Dude, Where’s My Oil?

Reading a newspaper in Beijing this week, two stories on the same page grabbed my eye. A Chinese company is trying to buy the Hummer brand from GM and the state-owned oil company is building massive storage tanks to stockpile gasoline and diesel fuel. It may make one chuckle - - they’ll need more gas to serve all those gas-guzzlers - - but there’s a more important message to take away from this news.


First, when a country the size of China increases reserves of anything by half, the rest of the world can expect shortages and lasting price increases. When it’s refined fuels - - not crude oil, but refined gas/diesel - - that’s even more daunting, because it takes three barrels of oil to make one barrel of refined product. That means much of the global crude supply is about to disappear, which will also drive up the price of plastics, building materials, and other things that come from a barrel of black gold.


Second, if China is strategically preparing for the rebound of the global economy by stockpiling oil products, it is probably gobbling up other commodities too. Why not - - China is sitting on a trillion dollars or more of foreign currency and their growth rate is still red hot by global standards (estimated to be at least 7% in 2009, while most other economies are in negative territory). While commodities are cheap because of sagging world demand right now, China can buy up supplies and sit on them, like any smart investor betting on a resource-constrained future.


Smart businesses would be looking for alternatives and locking up their supply chains. Even smarter ones would figure out how to get the same productivity with less, because we’re about to experience shortages of basic commodities at any price. And when you buy your next Hummer, don’t be surprised if the gas gage reads "Empty" in Chinese.


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