China´s Rising Oil Consumption and its Impact on the Global Oilmarket

Bachelor Thesis 2011 56 Pages

Geography / Earth Science - Geology, Mineralogy, Soil Science


Index of contents

list of figures

list of abbreviations

1. introduction
1.1 Wayof Posinga Problem
1.2 Research Objective and Thesis organisation

2. overview of oil
2.1 Oil Reservoirs and Oil Production
2.2 Oil Consumption
2.3 Reserves, Resources and Global Allocation of Oil

3. oil and its social impact
3.1 The Modern History of Oil
3.2 The First World War
3.3 The Second World War
3.4 The two Worldwide Oil Crisis
3.5. Today's Situation

4. the oil peak
4.1 Peak Oil Forecasts and Theories
4.2 Consequences of the Peak Oil
4.3 Criticism of Peak Oil

5. trading with oil- the global oil market
5.1 Place of Trading, form of Trading and Logistics
5.2 Price Formation
5.3 Asian Energy Markets- an Outlook

6. the role of alternative energies in china

7. china’s thirst for oil - the wakening of the petro dragon
7.1 Changes in China's Oil Markets
7.2 How to cover China's Rising Oil Consumption - a Geopolitical Question
7.3 Rising Oil Consumption-Consequences and Impact on the Global Oil Market
7.3.1 Political Consequences.
7.3.2 Environmental Consequences.



List of Figures












List of Abbreviations

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1. Introduction

1.1 Way of Posing a Problem

Today's global economy depends on nearly one single resource: oil! Oil is the main driving force of the global economy.

The global hunger for raw materials is increasing particularly in fast growing economies such as China, India or even Brazil. Globalization, the growth of population and the ever- advancing technologies are the main reasons for this growth in demand. Experts estimate that for example, China's demand for energy will triple by 2020. Commodities, especially oil, are scarce goods on the world markets. This becomes apparent, above all, by soaring commodity prices. In the next few years the pace of growth in China's demand for oil could be a key factor contributing to further increases in the prices for crude oil and refined petroleum products. Those price increases could affect the demand for petroleum and influence the investment decisions of refiners worldwide.

Oil is a finite resource. The following paper deals with the question of the effects and impact on the global oil market associated with the rising demand for raw materials and economic growth in China.

1.2 Research Objective and Thesis organisation

The aim of this bachelor thesis is to clarify the effects of to the growing demand for oil on the global market. China, a country that is currently experiencing an incredible rate of economic growth, serves as a dynamic example. This situation results in a series of questions the answers of which must be based on an extensive knowledge of the global resources of raw materials to produce energy and also on their availability. It also needs some insight into the regularities of the market for energies, its way of operation and its variables. This thesis starts by describing the formation of oil to make transparent that the genesis of oil comprises a long time interval, which makes oil therefore a precious good. Oil consumption as well as the distinction between the terms reserves and resources play here an important role. The social relevance of oil and the oil peak in the subsequent chapters, are an important basis to understand price and market developments. The chapter "Trading with Oil-the global oil market" is to give an insight and overview of the current oil market and the underlying system. Finally, in the last chapter, the role of China in the oil market and the impact of the strong economic growth are discussed. I have also discussed shortly the role, relevance and influence of alternative energies to complete the picture of a fast growing demand drive global energy market.

2. Overview of Oil

2.1 Oil Reservoirs and Oil Production

Petroleum is a naturally occurring, flammable liquid, which consists of a complex mixture of hydrocarbons of various molecular weights and lesser quantities of organic molecules containing sulphur, oxygen, nitrogen and some metals, that are found in geological formations beneath the Earth's surface.

Petroleum is formed from dead organic materials such as algae or wooden materials. They are accumulated and deposited over the course of several hundred thousand to several million years in areas of high organic matter productivity, which can include nutrient rich coastal up-welling, swamps, shallow seas or lakes.1

If low-oxygen conditions exist near the sea area of the seabed, rich sedimentary sequences with a high proportion of biogenic material will be formed. Low-oxygen conditions can be created by overproduction of organic matter or in environments where poor water circulation leads to stagnation. The absence of oxygen in the depositional environment impedes the decomposition of biomass, and the sapropel is formed. Over geological time, the organic matter mixes with mud and is buried under heavy layers of sediment resulting in high levels of heat and pressure (diagenesis). This process causes the organic matter to change, first into a waxy material known as kerogen, which is found in various oil shales around the world, and then, with more heat and more pressure, into liquid and gaseous hydrocarbons via a process known as catagenesis. General conditions for the formation of crude oil is a limited range of pressure and temperature, known as the oil window.2 The oil window is determined at depths from 2 to 5 km with temperatures around 80°C-120°C because all temperatures in the area above the oil window are to low to transform organic matter into crude oil and the temperatures below the oil window are so high that the hydrocarbons are broken down into methane.3

