China Long term contracts for energy
President Xi of China went to Saudi Arabia and Qatar to buy long term contracts for oil and pay them in RMB.

Most observers commented that the payment is made in RMB to bypass the US dollar. I agree.

They did not comment on the significance of the long term contracts. This is how I see it. 

a) China pays for the oil at the price agreed today. This price will stay for the duration of the long term contract. It protects the exporter and importer from future changes in the market price of oil. 

b) The purchase of oil under the long term contract provides energy security for China. They do not have to worry about shortages that may cause the price to spike up. However, they will not enjoy any sharp drop in price due to temporary oversupply.

c) It is better for a country to secure its future imports of essential energy at stable prices, to avoid the large price fluctuations in the market. 

d) A government can take a long term view to stabilize its energy needs and prices. This action cannot be taken by private companies that have to seek profits. 

I believe that China has taken the correct approach on its energy needs. 

This same approach should be taken for food security.

Tan Kin Lian


 

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