Another leftist narrative died on Sunday when the New York Times reported that the Chinese have been the biggest beneficiary of the recent Iraqi oil boom. No longer can one credibly argue that American soldiers died for the profits of Western oil companies.
The Times’ near-breathless reporting makes it look like China’s state capitalism works, but the reality is that its national oil companies are outbidding others for Iraqi fields just at the wrong time.
The Chinese now buy an average of 1.5 million barrels of Iraqi oil each day, almost half of the country’s production. They may even increase their share of Iraq’s oil as it looks like they might purchase ExxonMobil’s stake in West Qurna I or partner with the American company in that oil field.
The Times report will inevitably stir emotion because the Chinese did just about everything in their power to hinder the U.S. war effort, including supplying, through Iran, arms and ammunition to insurgents fighting American forces.
The fact that Washington allowed China to participate in the killing of U.S. soldiers is an American policy failure of the first order. Yet now that we have failed to hold China accountable and now that Iraq is run by its own government, there is nothing we can do to prevent Chinese state oil companies from competing against the Western majors for oil rights in Iraq.
And the Chinese companies do not just compete. They win. They have shown they are willing to accept Baghdad’s terms that permit only razor-thin profit margins. Moreover, they readily accept Iraq’s onerous conditions. China’s national oil companies agree to terms that others reject for the simple reason that Beijing orders them to do so. “Chinese companies do not have to answer to shareholders, pay dividends or even generate profits,” the Times correctly notes.
Many say Chinese state capitalism is superior to the American variety. And from the look of things in Iraq, it’s clear Beijing’s way of doing things gets results. In short, while the Times writes admiring stories, China’s companies are pumping oil in Iraq fast and furiously.
Yet there is such a thing as karma in the oil patch. Chinese oil companies may now be riding high, but they are just about to suffer a change in fortune.
The New York Times, accepting the dominative narrative, tells us that China is importing energy “to keep its growing economy running.” There is this notion that Beijing is inhabited by genius technocrats and that they can keep the economy expanding indefinitely. As they brilliantly manage their country, we are told Chinese enterprises will continue to devour Iraqi oil and the rest of the world’s commodities.
Not so fast. Just as the Times issued its story, HSBC, the global banking giant, released its purchasing managers’ index for China for last month, and it was a doozy. The index, which measures the health of the manufacturing sector, stunned analysts by showing that activity at Chinese factories tumbled from expansion to contraction in May.
The indicator is consistent with others that suggest China’s manufacturing is on the ropes. For instance, electricity production, by far the best indicator of Chinese economic activity, increased just 2.9 percent in the first calendar quarter of this year. And because the growth of gross domestic product has historically been about 85 percent of electricity growth, we are looking at an economy that may be expanding at only a 2.5 percent rate instead of at the 7.7 percent that Beijing’s National Bureau of Statistics claims.
In recent years, Beijing has directed its oil giants to overpay for foreign fields, splurging $12 billion in 2011 for instance. That may have been justifiable when China’s economy was growing at double-digit rates – like it was in 2010 — but now growth is anemic and will remain so for many reasons. As a result, Beijing will soon be saddled with excess supply. And to add to China’s woes, the price of oil looks like it is weakening. In short, Beijing could be forced to dump oil onto global markets, thereby further depreciating the value of its oil-producing assets. It may even have to sell oil fields. In the recent past, China has been forced to dispose of stockpiled commodities when the load became too heavy.
When one thing goes wrong for a state-directed economy like China’s, other things can follow in quick succession. Soon, Beijing’s relentless drive to dominate Iraqi oil production may not look like such a wise move.
— Gordon G. Chang is the author of The Coming Collapse of China. Follow him on Twitter @GordonGChang.