Off the keyboard of RE
Published on the Doomstead Diner on October 27, 2013
Discuss this article at the Economics Table inside the Diner
One of the longest running contrarian opinions I have spent ungodly hours debating on the net is the concept that the “Chinese Economic Miracle” is a sham, and that rather than ending up as Successors to the Great Amerikan Empire of the 20th Century, in fact they will likely end up with the most brutal problems of the Collapse of Industrial Civilization. It seems obvious enough to me that the path they have taken over the last 20 years to play “catch up” to the FSoA and Krautland as a Mercantile Powerhouse is unsustainable, but somehow the folks in charge of issuing mega-bucks of debt at the TBTF Banks have not had the same opionion. China has been the “Big Sink” for all the debt issued here, Hot Money off the Printing Press of Helicopter Ben Bernanke flowing over to China to Invest in new Factories for Widget Production, Ghost Cities, Bridges to Nowhere, High Speed Rail and all the rest, creating a Bubble of such outrageous proportions it makes Sub-Prime here in the FSoA look like GOOD INVESTMENT with SOLID FUNDAMENTALS. LOL.
Over on Zero Hedge this week, it was reported that China has now surpassed the FSoA as Oil Importer and chief Konsumer of Fossil Fuels, @ 6.3 mpbd to the 6.26 mbpd of the FSoA. The subtext here is that since China is using MORE Imported Oil now than the FSoA does, they are doing BETTER than we are! Their Industrial Paradigm is WORKING, while ours is FAILING!
Submitted by Rory Johnson via OilPrice.com,
Last month the world witnessed a paradigm shift: China surpassed the United States as the world’s largest consumer of foreign oil, importing 6.3 million barrels per day compared to the United States’ 6.24 million. This trend is likely to continue and this gap is likely to grow, according to the EIA’s October short-term energy outlook. Wood Mackenzie, a leading global energy consultancy, echoed this prediction, estimating Chinese oil imports will rise to 9.2 million barrels per day (70% of total demand) by 2020.
This trend has been driven by a combination of factors. Booming American oil production, slow post-recovery growth, and increasing vehicle efficiency have all served to reduce crude imports. In China, however, continued economic growth has brought with it a growing middle class eager to take to the road. While the automobile market had cooled earlier this year, September saw sales rise by 21%—a trend that is putting increasing strain on China’s infrastructure and air quality in addition to oil demand.
Some of the world’s largest traffic jams are now commonplace in major Chinese cities, and air quality issues have pushed authorities to pursue synthetic natural gas technology to offset the need for coal-fired electricity. Increasing oil consumption will only serve to exacerbate these issues.
Furthermore, the per capita consumption differential between the two countries is still vast, with an average Chinese citizen consuming a mere 2.9 barrels of oil per year compared to an average American who consumes 21.5. This indicates that China’s growing thirst for oil isn’t going to slow down anytime soon.
So what does this shift in oil imports mean?
More than anything else, it is a sign that China will increasingly depend on global markets to satisfy its ever-growing oil demand. This necessitates further engagement with the international system to protect its interests, encouraging a fuller integration with the current liberal order. This will have effects on both China’s approach to its currency and its diplomatic demeanour.
Derek Scissors wrote last week that this shift might usher in a world where oil is priced in RMB as opposed to solely in USD. This transition could only occur, however, if the RMB was made fully convertible and Beijing steps back from its current policy of exchange rate manipulation. Earlier this year, HSBC predicted that the RMB would be fully convertible by 2017, a reality that is surely hastened by its position as the single largest purchaser of foreign oil. A fully convertible RMB would be a “key step in pushing it as a reserve currency and enhancing its use in global trade, said Sacha Tihanyi, a strategist at Scotia Capital.
On the diplomatic side, while the United States is unlikely to withdraw from its role as defender of global oil production or guarantor of shipping routes, an increasing reliance on foreign oil will push Beijing toward a more engaged role within the international community. It is likely that we will see a change in Beijing’s approach to international intervention and future participation in multilateral counterterrorism initiatives—anything to ensure global stability. In the future, anything that destabilizes the oil market will increasingly harm China more than the United States. While Beijing views this increased import reliance as a strategic weakness, it a boon for those hoping to see Beijing grow into its role as a global leader.
