China dumps dollars for oil and gold

[Saul Thomas <stthomas@uchicago.edu>]

http://www.kitco.com/ind/Texashedge/oct182004.html

By The Texas Hedge
Todd Stein & Steven McIntyre

October 18, 2004

texashedge.com
	
Safeguarding one's access to vital natural resources such as oil and gas is 
crucial to nation's long-term prosperity. But telling soldiers and their 
families that they are fighting in part to protect against the threat of 
$10.00/gallon gasoline is not exactly good for morale or public relations. 
Protestors chanting "No blood for oil" would have a field day if the White 
House press secretary made an announcement such as, "Good news, the Baghdad 
Museum has been looted, 1,000 American troops have been killed, but we have 
secured 90% of Basra's oil fields."

Skeptics would tell you that part of the reason why American and NATO 
troops remain in Afghanistan after overthrowing the terrorist-harboring 
Taliban is to get a foothold in the game for Caspian Sea oil. Whether or 
not you believe these skeptics, it is a fact that multinational energy 
companies have developed a renewed interest in building gas and oil 
pipelines linking the Caspian region with the lucrative international 
market of the Arabian Sea. This activity has worried the three large powers 
in the Central Asian region: Iran, Russia and China. All three of these 
countries have indirectly (or sometimes directly) supported America's 
enemies over the last three years with either military or financial 
assistance. While Iran and Russia have long supplied America's adversaries 
with arms, the fact that China has stepped up its efforts in this arena 
marks a disturbing trend.

China, which President Bush has called a "strategic competitor", will see 
its demand for industrial energy more than double over the next 15 years. 
China's electricity demand has doubled within the last decade and is likely 
to quadruple by 2019. Could China's recent shenanigans in the region be a 
small baby step for an energy-hungry power getting restless?

As can be seen from the chart above, China was a net exporter of oil until 
about ten years ago. Today, China is the world's #3 consumer of oil behind 
the United States and Japan. Given its population and need for 
infrastructure, we can confidently predict that China will sooner or later 
overtake both nations and become the world's leading importer of oil, 
bringing it into conflict with the developed world.

China has already invested billions of dollars into pipeline projects in 
Central Asia and the Middle East and has strengthened its relationships 
with governments from energy-rich states. For example, China is Sudan's 
largest trading partner and the most important foreign investor in Sudan's 
oil industry. China National Petroleum Corporation has a 40% stake in the 
international consortium extracting oil in Sudan, and it is constructing 
refineries and pipelines, enabling Sudan to benefit from oil export revenue 
over the last five years. Recently, China deployed thousands of troops to 
Southern Sudan to protect its pipeline interests while Western oil 
companies have been withdrawing from the war-torn African nation. Sudan has 
been accused of using its oil revenue to purchase arms for its wars against 
its black African population in its Darfur region. In a classic example of 
realpolitik, China has threatened to veto a resolution that would consider 
U.N. sanctions against Sudan's oil industry if Khartoum does not stop the 
genocide. Could Chinese PLA troops in Sudan be a first step in China's 
growing expansionism throughout Eurasia?

Like Britain a century ago, the United States has greatly over-borrowed in 
an effort to control access to the world's energy supply and at the same 
keep its domestic economy firing on all cylinders. As competition for 
diminishing oil resources threatens U.S. dollar hegemony over world oil 
transactions, expect to see increased Chinese political and military 
presence in the Middle East. The presence of Chinese PLA troops in Sudan, 
in our opinion, marks the middle kingdom's entrance into the great game. 
China's next move could come in the form of massive dollar devaluation when 
they decide to unload their supply of accumulated greenbacks. China just 
recently released six billion of those greenbacks for its purchase of 
Noranda Mining - Canada's biggest mining company. Keep your eyes open for 
stepped-up greenback dumping by China in exchange for natural resources 
such as oil-bearing properties or perhaps more mines. We predict that in 
the near future, Saudi princes will decide to denominate some of their oil 
transactions in Yuan (or at least something other than dollars) and invest 
their profits into shares of China Mobile or PetroChina instead of Citigroup.


October 19, 2004
Todd Stein & Steven McIntyre
Texas Hedge Report