Today’s Money Weekend will leave behind the US government standoff that ruled the airwaves this week. Instead, we’ll focus on the development that will shape the world for decades.
With all eyes on America, you might not have noticed it, on the other side of the Pacific. Our mate Dan Denning flagged two years ago that it was on its way.
At the time he told his readers that one of the biggest things to watch in markets was the new energy superhighway developing between Beijing and Riyadh. He released a report about it. In fact, at the time he said the most important energy alliance for the next fifty years would be between China and Saudi Arabia.
So exactly what happened this week?
China overtook the USA as the world’s largest oil importer. As the Financial Times says, it’s a historic milestone.
Here’s some more from the FT:
‘The implications for international relations and global security are profound. The predictable element in the equation is the inexorable growth in Chinese oil demand, as the world’s most populous nation slowly approaches the standard of living of Europe, the US and its more prosperous Asian neighbours. The surprise has been the spectacular revival of US oil production over the past half-decade.’
Dan pointed out at the time that the increased US oil production would allow the US to reshape their security strategy away from the Middle East. With more production at home, there’s less need for imports. That’s thanks to technology opening up previously inaccessible resources across North America.
To give you an idea of just how big this shift has been, in 2001 it was thought likely that in twenty years the US would be forced to import nearly two-thirds of its oil.
Now it’s even considered possible it will import next to nothing.
That’s a big pivot. The Saudi-US alliance has been a fundamental link in global geopolitics since King Ibn Saud granted the American company Socal a concession to look for oil in Saudi Arabia in 1933.
Now China is already Saudi Arabia’s largest trade partner.
So that leaves a natural fit to grow between the biggest consumer (China) and the biggest producer (Saudi Arabia).
The Saudis won’t mind a new security ally. And China doesn’t have much choice but to look for foreign oil supply, preferably overland.
According to the latest release from the International Energy Agency, China is the fourth largest oil producer in the world. But its domestic fields are maturing and demand is outgrowing supply. And they know it.
Take this from the Australian this week:
‘China’s primary offshore oil company has invited foreign companies to bid on an unprecedented number of deep water blocks off its shores as the country attempts to firm up domestic oil output, which has grown slowly over the past decade, even though China’s energy demand has surged.‘
Deep water wells don’t come cheap, either.
Of course, China as a whole can’t afford to be as profligate as the US with its oil use per capita.
China has chronic pollution in its major cities. We touched on that the other week (and the innovative way companies are trying to address the problem).
On Monday, the Australian reported that pollution levels in Beijing were nearly eight times the level considered safe by the World Health Organization.
But here’s the key part of the story: ‘It was revealed on the weekend that the capital’s four coal-fired power stations would be replaced by natural generators.‘
Not only that, natural gas in America is delivering cheap energy to its manufacturing base and the potential for LNG exports.
In fact, The Wall Street Journal reported last week that the US is set to overtake Russia as the biggest producer of oil and natural gas combined.
With oil prices high and major fields in decline, and coal the dirtiest source of power, cleaner-burning natural gas is trending to be the key resource for the next hundred years. In his report, Dan called it a transition from the Age of Oil to the Age of Gas.
Dan argued that it wouldn’t be long before energy majors showed interest in Australia’s natural gas reserves.
He’s three energy punts are already up 51%, 115% and 168%.
Finally though, the big moves might still be ahead.
The big energy companies are eyeing off assets in Australia’s Cooper Basin. This was in The Australian on Friday:
‘Central Australia’s shale gas potential is drawing growing international interest and could lead US energy giants to sharpen their focus on the country after presiding over an extraordinary gas boom in North America. A leading energy investment bank in Houston, Texas, this week branded the Cooper Basin one of the best shale gas prospects outside North America.‘
Dan might be picking a recession for the Aussie economy as a whole, but of all the dreary stories about the US debt ceiling, it’s nice to know there’s an investment story out there where you can still bag some big gains. It’s part of what he calls his recession strategy. You can check it out here.
Callum Newman
Editor, Money Weekend
Special Report: UNAVOIDABLE: Australia’s First Recession in 22 Years