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Stable Oil Prices are the Key to Chinese Growth

Last week, oil prices dropped on concerns that Chinese demand might begin to slip.

It appears those concerns are going to be short lived.

According to a report by the IMF this morning, Chinese GDP will rebound strongly to 8.8% in 2013, up from a dip to 8.2% in 2012, propelled largely by increased domestic consumer consumption.

That's important to note since the Chinese also need reliable energy sources to continue this remarkable, ongoing boom.

After all, China needs to procure oil supplies from around the globe to facilitate this sort of growth.

And as China rises to the international stage, its bureaucrats are learning the hard way that all oil exporters are not the same, and political vulnerabilities and economic conditions are making it more and more difficult to procure oil over the long-term.

In fact, China's three largest sources of oil are all undergoing their own levels of political instability, which could disrupt long-term Chinese growth.

They are:

  • Saudi Arabia, a long-time ally of the United States and nation susceptible to political instability over the long-term. The Saudis recently announced they will fill the supply gap created by the European embargo, though they will not guarantee price. This will certainly increase the Asian premium on crude, and drive up prices in Europe and in India;
  • Iran, which is currently threatening the global markets with supply disruptions over its nuclear program. The country is highly susceptible to destabilization due to its heavy reliance on oil revenues to fund its government. As the nation is frozen from international credit markets, production capabilities are susceptible to a steep slow down; and
  • Angola, another major U.S supplier with rising economic and social problems, and resistance to foreign development. The nation is highly susceptible to unrest and corruption, as evidenced by the current investigation by US authorities into three most power officials in the nation over a recent venture with Cobalt International Energy.

That is why Canada's recent announcement that it will sell more of its oil to China is so important. Canada provides significant stability and confidence in its production. But that won't be enough.

Moving forward, China will be learning the hard way how foreign policy and economic and energy development go hand in hand.

That 8.8% growth rate will become more vulnerable over the long term as China's pressure to sustain it mounts.

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