China doesn't only buy oil on the world market. They are also buying entire oilfields in foreign countries in an effort to lock-in supply for the long term. This is creating tension in the USA who are increasingly aware of the approaching oil crunch (where demand exceeds supply). At least the Chinese haven't invaded anyone to secure their oil supplies. Yet...
From today's Financial Review, Page 11
Australia watches China, Brazil's new strategy
There's no worrying equity issue in deals with state-owned suppliers, writes Colleen Ryan in Shanghai.
China's strategy of offering bus loans from its cash-rich supplies of energy and resources took a significant step forward with the signing of a $US10 billion (($13 billion) loan agreement with Brazil's state-owned oil group, Petrobras, in return for the supply of up to 200,000 barrels of oil a day for the next 10 years.
China Development Bank will provide the funding - the same bank that is leading the consortium to fund Chinalco's proposed acquisition of an 18 per cent stake in Rio Tinto.
The Brazillian deal follows three similar deals in recent months to secure oil supplies. In February, China agreed to provide $US25 billion in loans to Russian state-owned companies in exchange for 300,000 barrels of oil a day for the next 20 years. Earlier, Beijing signed a $US10 billion deal with Kazakhstan and a $US4 billion deal with Peru in return for energy supplies.
The latest deal was announced during a high profile state visit to Beijing by Brazillian President Luiz Inacio Lula Da Silva, who brought 180 business leaders to push along new deals between Brazil and China.
Mr da Silva was given a lavish welcome by Chinese Preseident Hu Jintao and a 21-gun nilitary salute at Tiananmen Square.
China surpasses the United States last month to become Brazil's largest trading partner. And the focus that Mr da Silva and Mr Hu are placing on the China relationship provides an interesting comparison with the sensitive nature of Australia-China relations.
There is no thorny question of Chinese equity in either Brazil's major oil or iron ore producers - Petrobras and Vale are both state-owned. This removes an element of tension that tends to dominate Australia's relationship with China.
In the trade policy area, Brazil has still not approved China as a market economy. Australia, meanwhile, gave away market economy status to China before launching free-trade agreement talks that have now stalled after limping along for years.
Mr da Silva lauded the strategic relationship between China and Brazil, established 16 years ago, after meeting Chinese Premier Wen Jiabao on Tuesday.
"I believe Brazil and China are consolidating their strategic partnership, which is reflected in bilateral trade. I also believe the current status is just 10 per cent of the potential" Mr da Silva said. Australia has not yet established a strategic partnership with China.
Brazil and China also have the membership of the BRIC group, which includes Russia and India, to cement their relationship. The BRIC couuntries took the unusual step of releasing their own communique during the G20 summit in London last month. A summit of BRIC leaders is scheduled to be help in Russia next month.
Prior to his visit to China, Mr da Silva gave an interview to Chinese business magazine Caijina in which he gave voluble support to a plan foloated in Beijing recently by the centralk bank governor to replace the US dollar as the international reserve currency.
"Brazil and China need to establish a trade that is paid for in our own currencies", Mr da Silva said. "We don't need [US] dollars. Why do two important countries like China and Brazil have to use the dollar as a reference instead of our own currencies?"
In the Great Hall of the People this week, the two presidents witnessed the signing of 13 co-operative agreements. The oil and financing deal was the most prominent one and others covered agriculture, ports, science and space technology.
The chief executive of Petrobras, Jose Sergio Gabrielle, said after signing that the interest rate of the $US10 billion loan from the China Development Bank was less than 6.5 per cent. He said the loan used oil revenue as collateral and would be repaid in cash, not oil. The deal does not include guarantees to buy Chinese products or services.
Mr Gabrielli said concessions for Chinese oil companies to produce oil in Brazil could be discussed in the future. Petrobras may also look into exploring for oil in China. The company sells about 60,000 barrels of oil a day to China, he said.
In a separate deal, the China Development Bank also agreed to lend Brazil's development bank, Banco Nacional de Desenvolvinmento Economico e Social, $US800 million to bolster its cash in the middle of the financial crisis.
Sinopec, China's largest oil refiner, will also explore for oil in Brazil, said Zhang Guobao, the head of China's National Energy Administration.
WEhile the Brazilian deals have generated a lot of attention in China, cynics point oit that the proof is in the execution of the agreements, not the rhetoric.
For examplem when Mr Hu visited Brazil 4 years ago he promised $US7 billion of Chinese investment. So far, only $US142 million has been invested, which is equal to about $US2c on the dollar.
End of article, start of analysis:
1. The Chinese have loads of cash to toss into securing their energy supplies. While the US is trying to bail out their dinosaur car makers, the Chinese have spent $US49 billion THIS YEAR on securing access to oil. While this is less money than the US has spent in Iraq, I'd say the Chinese approach seems to be pretty darn effective.
2. Trading in their own currencies will place more pressure on the $US. Petrodollar recycling is the only thing keeping the US economy afloat and once oil starts being traded in Euros (like Saddam proposed shortly before the US so clearly declared their displeasure with him) or Yen then other countries will no longer need to keep a stash of dollars to trade with. The US has been the world's oil banker since the 1970's and it looks like the party is well and truly OVER.
3. The Brazil deal does not require Brazil to buy anything from the Chinese economy. Very strange and an excellent deal for the Brazillians - they get the cash and all China wants is that liquid gold...In effect they are saying "We know there's enough world demand for the goods made in our ultra-low-cost factories (prison slave labour camps) - but we're so desperate for that oil we'll even give you a low interest rate on the money.
4. If the Chinese are SO desperate to buy oil from Brazil, I seriously doubt the Brazillian prospectors will find much in China. Their back yard would be pretty well picked over by now if they are prepared to pay top dollar for Brazillian crude.
5. And to further isolate Brazil from US influence, we'll even toss in $800 million in cash to keep your banking system afloat.
6. Four years ago, the Chinese tested the waters and made a lot of promises. But that was before the oil supply peaked and drove the price to $140 a barrel. Now that the writing is on the wall, the Chinese are ready to make their move.
It won't be long before the Chinese use their petty cash tin to buy up all the infrastructure in the USA. Ports, airports, electricity, communications, manufacturing and turn the US worker in a serf. Just watch the US Auto Worker's Union try to organise a strike when the Chinese military intelligence owns the phone lines and mobile phone companies. The longer they wait, the weaker the US dollar becomes, the cheaper the takeover is.
You might call it the python's approach to business: financially strangle to victim, then swallow them whole.