Longer entry for Crisis on the China Rim
Report Title: Crisis on the China Rim: An Economic, Crude Oil, and Military Analysis (2005.04.14)
"China's People's liberation Army (PLA) is embarked on an ambitious, long-term military modernization effort to develop capabilities to fight and win short-duration, high-intensity conflicts along its periphery."
-US Department of Defense
Annual Report on The Military Power of The People's Republic Of China
FY04 Report to Congress on PRC Military Power
Pursuant to the FY2000 National Defense Authorization Act
June 2004
Crisis on the China Rim: Our Conclusions
Report Summary: There is a crisis rising on the China Rim, a crisis made of economic imbalances, energy insecurities, ancient hatreds, and unsettled scores. The catalyst for this crisis is success itself, the success of the People’s Republic of China (China) (PRC) in its de facto rejection of a failed experiment in communism and its rapid transformation into a thriving market economy. The inseparable companion of this success, though, is an insatiable hunger and thirst for precious and scarce resources... most important among these, crude oil. In a world that has been frozen in denial over the impending depletion of crude oil reserves, the emergence of China’s 1,298,847,624 citizens as a vibrant global economic force is thrusting every net importer of crude oil—particularly those on the China Rim—into an urgent quest for energy security. And it is thrusting every net exporter of crude oil—particularly those on the China Rim—into a rare concern over national sovereignty. Simply put, there will be far greater demand in the China Rim region for crude oil over the next five, ten, twenty, and fifty years, than there will be supply. And the China Rim is already deep in a fierce competition for energy security that the quick and strong will win, while the slow and weak succumb...
Based on our analysis of the intense economic, crude oil, and military confrontations developing among the China Rim region’s largest economies, we believe that the most aggressive crude oil price targets calling for $100 per barrel within the next three years will prove to be conservative. In our view, specific crude oil price targets are the realm of financial organizations with equity and commodities trading desks. As a pure independent research firm, we have neither. However, it is our opinion that the “likely direction of surprise” in crude oil prices will continue to be to the upside...
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The China Rim Region is comprised of China plus 18 surrounding countries. Of these 19 countries, only four - Russia Kazakhstan, Vietnam and Kyrgyzstan - generate a net production surplus of crude oil. Overall, this 19-country region generates a net crude oil production deficit of more that 1.7 billion barrels annually, and that deficit is rapidly expanding.
The China Rim region's net crude oil production deficit is concentrated among five countries, four of which - Japan, South Korea, China and Taiwan - border on the East China Sea, an historical vortex of confrontation and violence. Combined, these four countries generate an expanding crude oil production deficit of more than 3.8 billion barrels annually. The fifth, India, generates an expanding annual crude oil production deficit of another 0.5 billion barrels annually. The annual crude oil production generated by these five China Rim region countries is more than 4.3 billion barrels and growing.
China, at the hub of the China Rim, is home to 20.4% of the world's population, but accounts for only 1.8% of the world's proven crude oil reserves. This huge disparity has already begun to heighten political tensions in the Chin Rim region. The 19 countries, including China, that compose the China Rim region are home to 50.1% of the world's population, but account for only 9.7% of the world's proven crude oil reserves. Even if large reserves of crude oil are eventually proven in the East and South China Seas, the disparity between these population and reserve figures appears likely to remain immense.
Sharp economic expansion has already created an annual crude oil production deficit of more than 0.7 billion barrels in China, despite the fact that China's annual per capita crude oil consumption is still only 1.6 barrels, 93.7% less than the US's 35.4 barrels. As China's economy continues to expand, and its per capita crude oil consumption continues to increase, the competition for crude oil supplies along the historically violent China Rim appears likely to escalate and provide considerable support for a sustained increase in crude oil prices. At worst, this competition could deteriorate into armed conflict.
There is not one new economic behemoth emerging in the China Rim region, there are two. The second, India, is achieving high single-digit economic growth, has proven crude oil reserves of only 5.1 barrels per capita and is already generating an annual crude oil production deficit of more than 0.5 billion barrels despite the fact that its yearly per capita crude oil consumption is still just 0.8 barrels.
