Interpreting Middle East Economic News and Analyzing Market Trends

China is hooked on Mideast oil, which helps build a good case for a Petroyaun

China Oil Transit Routes 2013Source: Zerohedge (click on map to view larger size)

Last year China became the world’s largest oil importer, surpassing the U.S. for the first time.  The U.S. reliance on imported oil has been declining ever since shale oil production began to rise in 2008.  We remain skeptical on the long-term viability of U.S. shale production, but that’s a different story.  You can see our posts on the subject here and here.  Going back to China, what does this mean for Middle East exporters?

China and US Oil Imports and Trends       

A look at the chart above and you can see how U.S. oil consumption has been flat or declining since 2006, while China and other emerging countries are seeing rising consumption.  More importantly, the map above show how reliant China is on Mideast oil.  In 2011, 49% of China’s oil imports came from the Middle East and this number is rising.

China Oil ImportsSource: Zerohedge (click on table to view larger size)

What’s even more concerning is the importance of the Strait of Malacca to China.  Roughly 85% of all imported oil to China passes through the strait, which has been the center of piracy in Asia for decades.  It might also explain the growing tensions in the region on fishing rights, shipping rights and territorial claims on barren islands.  To help secure China’s oil, it has been building an oil pipeline from Burma to Kunming China, which will carry gas and crude oil off-loaded by tankers arriving from the Middle East.  This pipeline is expected to be operational this year.  This pipeline would allow China to completely bypass the Strait of Malacca.

With the growing relationship between China and the Middle East, it’s no wonder that there is now talk of a Petroyuan.  The yuan (RMB) is expected to be fully convertible by 2017.  Once it is, expect oil as well as other international trade to be conducted in yuan.  However, due to the growing problems in China; such as its over-extended credit markets, over-leveraged banking system, rising default rates, slowing GDP due to weak foreign markets and rising social tensions, just to name a few, expected the yuan’s full convertibility to take several more years.