Fig.1: The oil window

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Ref: Portrait of a Planet, 2nd Edition, Norton&Company

The petroleum system consists of four different parts. First is the source rock, which is a sedimentary rock, containing enough (2-3 weight percent) organic matter for the production of oil and gas when it is buried and heated. The source rock is followed by the migration pathway described by the movement of the hydrocarbons from their source to the reservoir rock while the movement of newly generated hydrocarbons. The so-called primary migration or expulsion needs to be differentiated from the further movement of the hydrocarbons into the reservoir rock in a hydrocarbon trap or other accumulation, the secondary migration. Migration can occur both along distances of hundreds of kilometres and locally in large sedimentary basins. The reservoir rock in which petroleum accumulates is a sedimentary rock like sandstone or porous limestone. The most important qualities a source rock needs to achieve are sufficient porosity and permeability.

Because most hydrocarbons are lighter than rock or water, they often migrate upward through adjacent rock layers until either reaching the surface or becoming trapped within porous rocks by impermeable rocks above a seal. This seal or cap rock tends to be fine-grained or crystalline with a low permeability. Typical examples are clay, cemented limestone and chert. The impermeable barrier and the reservoir rock form the oil trap, which can be differentiated in stratigraphic and structural traps or domes.4

Fig. 2: structuraland stratigraphic traps

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The petroleum's chemistry comprises a large number of different liquid or dissolved gaseous molecules, starting from the most commonly found alkanes to cycloalkanes, aromatic hydrocarbons and asphaltenes. The geochemical composition of oil must be differentiated according to its origin. The variety and unique mix of molecules in the petroleum defines its physical and chemical properties. The alkanes, which are also known as paraffins containing only hydrogen and carbon are saturated hydrocarbons with straight or branched chains. They are typical for their low viscosity, a light sulphur concentration (0,l%-7%) and their low density. Naphtenes or so-called cycloalkanes are saturated hydrocarbons having one or more carbon ring and are characterized by a mean viscosity, a low sulphur concentration and a mean density. The structure of Cycloalkanes and alkanes is quite similar; their main disparity is a higher boiling point on the part of the cycloalkanes. The unsaturated hydrocarbons or aromatic hydrocarbons are composed of one or more planar six-carbon rings called benzene rings. Their viscosity and density are high, and their sulfur concentration is as high as it is in the paraffins or naphtenes.5

2.2 Oil Consumption

Around two hundred years ago the use of oil was much less important than today. Oil was used for medical purposes or for heating, cooking and lighting. Heavy oil and tar were used for caulking boats or houses. With the beginning of paved road construction, an application was found for natural bitumen deposits and tar.

In 1888, when Karl Benz invented the world's first gasoline-fuelled automobile, and 15 years later, when the Wright brothers started to use the same type of fuel to power aircrafts the demand for petroleum began to increase. Both World Wars and the rising ownership of vehicles during the second half of the 20th century were further increased the demand for oil.

Compared to today, the discovery of new oil fields, oil exploration and oil production exceeded the rate of consumption. The demand for oil gained rapidly with the cumulative use of cars, innovations, globalisation, and the increasing world population.6 In the second part of the 20th century oil was the most important energy source and was one of the main contributors to wealth and abundance of developed nations.7

Today's use and consumption of oil can be differentiated into a large number of products, starting from gasoline and kerosene to asphalt and chemical reagents used to make plastics and pharmaceuticals. Life without oil - unthinkable nowadays!8 Oil is a non-renewable resource. One million years are necessary to accumulate the annual consumed amount of oil and gas as well. According to the BGR oil is one of the most important sources of energy with a 36% share of the primary energy consumption worldwide. Looking at the oil's share of the primary energy consumption over time, it increased from around 30% in 1950 to nearly 50% in 1973. The effect of the first oil crisis in 1973 was a decrease to 48%. After the second oil crisis in 1980, there was a downturn to 40% that lasted until 1985. Since that time this level is nearly constant.9 The worldwide oil production denoted an increase from 375 to 2001 million t in the years from 1946 to 1968.10

