China Flashes Its Cash to Build Its Oil Stash. Why the U.S. Shouldn't Be Rash in Reacting.

Flush with nearly $2 trillion in cash reserves, China has recently made some power plays as it attempts to secure long-term access to the petroleum it needs to power its economy.

China agreed last Thursday to make a $10 billion loan through the China Development Bank to the Brazilian national oil company Petrobras, to help the firm develop Brazil's promising deepwater oil reserves. In return, the Brazilians have agreed to export up to 160,000 barrels per day to the Chinese at market prices. While 160,000 bpd represents just north of two percent of China's 7.2 mbd of consumption, and a sliver of the 3.4 mbd that the Chinese import (both 2006 EIA estimates), the deal may produce greater dividends in the future if Chinese financing helps Brazil to recover a good amount of the 8 billion barrels believed to lie within its deepwater Tupi field. Tupi's reserves could boost Brazilian oil reserves by more than 60 percent. (By comparison, Norway's total oil reserves, the largest in Western Europe, are estimated to be around 7.7 billion barrels as of 2006.)

In addition, China has also recently agreed to loan a total of $25 billion to two Russian oil companies, Rosneft and Transneft, in exchange for Russia agreeing to export 300,000 bpd to China for the next 20 years. China has also lent $4 billion to Venezuela's PDVSA in exchange for exports of Venezuela's refined oil.

China's moves may appear to threaten America's energy security interests, as it attempts to secure the energy it needs continue its growth as an economic and military power. While American policymakers should take note of these trends, some of China's moves may actually benefit the United States. In order to access the oil within the Tupi field, for instance, Brazil will need to rely on the expertise and technology of American firms such as Halliburton and Transocean, a situation that provides the United States with leverage. Once production ramps up, some of the oil produced from the Tupi field could be exported to the United States. Also, despite the incendiary rhetoric of Venezuelan President Hugo Chavez, boosts in Venezuelan oil production financed with Chinese money may also lead to increased exports to the United States. As Stratfor asserts, Chavez wants to grab American cash "with both hands and make a stash" to finance his regime, as the United States remains Venezuela's most lucrative market.