REVEALED: Debt, China and an oil price at $50 a barrel



mesnipThis isn’t a scoop: far from it – I was sent a Reuters story about it last night, and since then have contacted those who should know in Asia. The story seems to explain to me why we’re back at $50 oil, why China is buying so much of it, and the geopolitics involved in Beijing’s continuing support for Emerging Market countries. What it also makes clear is that $50 oil is NOT based on real demand-driven global recovery.

We got trouble, right here in Beijing City, with a capital T and that rhymes with D and that stands for Debt.

Debt is one of the strongest weapons the West in general and the US in particular have for reining in those they see as enemies. They messed up Putin with oil manipulation. And they forced Hollande to about-turn towards austerity with an attack on French sovereign bonds. The Chinese élite has long suspected the US of attacking their currency (both buying and selling, sometimes through Japan), and of course this was the initial tactic used to get Iran onside.

China’s longer-term strategy – as evidenced by the already successful AIIB – is to create a credible transmission and investment currency to rival the Dollar hegemony….especially the petrodollar.

To this end, Beijing has both invested and lent money to EM oil producers like Angola, Nigeria, Iraq, Venezuela and Kurdistan – who together owe some $40 billion to China. To one extent or another, however, the collapsing demand for oil and consequent glut has left these countries in difficulties when it comes to paying cash.

So China has taken a smart decision: to stockpile oil while the price is low….and to buy it from nations in debt to it. This both protects the money they lend, and supports Beijing’s spheres of influence.

Specifially, the producers are paying off Chinese debt in oil. China has, for example, become Venezuela’s top financier via an oil-for-loans programme which, during the last decade, has funneled $50 billion into Venezuelan coffers in exchange for repayment in crude and fuel, including a $5 billion deal last September.

Keen to hype the oil price as “evidence” of a global recovery, Wall Street and Texas have been happy to show the increased volume – and pump the price of crude up on the basis of it. Ironically, this is also a geopolitical own-goal, because it means EMs can repay debt more quickly from now on, and China doesn’t wind up saddled with bad debt. China has already stockpiled oil in the cheaper $30-35 range as part of a fixed-price deal….which I understand is soon to come to an end.

But as Reuters points out, every wheeze has its consequences. People tend to look at current production volumes, but committing your entire production to China means (a) little room for negotiation and (b) ALL the income being used to pay off debt….rather than investment in new plant and markets. This is precisely the export dependence on China that will smack Australia in the teeth before too long.

Intriguing. And as always, debt, oil and energy geopolitics are behind what’s really going on. Global recovery? Of course not: look at the transportation, trade and real salary numbers throughout the West.

Connected at The Slog: A forming global duopoly