As Saudi Crude Flows to China, U.S. Need for Biofuels Grows

The U.S. biofuels story is a mix of interrelated elements: energy security (lessening dependence on Middle Eastern oil), ethanol, a clean energy economy…and China.

Traditionally, the geopolitical reality plays out like this: the United States relies on politically sensitive Middle Eastern petroleum, which makes the U.S. particularly sensitive to oil price volatility, which in turn, compels the U.S. to invest money and human capital in guaranteeing supply.

But as a major corn producer, the United States commits corn resources to biofuels in the name of moving towards energy independence, price security, and a clean energy economy.  Meanwhile, China is industrializing, making a lot of money in the process, and beginning to suck up a rapidly growing percentage of the global supply of crude oil.

Taking another look at the geopolitical reality, more recently, it plays out like this: the United States is getting squeezed out of the global marketplace.  More and more, it is scrambling to find oil as it can no longer guarantee supply through sheer grit, dollars, and boots on the ground.

In the past year, China has become the top destination, the largest market, for Saudi crude — replacing the United States in the process.  An article in Arab News explains:

Over the past two years, Saudi oil exports to China have increased by 60 percent. And in the meantime, the Chinese appetite for crude continues to grow and grow. Chinese crude oil imports could surge by more than 40 percent over the next three months after hitting an all-time high of 5 million barrels per day in December. The share of Saudi crude in the Chinese markets has now increased from 16 percent to 20 percent. China and Saudi Arabia also aim to boost bilateral trade by at least 50 percent to $60 billion by 2015, the Chinese Trade Minister Chen Deming said last month.

During that time, Saudi crude exports to the U.S. have fallen off dramatically, despite being one of its key suppliers.  In August 2009, imports from Saudi Arabia fell to 745,000 barrels per day, the lowest in more than two decades.

There could be many reasons for this, but most likely it’s a combination of lower demand within the United States due to the economic downturn, an effort to diversify away from Middle Eastern supplies, and a concerted effort to build out the country’s biofuels capacity.  China — which never really lost demand — snapped up the leftovers, and it’s snapping up more and more.

But the key message: within this new geopolitical reality, the rosy logic of biofuels is starting to take on a different hue.

With China and other rapidly developing countries acting like a vice on the global crude market, biofuels are rapidly becoming a strategic necessity for the United States, not just a means to mitigate greenhouse gases or create jobs.  As evidence of this new reality, Saudi Aramco, Saudi Arabia’s state petroleum company, is abandoning crude storage installations in the Caribbean in favor of facilities located in Japan, closer to the Chinese end-markets.

The Obama Administration recognizes this reality and strongly endorsed the biofuels agenda last week.  But commercializing technologies and growing enough to displace a sizeable percentage of foreign crude is a tall order.  Biofuels will never be a complete solution, but it remains a key strategic resource heading forward.

Mackinnon Lawrence is an attorney, principal consultant with Biomass Advisors, and editor & publisher of Biomass Intel.

photo: alexpgp