When Will China Start Drilling For Oil In America?

China may invest $10 billion in Brazil state oil company, Patrobras, on terms that the Latin American company cannot help but find attractive. In advance of the investment, China has secured 100,000 to 160,000 barrels of crude a day, to be sold to the world’s most populous nation at market prices. The parties have not said as much, but the transactions are certainly related. Brazil may end up investing over $170 billion in drilling for off-shore oil reserves. The nation’s deep water Tupi subsalt field may be one of the largest pools of crude in the world.

China is also aggressively courting oil interests in Iraq which is made easier by the tens of billions of dollars that the US has spent to stabilize the country and turn it into a democracy of sorts. The New York Times reports that China’s two large oil companies Sinopec and the China National Offshore Oil Corporation will be part of the bidding for Iraqi oil fields. The communist central government can provide them with a nearly endless supply of capital which will be needed to lock up more and more millions of barrels of guaranteed supply per day.

It is no news that with a 7% to 8% GDP growth rate and a country which may still be in the early stages of industrialization, China will need a nearly limitless supply of crude. It is like America was decades ago but the cost of oil was lower then and the US was a major producer of crude on its own. The United States is still among the top five oil producers on a daily basis, but its reserves are disappearing fast. China is, by most measures, the second largest consumer of crude, and its reserves are relatively modest.

The competition for oil may actually benefit the US. It is likely to lose some of the oil field bidding, but the availability of Chinese capital will allow for more aggressive exploration. Oil locked in the ground or below that ocean floor will make it to market sooner as the Chinese join America in making multi-billion dollar investments in those last massive fields of crude that are untapped and by using new technology to make existing fields yield what they could not just a few years ago. Oil supply may remain plentiful, at least until the largest fields begin to age and the plenty will keep prices fairly low, perhaps for decades.

The wonder of alternative energy is that it gets so little investment. The returns are uncertain as is the timing of when they will be efficient replacements for fossil fuels. Crude may be expensive to find and expensive to recover, but the return is easy to calculate and oil will not run low in the lifetime of most people who use gas, diesel, and oil-related products today.

China will put capital into oil exploration and refining because it is a sure and certain way to fuel its economy. If its plans work and it becomes the world’s largest economy sometime around the mid-point of this century, it can worry about alternative energy then. In the meantime, it just has to out-spend the US to make certain that its strategic plans to lock up supply are well executed.

Douglas A. McIntyre