China has just surpassed the US as the world's largest oil importer. This is the story of rising Chinese demand. But it's also the story of rising US oil production. And THAT's the story of shale gas, which we'll return to later this week. Here's how the Financial Times reports it:

'China has overtaken the US as the world's largest net importer of oil, in a generational shift that will shake up the geopolitics of natural resources.

'US net oil imports dropped to 5.98m barrels a day in December, the lowest since February 1992, according to provisional figures from the US Energy Information Administration. In the same month, China's net oil imports surged to 6.12m b/d, according to Chinese customs.

'The US has been the world's largest net importer of oil since the mid-1970s, shaping Washington's foreign policy towards energy-rich countries such as Saudi Arabia, Iraq and Venezuela.'

The US has actually become a net exporter of refined fuels. It's turning the boom in domestic energy production into an export boom. At a geopolitical level, this development completely reshapes the nature of US involvement in the Middle East. It also threatens the financial and political security of incumbent energy super powers like Russia and Saudi Arabia.

But the story is just as fascinating for what it's doing to energy prices. For example, natural gas prices have 'decoupled' from oil prices in the US. The shale gas boom sent natural gas prices much lower. It's no longer relevant to price gas relative to oil. Could this decoupling happen globally?

BP's chief economist, Christof Ruhl, thinks a global shale gas revolution could cause LNG prices to decouple from oil prices. Ruhl is worried that long-term LNG contracts between Aussie producers and Asian consumers may have to be rewritten with LNG prices no longer linked to oil prices. The growing supply of LNG alternatives - $180 billion of Aussie investment in LNG alone - is changing the dynamics of the world's energy markets.

Lower prices always threaten incumbents. It's a bit of a paradox. You'd think lower LNG prices are bad for Australia. But it depends on who you mean when you say 'Australia'. If prices go too low, then the economics of extracting LNG from stranded coal seams might become unfavourable. Or, lower prices might make some promising unconventional shale gas projects less promising.

But lower prices tend to increase demand as well. If something gets cheaper, people tend to use more of it. This is what's happening in the global LNG industry. And an increase in LNG demand is just the window of opportunity Australian shale gas players need. More on this later in the week, and more on the beneficial effect of lower prices, otherwise known as deflation.

Regards,

Regards,
Dan Denning
for The Daily Reckoning Australia