our dollar and world position ("super-power") are already 'toast'. In reality, I think our country's financial decline is probably a reality, but the progression is not acute.
Instead, think of the decline of the dollar and U.S. Financial markets as a process, quite similar to the aging process. it kind a creeps up on you, little by little in so many little ways over a long period of time. Like aging, you can hide its appearance superficially with various forms of "cosmetic surgery" (Political gimics and fixes), for awhile, that is. Eventually, everyone has to confront the reality of their own mortality, and that includes all empires, including the American Global Financial empire. Most of us have not quite arrived at that point yet, but it seems in the not too distant future for many.
Keith must be in danger of becoming a "Portland, Oregon Liberal". Often, many locals on the left coast display "Obama" Bumper stickers, quite often while driving a hybrid vehicle like a Toyota Prius. Liberals and Prius are often associated, in my observations.
Now, all that aside, I have been hearing about the financial demise of the U.S. Dollar and the United States financial system ever since the days of President Jimmy Carter (1970's). It is almost folklore that our dollar and world position ("super-power") are already 'toast'. In reality, I think our country's financial decline is probably a reality, but the progression is not acute.
Instead, think of the decline of the dollar and U.S. Financial markets as a process, quite similar to the aging process. it kind a creeps up on you, little by little in so many little ways over a long period of time. Like aging, you can hide its appearance superficially with various forms of "cosmetic surgery" (Political gimics and fixes), for awhile, that is. Eventually, everyone has to confront the reality of their own mortality, and that includes all empires, including the American Global Financial empire. Most of us have not quite arrived at that point yet, but it seems in the not too distant future for many.
I have been hearing about the financial demise of the U.S. Dollar and the United States financial system ever since the days of President Jimmy Carter (1970's). It is almost folklore that our dollar and world position ("super-power") are already 'toast'. In reality, I think our country's financial decline is probably a reality, but the progression is not acute.
Instead, think of the decline of the dollar and U.S. Financial markets as a process, quite similar to the aging process. it kind a creeps up on you, little by little in so many little ways over a long period of time. Like aging, you can hide its appearance superficially with various forms of "cosmetic surgery" (Political gimics and fixes), for awhile, that is. Eventually, everyone has to confront the reality of their own mortality, and that includes all empires, including the American Global Financial empire. Most of us have not quite arrived at that point yet, but it seems in the not too distant future for many.
Yes, China will surpass U.S.in oil consumption in the current speed of industrial develoepment.But what oil means? Burning money!People working hard,painstakingly, just for burning money?Many Chinese save money to buy a car,and have no moey for education,heallthcare,entertainment or other activities.What's worse,the environement is severely polluted,no clear water,no clear air.Developememt is a double edge sword,if not well used,it could be dangerous!
china is behaving like "a poor man suddenly becoming rich".He doesnt know what to do with that money so he starts buying whatever he puts his sight on.A day comes when he has no money left, and doesnt know what to do with the goodies he bought.It's of no use to him, so he starts disposing it at throw away prices so that he can survive.That's what will happen to China.
Sure, China is a poor man suddenly become rich, but it did not come magically. They are clever businessmen, having made and still making good investments, not merely what comes in sight as suggested above.
They are currently working on establishing not only an oil network, which will put them in the industry's foreground, but are also in a race for other energy sources. Why else are they agressively competing with the russians for uranium deposits in africa? Sure their oil consumption is increasing 12% every year, but the assumption that this rate will keep up is, according to me, not entirely correct. They must understand their future needs and are working hard to make sure they meet them as they arise, and to find alternate solutions.
According to me, they will find alternative energy solutions as they continue to industrialize, and they will never have to rely on oil as much as nothern americans do now.
sushil bhatnager & Maddy D.
Why would any one think China is "a poor man suddenly becoming rich"?
For too long the American Financial Empire ~ and its people ~ have had their heads in the sand.
Chinese people were already free market capitalist for three thousand years. They had a brief encounter with a command economy from 1949 to post 1976 when Chairman Mao died, but they have been hard workers and great savers since the time of Sun Tsu and Confucius.
Unfortunately American thinking still places the US as the world's largest economy…That was anciant history.
China with 1.4 billion people has a population 4.5 bigger than the US (at 308 million).
China already , feeds, clothes, shelters, educates, provides medical care, manages and builds infrastructure for citizens on a scale 4.5 time bigger than the US.
If the US had to do the same thing, her economy would come to a grinding hault (Oh sorry it already did with only 308 million pople).Sure Chinese people are not as affluent as US citizens but they do not carry the debt that the US citizen does or placed on future generations of young Americans. If a typical Chinese household carried the same long term debt liabilities as the average US family (presently about US$400,000 per household) then their life style would be reasonably flash as well.
The US has almost US$12 trillion on the current account deficit plus an extra US$44 trillion in long term debt and pension liabilities. The US economy is F*~#! and you wonder why countries like BRIC don't want the US to continue handling or attempting to manage the global financial system any more… You wonder why other countries no longer need the USD as a global reserve currency?
Time to wake up and get real!
America took control of the global economy around 1936, cemented their position with the Bretton Woods Institutions and proceeded to screw most countries (Perkins, J (2004) Confessions of an Economic Hitman).You reap what you sow, what goes around comes around. At no point in the equation did any one think "what about the debt burden placed on future generations of Americans".
NOT SMART JAN!
Great great post. I think another aspect to consider though is that, as oil is priced in dollars the world over, major changes to the market like the one you describe could potentially have the nonintuitive effect of altering the value of the dollar. That is to say, if Chinese oil demand skyrockets, so too the price of oil (in dollars), despite no change from the US's oil demand. This would effectively devalue the dollar. It's as if the US (and gradually the world) were to shift to the Crude Oil standard. I wrote a post analyzing the statistical correlations between the dollar value and the price of oil over on asset prime. You might be interested in checking it out:
http://assetprime.blogspot.com/2010/01/oil-and-dollar-2008-vs-2009.html
Keep up the great work.
I would like to invest in this LITTLE Co.,with the 49 billion worth of substance.I need the name and ticket aswell which exchange it is trading out of
Thank You.
Shawn.