China, Saudi Arabia and the New Oil Alliance

Now the most important energy alliance on the planet...

THE ALLIANCE between China and Saudi Arabia over energy and oil has just been strengthened, writes Dan Denning, editor of the Daily Reckoning Australia.

On Saturday – in the wake of Europe's debt crisis – Saudi state oil company Aramco signed a deal with China's Sinopec to build an oil refinery in the Red Sea city of Yanbu. The refinery will process 400,000 barrels of oil per day, some of which will presumably end up in China. 

"Saudi Aramco will hold a 62.5 percent stake with Sinopec holding the balance in the venture that highlights China's growing role as an infrastructure developer in the oil rich kingdom," according to AFP.

As an intriguing sidenote, Chinese Premier, Wen Jiabao – who made Saudi Arabia the first stop on his Middle East tour – signed a series of "agreements and cooperation programs" with Saudi King Abdullah. One of those was, "An agreement between the two governments on the peaceful usage of nuclear energy was also signed. Signatories for the two parties were Dr. Hashem Yamani, President of King Abdullah City for Atomic and Renewable Energy, and Chang Peng, President of the National Commission for Development and Reforms of China."

Hmm. Isn't that interesting? This confirms our idea that thanks to America's shale gas revolution – which makes Middle East oil imports a lot less important to the United States – the Saudis are shopping for a new strategic patron in the region and the Chinese are keen to be that patron. Aramco CEO Khalid al-Falih said the deal "Represents a strategic partnership in the refining industry between one of the main energy producers in Saudi Arabia and one of the world's most important consumers."

Meanwhile, Australia is set to become the world's largest exporter of liquid natural gas (LNG). Japan's Inpex and France's Total gave their final investment sign off to the $34 billion Icthys LNG plant in Darwin. Japan is the world's largest consumer of LNG, mostly for its domestic power generation. Australia now has $175 billion in LNG developments.

You can't have growth without energy. Excess credit growth is one way to "boost" growth artificially. But growth driven by credit creation just borrows consumption from the future. You end up with a huge debt overhang, low savings, and a tendency toward overconsumption – all of which makes new growth harder. This is the position Europe and America now find themselves in.

Meanwhile, the strategic race for energy – the natural fuel for growth – is on. 

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