China’s Petro-State "Lender Of Last Resort" Conundrum
By Tyler Durden
Submitted by Eugen von Bohm-Bawerk via Bawerk.net,
It took a while to play through, but our assessment that China would increasingly become the petro-state lender of last resort is starting to come good. The primary reason for that is producer states are rapidly running out of time to prevent full scale political implosion on the back of chronic economic pressures.
For all the hype around current ‘price recovery’, it means absolutely nothing for most producer states. It’s becoming painfully obvious that the prevailing geopolitical price of survival is structurally out of sync with geological costs of production. Ten dollars here, ten dollar there; it doesn’t really matter: Either China ‘steps up or steps out’ as the lender of last resort to keep fragile petro-states in the black at this stage. You’d think that’s a relatively easy call to make, but it’s anything but for Beijing. Prop up one petro-state, and the same standard will be applied across the board. Let one fail, and political contagion risks become very real across China’s entire supply base. That defines the very core of the lender of last resort conundrum for China. Where does Beijing want to draw its petro-state lines?
The most obvious (and extreme) test case is of course Venezuela. Beyond PSUV politicking around President Maduro, referendum recalls and whether the party can stagger on to 2019 without having to hold a national ballot, the country is economically collapsing. Nobody can get access to basic goods, kidnapping rates are through the roof, both of which happen to be directly linked to the government’s clear aim to cut imports as far as possible (towards $20bn this year) to try and service external debts. Beyond government control of food lines via ‘local supply and production committees’ with some pretty blunt tactics from the National Guard and police to contain massive social unrest, it’s still nowhere near enough to prevent outright default without Chinese help. Little wonder Venezuela is begging Beijing for another $8bn credit line, with postponed payments on PDVA’s oil backed debts to for at least a year, where China would basically provide ‘more cash’ and take less equity crude to buy Venezuela more 2016-17 time.
Whether China goes for it remains to be seen, but it’s in little doubt if it decides to keep Maduro on life support, it’s then going to be cutting far more cheques to buy President dos Santos another election in Angola (August 2016).
That would entail exactly the same ‘more cash vs. less equity crude’ mantra from Luanda, with Southern Iraq using the the same copy / paste story in Rumaila. Obviously you could add Ecuador, South Sudan and even Caspian players into the mix, but wherever you look, China has the same fundamental call to make: How many petro-players does it want to keep on its books, and at what strategic price, given that all means easing up on equity barrels as the mainstay of Chinese supply side optionality. Let’s not forget, petro-states are the absolute definition of ‘moral hazard’ …read more
Source: China’s Petro-State "Lender Of Last Resort" Conundrum
