<DrumBeat: May 9, 2007 The Oil Drum DrumBeat: May 10, 2007>

45 comments on Wildcats & Tigers: China's Oil Acquisition Strategy

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BenjaminCole on May 9, 2007 - 12:55pm Permalink | Subthread | Parent | Comments top

Actually, this is good news for the world and the USA. China is spending gobs of money, tens of billions, to develop oil fields everywhere, especially where we cannot due to political reasons. This is perfect for us.
Oil is a fungible commodity. If China spends $5 billion in Venezuela (they are), and pumps out great gobs of oil, and takes it back to China, that is that much less demand on other world oil markets.
This is even better than good. China spends the money to enhance the world's productive capacity, but we benefit from the extra supplies, which hold prices down.
The downside is that this is another reason to worry about a glut going forward. The higher prices we see now are flattening world crude demand, possibly causing a Peak Demand. That is the good news. The bad news is that an ensuing glut will pound prices back into the $20s range, then we go back to the profligate and polluting ways,

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jeffvail on May 9, 2007 - 1:01pm Permalink | Subthread | Parent | Comments top

Oil is, today, a fungible commodity. The notion of a dawning mercantilism suggests that its fungibility may be short-lived. The whole point of gaining an equity stake--as with the other current trend toward long-term, bilateral supply contracts--is to remove your supply chain from the uncertainties of a global marketplace. Fungibility defines what is on the market, but to a far lesser extent supplies that are locked down into equity stakes or long-term contracts.

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mbkennel on May 9, 2007 - 8:08pm Permalink | Subthread | Parent | Comments top

Remember, in a market environment, the value to a buyer of an essential commodity is not just in the average price (lower is better), but also in reducing variance (lower is better) of this price.

Classic option theory.

Consider a parallel situation with electricity demand. It's even worse than oil since it can't be stored at all (as opposed to having capacity to store a very small fraction of yearly consumption).

If alot needs to be purchased on the spot market then the variance will be very high and the consumer is subject to intermitted insane spikes which will hurt them economically.

China is interested in reducing the variance of its costs, not just optimizing the mean.

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45 comments on Wildcats & Tigers: China's Oil Acquisition Strategy

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