No one would dispute that China is fast becoming the manufacturing capital of the world. But this new-found status comes with challenges. Mainly, manufacturing plants require lots of power. Power requires oil. And therein lies the conundrum.

While supply managers in the U.S. and Europe have been bragging about securing “the China price” for goods and services sourced from the region, China has been quietly cutting deals to snap up already scarce oil sources around the globe.

Just this week, China penned joint venture deals to double its purchase of crude and fuel oil from Venezuela and to increase oil imports from Russia by 50% this year. China also this week entered into a joint venture with South Korea to jointly develop overseas oil resources around the globe. This week’s events follow China’s recent plans to step up investment to increase oil production and imports from Africa, particularly Sudan, but also Algeria, Zambia, and South Africa. China is still among the biggest importers of oil from Iran.

I can hear some of you saying, so what? The U.S. gets most of its oil from Iraq, Kuwait, and Saudi Arabia. Iran is on America’s “evil” list. And anyone who’s spent a week on Spend Matters knows how much the U.S. despises Venezuela. So who cares if China gets its oil from those sources. It doesn’t impact price of power in Detroit, right?

Wrong. The below chart from Gibson Consulting on U.S. oil consumption tells quite a different story. And raises some serious cause for concern.

(Click image to enlarge.)

The U.S. is heavily dependent on foreign oil, importing some 60% of its annual needs. Of that, the U.S. gets less than 20% of its oil from the Middle East. More than half of U.S. oil imports come from the very same countries China is targeting, including the 10% of imports that come from Venezuela. (In fact, Venezuela President Hugo Chavez views the China deal as a way to reduce his country’s dependence on the U.S. as a customer.)

China’s recent moves have the potential to constrain the flow of oil to the U.S. (and Europe) from these regions. It could also boost already sky-high oil, gas, and energy prices. That, in turn, will not only raise your company’s energy bill, but will likely push up prices for manufactured goods. Rising oil prices are a particular concern for those supply managers buying petroleum-based products, such as plastics, or for products that require significant energy to produce.

Understanding this geo-political landscape can help supply managers devise sourcing and supplier strategies to better manage risks and hedge prices and total product costs over the long-haul.

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