China's Energy Future

Brian Hicks

Updated July 20, 2010

Even after all these years of double-digit growth, it seems as though China is still hungry.

And while China bears like Marc Faber, James Chanos, and James Rickards see nothing but bubbles behind the Great Wall, her 1.3 billion people are refusing to cooperate.

Instead, they are as hungry as ever as they drive the country’s economy to new heights in search of a better life.

So while the country’s housing market is building a bubble of epic proportions; by its sheer size alone, China’s demise seems to be greatly exaggerated at the moment…

China’s energy future: full steam ahead

It seems like no matter how much the Chinese put on their collective plate, it’s not enough.

This fact is never more apparent than in the energy markets, where The Dragon remains unquenchable.

After all, China is no different than any other nation in the world when it comes to energy… It needs massive amounts of power to keep it all going. Without it, its “economic miracle” would wither on the vine.

Simply put, China needs energy in the same way that its babies need rice. As the Chinese economy grows, power consumption must grow right along with it.

And unlike the U.S., where energy usage peaked in the latest bubble, China’s per capita energy usage still has a ton of room to grow. That’s because by comparison, the average Chinese consumer burns five times less energy annually than the average American does, leaving nothing but upside as the Chinese workforce consistently consumes more.

It’s a pattern that will continue, even if the economy begins to “slow.”

(Keep in mind that 8% annual growth for them would be considered a downturn. Meanwhile, the U.S. economy will likely remain stuck in the ditch for some time growing by just over 3%.)

In effect, we’re seeing two ships, passing in the night: One that peaked on the madness of cheap money, and the other that’s just getting warmed up.

Believe me — there’s only one setting on the Chinese throttle, and it’s full steam ahead…

Even after China reported last week that its second quarter growth had moderated, Premier Wen Jiabao said, “Only through sound and relatively fast economic growth can we ensure employment. We should expand domestic demand while stabilizing overseas demand.”

In other words, an overheating economy or not, China’s going to keep the pedal to the metal. And that’s after GDP growth fell from 11.9% to 10.3% in the second quarter. If we only had those problems, the Dow would be north of 20K by now…

As I said before, it takes more energy usage to make it all happen. And that’s why no one should be surprised to hear that China is now the world’s biggest energy consumer — a title the U.S. held for over a hundred years.

According to new data from the International Energy Agency, China consumed 2,252 million tons of oil equivalent energy last year — about 4% more than the U.S.

It was only 10 years ago that China consumed half of what the U.S did.

“The fact that China overtook the U.S. as the world’s largest energy consumer symbolizes the start of a new age in the history of energy,” said IEA Chief Economist Fatih Birol on the latest energy milestone.

But there is still one place that the U.S. is king of the jungle: oil.

Even in this Chinese growth story, the U.S. still uses twice as much crude as China does — 19 million barrels of oil a day, compared to 9.2 million barrels.

China’s automotive future

But even the days of U.S. oil consumption domination seem numbered, since China now boasts the world’s number one car market (as of last year). It was the first time since the days of Henry Ford that any country other than the United States led the globe in auto sales.

Total Chinese vehicle sales may hit 17 million this year — more than the biggest year ever in the United States. That’s why Ford (NYSE: F) and General Motors are working overtime to grab a piece of this market.

Did you know that GM is on pace to sell 2 million vehicles in China this year, and is forecasting sales of 3 million units by 2015?

Or that Ford is building a $300 million assembly plant in Nanchang with capacity to build 300,000 vehicles a year?

That’s because in China, cars are literally changing landscape — much in the same way they did in the States 60 years ago.

“A car has become the new ‘must have’ for lots of households,” one Chinese car company executive told The Financial Times recently. “Buying a car has become the most desirable thing to do.”

As a result, China has spent years building a highway system that is second only to our own, adding over 30,000 mile of pavement since 1998.

But this only scratches the surface of how big this market can become…

Even as it becomes the biggest car market in the world, China only has about 40 vehicles per thousand residents. That’s nothing in a world in which Europe has 590 per thousand; the U.S. – 950.

Clearly, China has the potential to put untold millions of more vehicles on the road.

But here’s the rub…

With less than two percent of the world’s oil reserves, most of China’s growing oil needs are going to have to be imported. After all, a car-centric economy really only runs on one thing: lots and lots of crude.

That’s one of the reasons that you could easily argue that long-term crude is cheap here, since there still plenty of room for demand to grow — even as the rest of the developed world takes a breather.

Think about it…

The world is suffering under the weight of the greatest financial crisis since the Great Depression, and oil is still twice what it was five years ago.

Think about where the price is headed when demand perks back up and all of these new Chinese cars hit the road.

I myself pondered those two points — and that’s why I was all ears when Christian DeHaemer told me earlier this year about an old oil find in Mongolia roughly the size of Connecticut.

After all, Mongolia is practically in China’s backyard. 

What’s more, according to Christian, the oil is plentiful and easily accessible. Unlike the rest of the new finds, it isn’t under 5,000 feet of sea water, buried deep inside a mountain range, or even in hard-to-process oil sands.

It’s just below the Earth’s surface — in conventional, easy-to-drill deposits.

And here’s the real kicker, according to DeHaemer: “One tiny, under-the-radar company owns it all.”

That’s why, when Mongolia emerged as having a substantial amount of oil, China immediately jumped into the mix.

Confucius once famously remarked, “China’s gotta eat… “

When it does, crude oil is sure to be on the table.

Your bargain-hunting analyst,

steve sig

Steve Christ
Editor, Wealth Daily

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