Comparing the years 2003 and 2004 a rise in the share of primary energy production of 3.4% can be observed. In 2004, the oil production was around 30 billion barrels. The main producers were the United States, Russia and Saudi-Arabia. Though the United States is one of the main producing countries, it consumes about three times of its domestic production which means a high rate of oil imported to the United States.11 Although the import rate of the U.S oil was so high and is at the top of the list of countries with the highest oil consumption and imports, the People's Republic of China is hot on their heels! In 2007, the Asian region, which includes Japan and South Korea as well as China, already accounted for half of all global imports.12

2.3 Reserves, Resources and Global Allocation of Oil

It is important to distinguish and define the terms reserve and resource. All materials taken from the earth are finite. The term reserve defines those deposits that have been accurately detected and can be recovered economically with current technical capabilities. In contrast to reserves, the term resource defines the amount of energy- producing raw materials that are geologically proven, but cannot currently economically be obtained, as well as the amounts that are not proven, but can be expected for geological reasons in one area. Resources can become profitable as soon as new technologies are developed or in case of price increases. The terms reserve and resource can be grouped together under the term “Estimated Ultimate Recovery" which defines the total amount of recoverable hydrocarbons, thus the total sum of previously funded amounts of reserves and resources.13

Fig. 3 Estimated Ultimate Recovery of Conventional oil 2009 (419 Gt)

illustration not visible in this excerpt

Ref: BCR, Energiekurzstudie 2010, ?.16

The PRMS is a common system for the classification of global oil reserves and resources. By the year 2007, the PRMS was composed of classifications of the WPC and SPE. In 2007, the classification was widely restored and the two more organizations AAPG and SEEC were added.

The PRMS or SPE / WPC / AAPG / SEEC classification defines terms such as reserves and resources, but also deals with the efficiency of individual deposits, and measures the likelihood of the presence of oil.

The consideration of current trends such as non-conventional energy resources, are important as well. The following graphic shows the reserves divided according to the certainty of their evidence in the terms P1, P2 and P3. P1 is equivalent to proved, P2 is probable and P3 means possible. The denotations IP, 2P and 3P are the terms for safe (IP), the sum of proved and probable (2P) and the sum of secure, probable and possible (3P) reserves. Furthermore, it is important to distinguish between the economic reasons, the potential of undiscovered resources and the potential resources.

Fig. 4: Petroleum Resource Management System SPE/WPC/AAPG/SPEE (SPE, 2007)

illustration not visible in this excerpt

Ref: BCR Energierohstoffe 2009, p. 26

With new discoveries in Ecuador, Vietnam, Russia, Iran, Nigeria and Qatar, the conventional oil reserves in 2010 were estimated to be 161 Gt, 1 Gt more than in 2009. Most of the world's existing reserves are located in the Middle East. OPEC and particularly the Gulf region enjoy a special role, because OPEC controls 76% of global reserves, and is one of the major producing regions. Regarding to resources the CIS, Africa and Latin America could denote an increasing by scores of almost 10%. China was once one of the oil exporters and is known for its rich mineral resources.14 However, China changed from a formerly country exporting oil to an importing country. In the 60s and 70s many strategically important oil sources were found in China. In 1978 China was one of the largest oil exporters in the world. The main fields here were in Shengli, Liaohe and Daqing. The Daqing oil well was the largest and most profitable in China. By the early 80s oil production declines dramatically. An increase in production was no longer possible and the development of new fields took a long time. Nevertheless, in 2003 China was still one of the seven largest oil producers in the world with proven reserves of 18 billion barrels.15

A trend from shallow water drilling towards deep water drilling (water depth starting from 1500m) is clearly emerging. Admittedly, high risks are involved. The best example here is the accident on the oilrig of the giant BP, the Deepwater Horizon in the Gulf of Mexico in May 2010.