The simultaneous economic rise of China and India will have a huge impact on worldwide crude oil markets. Specifically, an increase of only "one barrel" in per capita crude oil consumption in China and India combined will boost annual worldwide consumption by 2.4 billion barrels, or 8.6%. This incremental demand, we feel, is likely to provide considerable support for a sustained increase in crude oil prices. Our Our calculations indicate that, as of mid-2004, China and India had a combined population of 2,363,000,000 and average per capita crude oil consumption of 1.2 barrels, just 17.4% of the worls per capita consumption level of 4.3 barrels annually. This also compares with annual per capita consumption of 25.4 barrels in the US, 15.9 barrels in Japan, and 10.3 barrels in the UK.
The large and expanding crude oil production deficit currently being generated by the China Rim region's five largest economies is already causing their hunt for crude oil supplies to "spill over" into distant geographic areas such as North America, Central America, and South America. This is likely, we feel, to provide further support for a sustained increase in crude oil prices.
The rapid and simultaneous rise of at least two behemoth economies, China and India, comes at a time when the world's crude oil production appears poised to peak. A sustained upward move in crude oil prices is likely to create drilling economics that will favor the exploitation of reserves that were previously uneconomical to tap. However, the marginal increase in reserves that might result is unlikely, in our view, to substantially offset the crude oil price impact of an eventual worldwide "peak" in crude oil production. In our view, it might, at best, delay that peak.
Given the tremendous costs and risks associated with importing crude oil into the China Rim region from the violent Middle East, we anticipate that pressures will continue to mount on the region's largest crude importers - Japan, South Korea, China, India, and Taiwan - to secure the reserves on the China Rim. As a result, the China-Taiwan reunification issue is a potentially violent Chin Rim flash point. The broadly based confrontation between China and Japan could easily, in our view, escalate into another. China's pursuit of direct "land bridge" access to Bay of Bengal and Arabian Sea crude oil sea lanes via Burma and Pakistan, respectively, will likely, in our opinion, be perceived as a threat by India. China's drive for access to the Caspian Sea's huge crude oil reserves via the Kazakhstan "land bridge" is likely to create mounting tensions with Russia. South Korea, facing the inevitable economic disaster of reunifying with North Korea, is likely, we feel, to slip back into Chinese suzerainty.
From a global perspective, the world's total population of 6,379,000,000 implies that each one barrel increase in the world's annual per capita consumption of crude oil would require an additional 6.4 billion barrels of worldwide crude oil production. This hypothetical increment would represent a 23.4% increase in production from recent worldwide crude oil production levels of approximately 27.4 billion barrels. It the world's average annual per capita consumption were to increase by two barrels, the increment to demand would represent 46.8% of recent worldwide produstion. One of the most important lessons we have learned in the course of our travels through Asia, Europe, and North America is that globalization is spreading at an accelerated pace. In algebraic terms, "the rate of change in the rate of change" of globalization is increasing. Globalization implies that the world's average per capita consumption of crude oil of only 4.3 barrels yearly will gravitate towards the much higher levels reported by the wold's more economically advanced countries such as the US (25.4 barrels per capita), Japan (15.9 barrels), and the UK(10.3 barrels). This is likely, we feel, to provide considerable support for a sustained increase in crude oil prices.
While China's economic rise is fostering a worldwide grab for crude oil reserves, it is also creating a "war chest" with which China is financing the rapid modernization of the People's Liberation Army (PLA). The PLA, in turn, is the ultimate guarantor of China's energy security.
One key purpose of this analysis is to provide oue research users with a "context" or "unified theory" for interrelating economic, crude oil, and military developments on the China Rim. Towards that end, we have developed two indexes designed to measure military spending relative to crude oil consumption and imports.
(emphasis in original)
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Report Date: Thursday, April 14, 2005
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