Komorowski’s Korner by Richard Komorowski – Peak Oil – the Chinese Contribution PT 3 – Cornwall Ontario – August 9, 2010

Cornwall ON – News that should shock us all out of our complacency, (but probably won’t) came out last week – China is now the NUMBER ONE global energy consumer, surpassing the United States, which has held that position for the last century or more.

According to the latest report from the International Energy Agency (IEA), in 2009, China consumed 2.2 billion tonnes of oil equivalent (i.e. China’s energy consumption from all sources, e.g. oil, coal, natural gas, nuclear, hydro power etc. was the equivalent of 2.2 billion tonnes of oil). The US, during this same period, used 2.17 billion tonnes.

In terms of energy used per person, however, we, and our American neighbours still take top prize, as we use about 5 times the energy of our Chinese counterparts.

The critical point, however, is that while North American oil consumption grew at a relatively modest 17% (from 17.7 to 20.7 million barrels per day) between 1995 and 2005, Chinese consumption doubled during this same period, from 3.4 to 7 million barrels per day. In 2008, US consumption was down to 19.5 million barrels per day (no doubt due to the recession), while Chinese consumption rose to 8 million barrels per day. In that same year, Chinese automobile production went up by about 15%.

The important thing to consider is that here in the west, the automobile market is virtually saturated (everyone who wants a car can usually get one, even if it is second hand). But in China, car ownership is restricted to the middle and upper classes, and in terms of the population as a whole, is still relatively rare. But with production increasing at this rate, more and more people will be selling their current vehicles to upgrade to something newer – thus, the minimum income needed to purchase a car constantly goes down as the used car market gets bigger, and the car owner population increases.

Another issue about to hit the proverbial fan is revaluing the Chinese currency. The Americans (and most of the western world) are putting strong pressure on the Chinese government and central bank to let their currency rise in value to its true worth in comparison to the world’s three major currencies (i.e. the US Dollar, British Pound and the Euro). This would be like having the Canadian dollar rise from 50¢ US to par. When the Canadian dollar approaches par, everyone shops across the border, because it’s so much cheaper than shopping at home.

Once the Chinese RMB reaches its true value, not only will prices at Wal-Mart go us, but the Chinese will want to shop abroad, as we do. The problem is, we don’t have too much of value to sell to the Chinese, as most stuff is made in China anyway. However, oil and coal are commodities China needs desperately. With a revalued RMB, the world oil price in Chinese currency is suddenly cut by half. The price of coal (the other major energy input in the Chinese economy) will also go down relatively, as they import a lot from Australia. The result? Same as over here – production becomes much cheaper, and therefore rises, along with the Gross National Product. Bear in mind that the Chinese do not use energy nearly as efficiently as North America or the EU.

One of the major reasons the Chinese do so well on the world market is their cheap labour costs. Now, if we start adding cheap energy to this mix, what will happen? Revaluing the RMB will make Chinese exports to the rest of the world somewhat more expensive, giving the North American and European labour forces a chance to win back a piece of the action. At least, that’s the hope. But if we’re cutting their energy prices in half…? That’s anyone’s guess. Cheaper energy prices will also put the brakes on Chinese research and development in alternate energy sources, something from China which actually does benefit all of us.

So American pressure to value the RMB fairly will probably back fire on all of us; Chinese drivers might be idiots when it comes to actual driving, but none of them buy anything imported from Michigan or Ontario. But they will be able to afford a lot more gas to pump into their Chinese, Japanese and Korean built vehicles, and with cheaper oil and coal, along with the increase in living standard this will bring, they’ll be building even more of them.

But this is only the start of the troubles to come. Like the west, China cannot serve its own energy needs without importing energy (oil and coal) from elsewhere. In the case of oil, we are now at the peak of production – in the next few years, supplies will start to drop, and this drop will accelerate. China, with its booming economy, will be demanding more and more of what is becoming less and less. Some people may remember the 1973 oil crisis, when Americans were coming to Canada to fill up their tanks because of the gas shortages at home. Imagine this on a world scale, where the gas shortages are coming from North America and China, who together want more than the market can supply. Each party, quite naturally, wants “energy security.”

Currently the US is trying to achieve energy security. Thousands of its young people have died in an unwinnable fight to the death called Iraq. The worst case is that the US will continue its fight for energy security, not only in Iraq, but also in Kuwait, Saudi Arabia, Dubai, possibly even Alberta. The Chinese, meanwhile, would invent a “need” to liberate the Iranians and their neighbours. The result: two concurrent Gulf Wars. The cost, both in human lives and the materials we need to live with: don’t even ask. And the winner: nobody, even assuming that the Chinese and the Americans don’t go to war with each other directly.