Currently 6% of the global oil production areas are deep-water areas, with a rising trend. However, the technical effort is still too high. The time from discovery of an oil deposit to its development could take up to 10 years. The development of so-called unconventional oil, which includes fat fuels, oil sands and oil shale, is on the rise. Reserves of unconventional oil comprise about 40% of the reserves of conventional oil, yet unconventional resources are triple those of conventional oil resources.16

3. Oil and its Social Impact

3.1 The Modern History of Oil

"Stability is oil. " This sentence can be read in various business magazines all over the world. Oil decides wars and contributes significantly to the material prosperity of industrial societies but is itself a trigger of crises and wars as well. The official reasons given by the United States for a war against Iraq, are the fight against Islamic fundamentalist terrorism, the development of nuclear weapons by Saddam Hussein and the fall of the dictator. But some Arab regimes are more involved with terrorist organizations than Iraq. In fact, the second Bush administration wanted to bring the oil reserves ofIraq under its control.17

If only date palms were its primary natural resource Kuwait and Iraq might have suffered less during the Gulf war 10 years ago.18 The oil reserves in the world are limited. Two thirds of these reserves are located in the region around the Persian Gulf. The largest reserves are lying under the soil of Saudi Arabia and Iraq. The relationship between the current annual oil output and the potential output in Iran is 1:53, in Saudi Arabia 1:55, 1:75 in the UAE, Kuwait 1:116 and Iraq 1:525! The latter indicates the particular strategic importance ofIraq.19 The modern history of petroleum began in the U.S. as New York attorney George Bissell had the patient idea to use the petroleum as fuel for lamps. He founded the Pennsylvania Rock Oil Company and commissioned retired railroad worker Edwin Drake to drill for oil. In 1859 Drake was successful and found a rich source of oil in Titusville, Pennsylvania. With the end of the American Civil War in 1865, and growing industrialization, Titusville was the centre of the first oil boom in history. With the development of the West, new markets were created. 1870, John D. Rockefeller founded the Standard Oil Company, which controlled the majority of American refining capacity and exported oil as well. Soon Rockefeller got competition from Russian oil from Baku on the Caspian Sea in which the Nobel brothers were involved. The Rothschild family from Paris got into the highly lucrative oil business as well and financed a railway line to the Black Sea to facilitate the access of Russian oil to the Western European markets. In May 1908, the Gulf region took a new turn. British lawyer and oil entrepreneur William D'Arcy drilled for oil in the Gulf Region and was successful. Thereupon, the Anglo- Persian Oil Company was established. That company is known today as British Petroleum. The main intention of the British government was to secure access to oil that was, above all, of great strategic importance. The British First Lord of the Admiralty Winston Churchill had in fact decided to fuel new large warships with oil. Vessels with internal combustion engines were faster. In an arms race with Germany that was intended to catch up during the "global politics" of emperor Wilhelm II with the British fleet, the British fleet had a major advantage. Churchill was convinced that a world war would soon break out. Actually Germany declared war on Russia on 1st of August in 1914. The First World War had begun.20

3.2 The First World War

The balance of the First World War: 10 million dead and several times more wounded and displaced persons were the price. Oil played a crucial role less in the navy but in countryside: The First World War was the first motorized war. Trucks transporting troops and supplies, tanks ultimately ended the static warfare, and airplanes were used to investigate and to bomb the enemy - the experience of warfare gained a new dimension. Thus, the oil supply was in fact key to winning the war. When in 1917 Germany began unrestricted submarine warfare and sank more and more Allied supply ships, their oil supply threatened to falter.


1 cf. POHLl922,p.446ff

2 cf. Gluyas & SWARBRICK 2004, p. 4-5

3 cf. Grotzinger, Jordan, Press&Siever 2007 p. 55

4 cf. Gluyas & Swarbrick 2004 S. 2-5, 93ff

5 cf. POHL,l922,p.447

6 cf. GLUYAS & SWARBRICK 2004 p.15-16

7 cf. BGR, Energierohstoffe 2009, p. 31 ff

8 cf. Gluyas & Swarbrick 2004 p. 15-16

9 cf. BGR, Energierohstoffe 2009, p. 31 ff

10 cf. Eich, 1971, p. 25

11 cf. Grotzinger, Jordan, Press&Siever 2007, p. 559-560

12 cf. BGR, Energierohstoffe 2009, p. 50-55

13 cf. Grotzinger, Jordan, Press & Siever 2007, p. 556-557

14 cf. BCR, Energierohstoffe 2009, p. 25

15 cf. PÖLLATH 2005, p. 23-25

16 cf. BGR, Reserven, Resourcen und Verfügbarkeitvon Energierohstoffen 2010, p. 16ff

17 cf. von Rohr, Walde, Battlog 2009, p. 56

18 cf. Seifert, Werner 2008,p.80

19 cf. Pilz 2007, p. 7-18

20 cf. Seifert, Werner 2008, p.7-40


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Price Building Oil Market China Oil Consumption Sustainability



Title: China´s Rising Oil Consumption and its Impact on the Global Oilmarket