Bottom line: as Chinese oil imports grow, Beijing will become increasingly reliant on the current market-oriented global system—this is nothing but good news for those that enjoy the status quo.
Why is increasing consumption of a non-renewable resource viewed as a GOOD THING? In all reality, this is a BAD THING, because obviously when the resource you depend on RUNS OUT or gets TOO EXPENSIVE, your whole paradigm is shot to hell. In the mind of the Economista though, Increasing Consumption is GOOD! It means Increasing GDP! In the pathway from Production (really Extraction) of Resource to its consumption, the Intermediaries along the way sieve off their “Profits”. This is how people get RICH! They insert themselves somewhere in the chain which goes from the Extraction of the Resource to its Consumption and production of Waste and take a piece of the downhill energy flow. The more WASTED at the bottom of the Pyramid, the RICHER the folks at the top of the Pyramid get.
To the people who run this show, China looked just GREAT! 1.3B potential Konsumers of Energy they could leverage on to still GREATER heights of Unimaginable Wealth! Long as those Chinamen are continuing to Increase in their Energy Konsumption, somebodies in the Middle of the flow are getting very, VERY rich! If you are in there as a BENEFICIARY of this waste based system, the LAST thing you want is for it to STOP! So China Bulls promote the Asian Economies as the Next Great Place to GET RICH, investing in the further build out of the energy intensive economy in this locale.
What is the PROBLEM here? The problem is the ENERGY increasing Production out of the Chinese Economy is becoming increasingly scarce and increasingly EXPENSIVE to extract with each passing day. On the Graphs produced of EXPECTATIONS, it looks like those Industrious Chinamen are gonna continue to BUY & BURN more energy than we can, so THIS is the place to Invest your Money! Can they REALLY continue on this Up Slope all that much longer though? When you peruse the latest RESULTS of this last ditch effort into Industrial Manufacturing on the Grand Scale, you see the small problem of ENVIRONMENTAL CATASTROPHE! Every day now another entire Chinese CITY gets shut down due to overwhelming SMOG! This is not bombast coming from the Blogosphere, it is straight off the pages of CNN and the rest of the MSM:
(CNN) — Schools, major roads and an airport remained closed Tuesday, as a thick cloud of filthy smog smothered the northeastern city of Harbin.
Meteorologists in the city, which is famous for its annual ice festival, issued a red alert for fog at 5 a.m. Tuesday, with visibility in some central areas of the city down to less than 20 meters (65 feet), the state-run Xinhua news agency reported.
Video from China’s state-run CCTV showed some people — obscured by smog even just steps away — wearing masks over their mouths as they walked in the province. Some drivers who braved the roads flashed hazard lights.
Kindergartens, primary and junior middle schools were ordered to suspend classes for a second day, while Harbin Taiping International Airport remained closed — with 250 flights canceled on Monday alone, according to Chinese state media.
Hazardous levelsChina’s toxic smog problemThick smog blankets city, closes schoolsOn China: China’s role in climate change
Pollution levels remained far above international standards, as the city’s monitoring stations on Tuesday showed that concentrations of PM2.5 — the tiny airborne particles considered most harmful to health — were more than 30 times the World Health Organization’s recommended standard, the state-run China Daily reported.
Government officials blamed the smog on a lack of wind and farmers burning crop stalk after their autumn harvest, though the city’s coal-burning heating system, which was recently started, is also a likely factor. Harbin’s environmental bureau has also conducted checks on factories known to discharge pollutants, the China Daily report added.
Fang Lijuan, the city’s chief meteorologist, said it was very rare for the city to suffer such extreme conditions.
“There has been no strong wind and the level of humidity is high,” she said, in quotes carried by China Daily.
Residents of this city of 10 million people were also surprised by the thick smog.
“The pollution is indeed very bad, we can only see things within 100 meters, and yesterday it was 20-30 meters. We can smell the smoke in the air,” one man, who identified himself as Mr. Ren, told CNN.
“The smog started about four days ago … I heard all face masks in Harbin are sold out. People are very angry about this and there is a lot of discussion over the Internet.
“The main reason is Harbin started its heating and the main resource is coal. Every year at this time, the air quality is bad — but this year is especially polluted.”
