Who Controls The Oil Market? Not Who You Think...
by the Investment U Research Team
The world's largest countries are drastically changing the way they buy and sell oil. And it could affect every person, family, small business and large corporation across the globe…
So far, this historic shift has been vastly under reported. But the transformation is undoubtedly underway and quietly altering the future of energy.
These days, every time a new barrel of oil is discovered, the world uses four existing barrels. And believe it or not, China and India's demand for oil is still in its infancy.
Rapid economic expansion in these – and other – emerging economies has led their governments to make substantial changes in the way they obtain oil.
And they've opted to circumvent the traditional distribution networks of the New York Mercantile Exchange (NYMEX) and even the traditional international oil companies entirely. In fact, they're undermining them and "locking up" supplies by purchasing crude from the oil producing countries directly.
For example, over the past several years, China has gone on a global shopping spree for oil… cutting deals and locking up every source it can.
That includes tens of billions in loans to Brazil, Russia and Venezuela in exchange for future supplies; direct purchase of oil producing companies; and pledges of infrastructure to countries such as Angola and Kazakhstan… all giving China a claim to billions of barrels of future production.
Over the past decade, Chinese oil consumption has skyrocketed to more than 9 million barrels a day. And that's according to figures last recorded in 2010! Many believe the next decade could see an even larger increase as the country's demand continues to jump.
It has even become the world's second biggest importer of oil, relying on outside sources for about two-thirds of its daily usage.
That stems from not only the country's rapid industrialization but also its growing middle class' growing needs.
China's is the world's largest vehicle market, having already surpassed the United States (12.7 million vehicles sold in 2011) with over 19 million vehicles sold in 2012.
In fact, according to some estimates, China will have more cars on its roads in the next 20 years than all those we currently have in the U.S.
OPEC Looks East
Both producing countries and the large, consuming nations of Asia are bypassing the traditional paths oil has been traded through for decades.
So these days, the American markets and companies that have historically determined the commodity's pricing and allocation are in sudden danger of becoming much less important to the oil market.
Demand from the West, which OPEC has supplied for the past 50 years, is stagnating while energy-hungry Asian countries are refocusing the cartel's attention eastward.
Only a year or two ago, Saudi Arabia agreed to nearly double its export to India, which already relies on it for a quarter of its oil.
Chinese imports of Saudi oil even recently surpassed one million barrels a day. This came as Saudi exports to the U.S. – long its biggest and most important customer – slipped below that mark.
The CEO of Saudi Arabian Oil Company, Khalid A. Al-Falih, said earlier this year: "Our eyes are focused on China and we will continue to look for all opportunities."
Together, the two countries aim to boost trade by 50% to $60 billion by 2015. This should come as no surprise, since Saudi Arabia is looking for what it calls "demand security."
State-Run Oil Will Dominate the World Energy Market
The other key change to occur in the oil markets is the state-run oil companies' rise to power, steadily surpassing or threatening to surpass international oil companies such as ExxonMobil (NYSE: XOM) in importance.
Investors are going to have to get used to western businesses losing their monopoly on many of the world's most-prized oil fields. Instead Brazil's Petrobras ADR (NYSE: PBR) and China's Petrochina ADR (NYSE: PTR), CNOOC ADR (NYSE: CEO) and Sinopec ADR (NYSE: SHI) are quickly taking over.
Other large, state-controlled energy companies include Russia's Gazprom ADR (OTC: OGZPY) and Rosneft. As evidenced above, many are spublicly traded and listed on global stock exchanges.
In fact, as of 2010, the 13 largest energy companies in the world, measured by the reserves they control, were owned and operated by governments. Not to mention state-owned companies now control more than three-quarters of all crude oil production, while multinational oil companies barely produce a tenth of the world's oil and gas reserves.
This shift is to the tune of trillions of dollars, so don't think it's not a big deal.
National oil companies often appeal to investors because they have a number of important advantages over the international oil companies…
They either own or control much higher oil and gas reserves – as in the case with Petrobras and Gazprom – or they have access to a huge consumer market and benefit from the deep pockets and ambitions of their governments, as in the case with PetroChina.
In contrast, companies such as ExxonMobil are struggling to increase their levels of production, find new reserves and gain access to huge consumer markets such as China.
It's a brave new world in the oil markets. Investors need to realize that and invest accordingly.
This doesn't mean that it's necessarily safer to buy shares of state-run energy businesses… just that it's no longer quite so profitable to invest in their western competition.
Investment U Research Team