China's Energizing Enterprise

The Wall Street Journal today reports that Brazil has turned to China to help finance its oil exploration:

The nations are being thrust together by the global financial crisis. Brazil's state-controlled oil giant, Petroleo Brasileiro SA, wants to spend $174 billion over the next five years to elevate Brazil into the major leagues of oil-producing nations. With international capital markets on life support, China is among the few remaining sources of cash.

It isn't hard to understand why China is so interested in oil. With high growth, their dependence on oil has become almost exponential since 1980:

China's Oil Consumpsion.png

(Source: Department of Energy)

At around 8 million barrels per day, that means the 200,000 barrels per day that Brazil has promised amounts to a whopping 2.5% of their daily need. China is ranked second in oil consumption, still far exceeded by the U.S. at around 20 million barrels per day. That implies that the U.S. needs these kinds of agreements more than China right now. So why didn't the U.S. make Brazil a better offer? From that same WSJ article:

"The U.S. has a problem," Sergio Gabrielli, chief executive of Petrobras, said recently when asked about the loan talks. "There isn't someone in the U.S. government that we can sit down with and have the kinds of discussions we're having with the Chinese."

And later:

"What you are seeing is the new geopolitics of oil, where deals start from a political understanding and cut out the international oil companies," says Roger Diwan, a partner at PFC Energy, a Houston-based consultancy.

Obviously a state-controlled economy has an advantage in this instance, but there are still ways that the U.S. government could step in. It could guarantee loans made to U.S. oil companies, enabling them to provide cheap financing to Brazil. This would not be entirely unprecedented, as industries such as big sugar have relied on U.S. government loan guarantees to remain competitive.

While such a move might not scream capitalism, it's unclear how else the U.S. can compete when a powerful nation's government is willing to take such measures. After all, Brazil is probably the best prospect the U.S. has for a major oil provider in the Americas.

This news is even more startling if taken into context with Lisa Margonelli's piece on clean energy in May's edition of The Atlantic. She makes an important point about clean energy's reliance on rare earth metal neodymium, a necessary component for lightweight permanent magnets in hybrid motors and wind turbine generators:

But in 2006, nearly all of the world's roughly 137,000-ton supply of rare-earth oxides came from China. And over the past few years, China has cut exports to nurture its own permanent-magnet industry, sending the price of neodymium oxide to a high of $60 a kilo in 2007. This worries analysts like Irving Mintzer, a senior adviser to the Potomac Energy Fund who sees shortages stifling clean-tech industry, and worse. "If we don't think this through, we could be trading a troubling dependence on Middle Eastern oil for a troubling dependence on Chinese neodymium."

Now add to that today's news of the Chinese government pushing alliances like that with Brazil. It's pretty clear that China is serious about making its dominance felt in the world energy market.

Why does this matter? Because virtually everything businesses do directly or indirectly relies on energy consumption. China knows that and is taking steps to insure its growth is uninterrupted while becoming an integral player in the world's energy needs. Meanwhile, the U.S. may be falling behind, hindering its economic recovery and hopes for energy independence.