Naming and shaming
Last month China announced plans to start listing its top ten most air-polluted cities every month in the hopes that national humiliation will push positive environmental action.
“We must put air quality control as an ecological red line for economic management and social development,” China’s Vice Premier Zhang Gao Li said in a statement as he announced the new policy at the 18th Air Pollution Control Conference in Beijing.
Chinese officials did not say when the first list would be announced, but the northern megacities of Beijing and Tianjin, as well as the surrounding provinces of Hebei, Shanxi, Inner Mongolia and Shandong have signed onto an official plan to speed up air pollution control measures.
China’s capital often suffers with hazardous pollution levels and smog. An explosion in the number of cars on the roads, as well as industrial pollution are seen as the main contributors.
This is a sustainable paradigm? GIMMEE A BREAK! These folks got an Overshoot problem in Population non-pareil in absolute numbers, virtually ZERO Energy Resources of their own to mine up, depleted land for farming AND internal debt on Ghost Cities and Bridges to Nowhere too! The main ASSET the Chinese hold is a ton of IRREDEEMABLE DEBT issued over here by our Treasury Department.
Now, here is the REAL question to ask yourself. HTF is it that the “Richest” country in the world in say 1990 (ostensibly the FSoA) was able to borrow $Trillions$ from an impoverished COMMUNIST nation that at the time had pretty much ZIPPO in the way of Industrial Infrastructure? Where were the Chinese getting money to LOAN to the FSoA? Answer: They didn’t HAVE it until we BORROWED it. Then they created the money to loan out! This is just a bigger version of the same scam your local Bank does when it Loans you money on a Mortgage to buy a McMansion. AFTER you borrow the money at the current Interest rate charged for retail loans, the Bank then uses this asset to Borrow the money at a lower interest rate (nowadays ZERO) from Da Federal Reserve, who creates the money based on this new “Asset” on the Loan Book of the Bank who issued the loan out.
Of course it is a good deal more complicated than this with Securitization of Mortgages, Rehypothecation etc, but this is the essence of how this Money Creation Game works. So the Chinese become this ENORMOUS Lender, based on nothing really other than the fact it is a big country with lots of people in it. Investment money flows toward China from the Private Sector to build up the Industrial Infrastructure that will produce toys that Amerikans will buy on…yes still MORE Credit! This time a lot of it UNSECURED credit in terms of Credit Cards, but also HELOC loans based on a perceived Asset Value of McMansions that itself was all based on the further issuance of Credit.
The Finance and Economics industry has all sorts of neat names for this, “Animal Spirits”, “Bull Markets” etc, but basically it’s self-replicating FRENZY that develops when there are lots of Resources to exploit around, and the people in charge of Credit Creation set up the game to get outrageously RICH on the Spreads and Management Fees involved in pushing out all this Credit. All the laws are written to favor the Creditors, so even in a Bust situation they usually figure to come out OK. They just Repo the Assets for Pennies on the dollar, leave the Debtors completely Impoverished and then Reboot.
At least that it how it worked up to this iteration of the cycle, but this time really IS DIFFERENT. On this occassion, the Frenzy of Animal Spirits in the Bull Market basically exhausted the supplies of Cheap, EZ to Access Fossil Fuels that run the Industrial Economy, and most if not all of the Physical Assets created using this energy source such as Carz, McMansions and Factories are basically WORTHLESS in the absence of MORE Cheap Energy. You CAN repo them, but their Liabilities are greater than their TRUE Value, which is ZERO. You cannot repo at ALL the Oil burned up in the production of these now worthless assets, it is all floating around in the atmosphere now as molecules of CO2.
Which brings us back to Chinese Toast.
First, the idea that China’s energy consumption and importation of Oil will continue to Increase here for any great length of time is preposterous. Total Oil production has plateaued here, and all the major fields providing relatively Cheap Oil are declining in productivity. More and more countries who were net Oil Exporters are flipping over to being Oil Importers, if they can get Credit for that of course.
Second, all the countries which BUY Chinese products have hit a Debt Saturation point, and demand is falling across the board for just about everything except food, which is relatively inelastic. The Chinese environment overall these days for doing food production is deteriorating, so it is unlikely they can become Food Exporters.
