When it comes to oil, China has a ‘triangle problem’

About 11 years ago, the US Department of Defense formed a small commission that was charged with assessing the potential for resource conflict.

The specific commodities in question were oil and rare-earth metals, and China figured prominently in the equation. Because China was such a prominent part of the discussion, we felt compelled to circle in on a key dynamic, namely China’s “ascending triangle” problem, which will be explained below.

At the time the commission was convened, China’s oil production was growing only modestly — it eventually made an unceremonious peak in 2015. China’s oil demand, however, was already outstripping its domestic oil production, and its usage was in a very pronounced uptrend. Oil was (and still is) a comparatively small part of its total energy consumption — it remains dominated by coal.

As time moved forward, the prospect was that this gap between China’s oil demand and domestic oil supply would grow larger and larger and larger, which has proven to be the case.

The commission was formed four years after China began accumulating crude oil for its nascent strategic petroleum reserve. The decision to build an emergency stockpile came in reaction to the global oil supply shocks of 2003.

You may recall that all of Iraq’s output went offline early that year, that Venezuela’s oil production collapsed by 90 percent from an oil workers’ strike and that 40 percent of Nigeria’s production was shuttered from rioting related to a contested presidential election.

Beijing’s directive was to create a 500-million-barrel stockpile by the end of 2020 and to then expand the stockpile to 1 billion barrels by 2025.

About two weeks ago, Beijing announced it would sell some oil from its emergency reserve to help alleviate upward price pressures. The announcement did cause some anxiousness in the oil market, and crude prices did fall back by about $1 per barrel. From our perspective, though, China’s announcement equated to throwing a deckchair off the Titanic.

In point of fact, it looked to us that China was simply attempting to manipulate prices lower ahead of what would likely be a large oil purchase.

Since the announcement two weeks ago, it has been indicated that China’s initial emergency crude stock sale will total just 7.4 million barrels.

This is less than one-half of one day’s crude imports. We expect there will be additional emergency stock sales but feel compelled to highlight that these will not alleviate its “triangle problem” and the secular pressure it faces to expand oil imports to meet still growing demand.

• Michael Rothman is the president and founder of Cornerstone Analytics, a US-based consultancy focusing on macro-energy research. He has nearly 40 years of experience covering the global energy markets and has been attending OPEC meetings since 1986.