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The U.S. faces new obstacles to achieving a secure supply of oil. Until recently, the main challenge was to diversify oil imports away from sources in the politically volatile Middle East. But a scramble by China and other fast-growing countries to meet their own energy needs adds a new element of complexity. The U.S. will meet stiff competition for contracts to tap promising oil fields around the globe.
This battle for crude is sure to heighten supply and price volatility for U.S. oil and fuel consumers at a time when worldwide demand for oil is already extremely brisk and likely to remain so for many years. Refiners servicing the American market face a greater risk of not being able to get the oil they need when they need it. Oil companies will also have to pay more for long-term contracts with producers, adding to upward pressure on oil prices.
"While China's huge increases in oil purchases last year were in part responsible for the runup in prices, [the purchases] were done in the open market. But locking up oil—effectively taking it off the market—greatly increases the chances for a free-for-all by other countries and a result that $50-a-barrel oil would look dirt cheap," says John Kilduff, a senior vice president with Fimat, U.S.A., a commodities trading firm.
This new oil supply challenge is also likely to bolster efforts in the U.S. to develop commercially viable alternative fuels. In the short term, this probably means ramping up domestic production of ethanol made from agricultural waste for passenger autos and soybean-based biodiesel for trucks, says Janet Sawin, a senior researcher with the Worldwatch Institute, a public policy and environmental think tank. Over the longer term, it means more support for hydrogen fuel technology and nuclear power generation.
The U.S. has successfully encouraged—and participated in—oil development in Russia, other former Soviet states, West African and Latin American nations to offset reliance on Middle Eastern members of the Organization of the Petroleum Exporting Countries. But the strategy also assumes that the U.S., with its large and vibrant economy, remains the dominant player on the buying end—an assumption that is fast losing credibility.
China's oil imports will reach 6 million barrels a day by decade's end, double last year's level. The U.S. will be importing 12 million barrels in 2010, up from 10 million last year.
As China's demand for foreign oil soars, it is embarking on a buying spree to ensure that its rapidly industrializing economy will have the fuel it needs. In the past two months, China struck deals to import 100,000 barrels of oil a day from Venezuela, which will likely come out of the 1.3 million barrels a day that Venezuela ships to the U.S., our fourth-largest oil source. China also agreed to buy 200,000 barrels of oil daily from Russia and another 300,000 from Oman. India is angling to secure oil production from Russia's million-barrel-per-day Sakhalin oil fields. Both Chinese and Indian oil buyers are on the prowl for more guaranteed supply contracts in Khazakstan, Uzbekistan and Nigeria that industry officials say are likely to total more than 2 million barrels a day.
Meanwhile, China agreed to form a partnership with Venezuela's state-owned oil company to develop a 400-million-barrel oil field and invest $3.5 billion to develop Bolivia's oil and natural gas fields over the next decade or so. China's state-owned oil company is considering the purchase of Venezuela's state-owned refiner, Citgo.
If China bought Houston-based Citgo—which is by no means certain—it would underline the rapidly changing oil landscape. Citgo accounts for about 15% of U.S. refining capacity and operates 14,000 service stations. Citgo wouldn't shut down U.S. operations overnight, but the company's gasoline production easily could be diverted to China if its new owners wished to do so. And the idea isn't so far-fetched, given that China will probably have the world's largest passenger vehicle market within a decade or so.
Equally unsettling is that Venezuelan President Hugo Chávez has hinted strongly that he would like to find other markets for the 30,000 barrels a day of gasoline that his nation's state-owned refineries ship to U.S. oil companies. As it is, U.S. refineries import about 300,000 barrels of gasoline a day to help them meet demand. This accounts for 5% or so of their total gasoline sales, a number that will increase to more than 7% within five years.
Kilduff says we shouldn't rule out a Chinese oil buying spree in Canada, which supplies about 17% of U.S. oil imports—more than any other country. Rapidly industrializing India will be in on the hunt, too, as its oil consumption of about 2.5 million barrels a day at least doubles by decade's end.
The competition for oil resources is further complicated by political factors—the market isn't just a question of selling to the highest bidder. Timothy Evans, a senior energy analyst with IFR Markets, a commodities trading firm, explains: "It will cost China a bundle to import oil from Venezuela by ocean freighter, but the economics don't matter, since you're dealing with two leftist governments, neither of which have pleasing the West as a top agenda item."
Meanwhile, Russia has curtailed the American role in its own oil development and exports. Evans says that Russian leaders are now focused on nationalizing energy production to use it as a tool for geopolitical aims such as rebuilding ties with China and India.
Researcher/Reporter: Michael J. Smith
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