Third, EVERYBODY KNOWS China has a massive Bubble in Real Estate, with Hong Kong PARKING SPOTS retailing out at like $200K. Ghost Cities, Bridges to Nowhere and a Pollution Problem so bad they have to shut down a City a Week these days as the Smog rolls in.
In their own way the Chinese appear to see the problem, and are Prepping Up by trying to buy up tons of Gold, Farmland in Africa and Coal Mines in Oz. It remains to be seen whether they can keep shipping food OUT of Africa to China when local Africans are STARVING. Whether the tons of Gold they are importing NOW will buy what is left of MENA Oil in 5 years is also an open question. Do Saudi Sheiks really need any more Gold? If the Saudi PEOPLE are starving, how long do the Sheiks maintain enough control to ship out any remaining Oil?
If the Chinese do go ahead and try to wholesale dump USTs, it will send the whole House of Cards down. They’ll never really be able to back Renminby with Gold, because anybody holding Renminby will want to convert it to Gold. If they don’t allow the conversion to Gold, then RMBY is NOT really “backed” by Gold. So the Chinese will play along here as long as they can, and the charade continues a while longer until there is some real hard stop in actual supply chains. Most likely to occur resultant from escalating War in MENA, but other possibilities exist as well.
On an economic level, when the price of production exceeds the price the customers can pay, this is what will force the shut-down of high priced “tight oil” production facilities, which is what keeps us plateaued here rather than seeing a large drop in total world Oil production. Steve on Economic Undertow refers to this as the “Triangle of Doom“, and the trend lines appear to converge around the end of 2014.
Rock, Meet Hard Place here. Far as the Chinese are concerned, this is the point at which they could not continue to Increase Consumption of Energy even if they wanted to. The customers won’t have money to buy it in greater quantities, and the Oil Extractors won’t be pulling so much out of the ground. Even a forced Credit Expansion by the PBoC won’t work, since Gold or no Gold in the basement safe of the PBoC, issuing out credit to buy what is not there to buy just devalues the credit.
It remains to be seen how real contraction of available energy affects the various Nations currently dependent on increasing consumption for nominal Growth in their respective GDPs. There will no doubt be demand destruction across the board here, which will make the Pricing extremely volatile. Forced conservation efforts may be undertaken also, and more peripheral countries triaged off the Credit Bandwagon also, leaving those countries still with access to credit to comepte with each other for the remaining supplies. However, you cannot get round the fact that less energy will be available here, because there simply are no sources of CHEAP energy, and that is what the Waste Based system has as its underpinning.
If Energy had been priced correctly from the beginning of the Industrial Revolution in terms of the Work it was capable of doing and the Finite Limitations of its availability, the structures we created in the intervening time would never have been built. The Eisenhower Interstate, the vast and spread out living arrangements of McMansions dependent on Automobiles, the long Supply Chains moving products 1000s of miles every day around the Globe…all of this was based on Mispricing Energy.
The above chart updates the one I posted in my last couple of articles by showing pricing through history in 2010 dollars, which gives you a better idea of the volatility during periods when Oil supply is not a sure thing. In those early years while Standard Oil was being consolidated as a Monopoly by John D. Rockefeller, the price of Oil was even more volatile than it is now. You can see the spikes which occurred through the period when various political events put a crimp in the supply chain of delivery from Well to Refinery, but overall until the Yom Kippur War the price of Oil and the availability of credit to buy it stayed LOW, and building out the system based on ever more extraction was possible. The volatility we see in the aftermath of that shows that the perpetual increasing production could not be maintained, and ever more expensive Oil has had to be sourced since then. If credit gets issued on FUTURE production, it gets defaulted on, because the price increases faster than the customers ability to purchase it does. On a gross level, the system is no longer GROWING, it is CONTRACTING. The numbers get masked by wacky accounting fraud gimmicks, but the results are quite obvious. More Biz goes BK, more homes foreclosed on, more Nation States unable to collect sufficient Taxes to support their systems.
The Chinese are really at the Leading Edge of this problem, regardless of what current economic indicators purport to show. They have one of the worst problems in Population Overshoot, real Resource Depletion issues with Water and Arable Land, dependence on Energy and Food Imports, horrible Pollution issues and a mercantilist economy quickly running OUT of customers to sell to. Heaps of UST paper and Mountains of Gold cannot save the Chinese. They are TOAST.