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China’s New Deals and Brazil’s Deep Water Oil

We’ve been watching with great interest the series of long term oil deals being signed by the Chinese, and now Steve LeVine has a pretty good analytical piece up explaining how the current underinvestment in production is going to lead to another boom cycle in prices – however this time the power politics dynamics could be different – not tilting toward the multinationals or state-owned companies, but perhaps their new Asian financiers.

The Brazilian case is perhaps more important because it appears on the cusp of the country becoming a huge petro-power on the backs of an estimated 12 billion barrels of offshore oil; Brazil itself says it may possess an additional 100 billion barrels of oil.

Because the oil has been found in extremely deep water, analysts have forecast that Petrobras will need Big Oil’s cash and capabilities in order to develop it. Indeed already Exxon Mobil, Amerada Hess and BG are among companies working offshore in Brazil. But if China remains open-walleted, there will probably be less need for more cooperation with multi-nationals.

Interestingly, both Russia and Brazil were willing to be on the hook to China for guaranteed reserves while at least for now remaining closed to new cooperation with Big Oil.

The ramifications for future oil prices stems from the nature of thedeals. The price of oil is set to a large degree on the availability ofsupply during moments of man-made or natural crises, such as war or hurricanes. To the degree that the available supply is already tied up in long-term contracts, there’s less wiggle room during these crises, and thus more of a chance of a price spike.

Already, oil companies are significantly reducing new exploration projects, and shutting in uneconomic oilfields in the U.S. and elsewhere. This means that, once the economy and oil demand recover, there will be less supplies of oil and natural gas. China‘snew oil deals will exacerbate the supply tightness. And anygeopolitical or weather-caused crisis will more likely drive oil andultimately gasoline prices higher.