Maybe this particular scenario won’t come to pass. Personally, I hope it doesn’t. But the other possibility is really no better. OPEC, without doubt, will try to satisfy all its markets, but at a price. Oil prices are going to go through the roof. The prices we saw recently, in 2008, were just a prelude. The point will come when China, no matter how it values its RMB, will no longer be able to afford the energy it needs on the world market. Production there will slow down, and shipping its products to your local Wal-Mart will become prohibitively expensive. The result in China: recession, a breakdown in order, disease, perhaps not mass starvation, but definitely a lot of hunger, and perhaps a bloody revolution. The result for Wal-Mart: higher prices, and perhaps a “buy North American” policy.

Over here we’ll start to see many of the same problems as China, although perhaps not the bloody revolution. The 2008 recession was triggered mostly by a sudden peak in oil prices – Wall Street greed played its part, certainly, but the real cause was oil prices. Sub-prime mortgages were only a symptom of the depression, certainly not the reason. The cause of the recession was that there were too many Americans who couldn’t afford to live their accustomed lifestyle, make their mortgage (and other) payments, and at the same time fill up their gas tanks so they could drive to work, to the supermarkets, to Atlantic City and Las Vegas. Some got by simply by reducing their lifestyles, by eating at home instead of restaurants, for example, or putting off purchasing a new car or a new home for a while, until things settled down. But even this economy of lifestyle has a bad ripple effect. People who build homes, or assemble cars, or work in hotels or marriage parlours in Vegas, lose their incomes. They’re forced to spend less, and the cycle continues and expands. Automakers go bankrupt, and the taxpayer has to bail them out lest worse problems arise. We’ve all seen what happened, and many of us have suffered. And despite what the Bank of Canada, the federal government and the provincial governments say, the recession is certainly not over.

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8 Responses to "Komorowski’s Korner by Richard Komorowski – Peak Oil – the Chinese Contribution PT 3 – Cornwall Ontario – August 9, 2010"

  1. smee   August 9, 2010 at 5:55 AM

    Doesn’t China own America’s debt or at least 65 % of it.

  2. Matt Staben   August 9, 2010 at 1:39 PM

    China owns much of America’s debt, or more specifically, our mortgages. I will state that other than some more liberal enclaves, there is no way China will be able to call in the loans and seize the collateral because they’ll realize that they’ll not be able to move their country-folk into those houses without the neo-Nazis going crazy over it – in other words, the debt China holds is essentially worthless except that it’s debt and as long as the US feels obligated to it, China has an amenable position.

    Second,

    I disagree with your comment that the Iraq war was “unwinnable” except that progress was exceptionally difficult due to the liberal left-wing media crying about every dead soldier like it was something he didn’t want to die for. Any time a liberal gets involved in a conflict, the cause is lost. For instance, during the Vietnam war, our own traitor, John Kerry, illegally met in Hanoi with Nguyen Vo Giap, the commander/general in charge of all NVA operations, and thereby in response to promises of protests and anti-war sentiment in the US, the NVA were encouraged to reconsider surrendering and continuing the war as Kerry (and Jane Fonda) performed his psychological warfare in behalf if the NVA in the US.

    This is well documented in the 1973 memoirs of Nguyen Vo Giap.

  3. Sarcasmatron   August 9, 2010 at 5:36 PM

    Chinese are fools, Americans rule. After the overwhelming success of the Iraq/Afghanistan initiative, The Yanks will fuel up their rigs, and go kick some Commie arse. Collect your debt then, losers. America, F yeah!

  4. smee   August 10, 2010 at 5:23 AM

    I thought Viet Nam was a police action not a formal war?
    Yes it was unwinnable, when you empty your prisons sending criminals to fight your battles you have people whom already have proven their lack of commitment to society.
    I have a friend which served as a gunner on one of the choppers, If you have your choppers delivering beer and foods to troops in the front lines what kind of war is that?

    As for the debt, it has to do with the IMF’s destruction of the norrth American currency value and deindexation of wages. Quite simple actually.

    Once the US fails to pay it’s debt it is blacklisted by IFI and IMF then they block short term credit on commodity trading.

    We become the next third world

  5. smee   August 10, 2010 at 5:24 AM

    Well said Sarcasmatron, too bad the US has never ever won a war.
    Smart bombs and stupid people nulify each other.

  6. smee   August 17, 2010 at 6:33 PM

    Rick
    Your site name peak oil seems to reflect Matt Sevinar’s opinions.

  7. Richard Komorowski   August 17, 2010 at 10:55 PM

    Interesting comment, Smee. I actually had to google the name to find the site.

    To be honest, I first became interested in peak oil in the late sixties or early seventies. A recommended reading for an ecology course I was taking was a book called “The Limits to Growth”. Unfortunately, I forget the author, but its message is true today. When you only have a limited amount of resources, you’re eventually going to run out, no matter how much you’re prepared to pay.

    As for Matt Sevinar, I can assure you that whilst I tend to agree with him somewhat, he and I have arrived at our opinions completely independently of each other. It is nice to know, however, that I am not a lone voice crying in the wilderness, and that there are others who can see what is going to happen.

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