from Follow the Money

Oil makes for strange bedfellows

October 29, 2006

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I certainly didn't see this coming.   It makes a certain amount of sense. 

Iraq needs investors with a high willingness to take risk ...

China doesn't exactly have a low risk portfolio of external assets right now.   It is very exposed to moves in the dollar/ RMB.    But it does have a generally low-yielding external portfolio.  If my estimates are right, it does have a concentrated ($700b) portfolio of dollar-denominated assets that pay around 5%, maybe a bit more.    Diversifying into even-lower-yielding euro assets doesn't offer much additional benefit -- the RMB/ euro could move more than the RMB/ dollar. 

But diversifying into oil is another thing altogether.   China is rather clearly is willing to take on a more than a bit more risk to try to profit from the rise in oil demand associated with its development.  In Angola (now China's largest supplier of oil).   In Sudan.  In Nigeria.  In Iran (though more for gas than oil).  In Kazahkstan.

And now in Iraq.   Southern Iraq that is.

China's willingness to put its surplus savings to work by snatching up the world's oil field's is clearly bad news for the world's private oil companies.  It will be harder and harder to find oil fields to buy on the "cheap" -- the price oil companies have to pay to develop a country's oil will go up.  But I am not sure it is bad news for the US.  If Iraq's oil flows to China, more oil will be available somewhere else to supply the rest of the world.

Still, I rather doubt those who led the charge to invade Iraq intended to open up Iraq's oil for Chinese investment.  Then again, they don't seem to have anticipated the majority of the consequences of the US invasion of Iraq ....

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