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Sunday, July 14, 2024

China Pays Too Much for Oil in Iraq – $16 A Barrel!

China wisdomHow 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!

Iraq oilOf 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.

china oilSo 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.

xom cvx totWake 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?



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