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Fueling the dragon: China's race into the oil market

Oil guzzling dragon
With 1.3 billion people, the People's Republic of China is the world's most populous country and the second largest oil consumer, behind the U.S. In recent years, China has been undergoing a process of industrialization and is one of the fastest growing economies in the world. With real gross domestic product growing at a rate of 8-10% a year, China's need for energy is projected to increase by 150 percent by 2020. to sustain its growth China requires increasing amounts of oil. Its oil consumption grows by 7.5% per year, seven times faster than the U.S.'
Growth in Chinese oil consumption has accelerated mainly because of a large-scale transition away from bicycles and mass transit toward private automobiles, more affordable since China's admission to the World Trade Organization. Consequently, by year 2010 China is expected to have 90 times more cars than in 1990. With automobile numbers growing at 19% a year, projections show that China could surpass the total number of cars in the U.S. by 2030. Another contributor to the sharp increase in automobile sales is the very low price of gasoline in China. Chinese gasoline prices now rank among the lowest in the world for oil-importing countries, and are a third of retail prices in Europe and Japan, where steep taxes are imposed to discourage gasoline use.

Where will China get its oil?
China’s ability to provide for its own needs is limited by the fact that its proven oil reserves are small in relation to its consumption. At current production rates they are likely to last for less than two decades. Though during the 1970s and 1980s China was a net oil exporter, it became a net oil importer in 1993 and is growingly dependent on foreign oil. China currently imports 32% of its oil and is expected to double its need for imported oil between now and 2010. A report by the International Energy Agency predicted that by 2030, Chinese oil imports will equal imports by the U.S. today.

China's expectation of growing future dependence on oil imports has brought it to acquire interests in exploration and production in places like Kazakhstan, Russia, Venezuela, Sudan, West Africa, Iran, Saudi Arabia and Canada. But despite its efforts to diversify its sources, China has become increasingly dependent on Middle East oil. Today, 58% of China's oil imports come from the region. By 2015, the share of Middle East oil will stand on 70%. Though historically China has had no long-standing strategic interests in the Middle East, its relationship with the region from where most of its oil comes is becoming increasingly important.

Implications for U.S.-China relations
U.S.-China relations are influenced by a wide array of issues from Taiwan to trade relations and human rights. But undoubtedly access to Middle East oil will become a key issue in the relations between the two powers. Clearly, in the short term, China recognizes that its energy security is increasingly dependent on cooperation with the U.S., rather than competition with it. China would like to maintain good relations with the U.S. and enjoy the economic benefits derived from such cooperation. But this inclination is balanced by the feeling among many Chinese leaders that the U.S. seeks to dominate the Persian Gulf in order to exercise control over its energy resources and that it tries to contain China's aspirations in the region. The U.S. is therefore considered a major threat to China's long-term energy security.
Although China is banking on oil development projects outside the Middle East, Beijing most likely will insist on nurturing its relations with the main oil-producing states in that region as an insurance policy. But its attempts to gain a foothold in the Middle East and build up a long-term strategic links with countries hostile to the U.S. could also bear heavily on U.S.-China relations. Especially troubling are China's arms sales to the region, its support of state sponsors of terrorism and its proliferation of dual use technology.
A report by the U.S.-China Security Review Commission, a group created by Congress, warned that China's increasing need for imported energy has given it an incentive to become closer to countries supporting terrorism like Iran, Iraq and Sudan:
"A key driver in China's relations with terrorist-sponsoring governments is its dependence on foreign oil to fuel its economic development. This dependency is expected to increase over the coming decade."
China's relations with state sponsors of terrorism has provided these countries a great deal of money, allowing them to continue to harbor terrorist organizations and to maintain a policy of oppression and exploitation of their people. China is the number one oil and gas importer from Iran. The two countries are bound by energy deals reaching a total value of $120 billion and growing. While the U.S. and EU were forging a diplomatic strategy to halt Iran’s nuclear program, China signed in October 2004 its largest energy deal with Iran ever and promised to block any American attempt to refer Iran’s nuclear program to the UN Security Council. This may indicate not only that China is interested in a militarily strong, even nuclear Iran that dominates the Gulf but also that for China, energy security considerations trump international cooperation on critical global security issues. In addition to its special relations with Iran, China is also known to be a provider of WMD technologies to rouge states including North Korea, Syria, Libya and Sudan.

China also provides conventional weapons that could threaten U.S. military forces securing the Persian Gulf. Of particular concern are China's sales to Iran of anti-ship cruise missiles, which pose a threat to oil tanker traffic and American naval vessels operating there. This arms trafficking presents an increasing threat to U.S. global security interests, particularly in the Middle East and Asia.

A key component of China's strategy to guarantee access to Persian Gulf oil is the special relations it has cultivated with Saudi Arabia. The ties with Riyadh go back to the mid-1980s when China sold Saudi Arabia intermediate range ballistic missiles. Since then, the relations have grown closer. High-level visits of Chinese leaders to Saudi Arabia culminated in 1999 with President Jiang Zemin's state visit in which he pronounced a "strategic oil partnership" between the two countries. China has offered to sell the Saudis intercontinental ballistic missiles. The Saudis have so far preferred to turn down many of the proposals and limit their procurement from China in order to maintain their special relations with the U.S. But continuous deterioration in Saudi-American relations or, in the longer run, a regime change in the oil kingdom, could drive the Saudis to end their reliance on the U.S. as the sole guarantor of their regime's security and offer China an expanded role.

Outside of the Middle East, China’s pursuit of oil could undercut U.S. security interests on multiple fronts: In the South China Sea, China is involved in territorial disputes with Malaysia, the Philippines, Taiwan, Vietnam and Brunei over access to energy in the Spratly and Paracel Islands. In the East China Sea, where rich oil and gas reserves are believed to exist, rivalry is developing between China and Japan over access to energy resources. China has already begun the exploring process for gas reserves on its side of the East China Sea. The Japanese government claims that some of the reserves are actually on its side of the demarcation line and has accused China of attempting to extract hydrocarbons from its water. It also allowed its own oil firms to drill in the disputed territories—a move considered a provocation by China. Another source of tension is access to Russian oil. For many months, China and Japan have been involved in a bidding war over a major pipeline deal to deliver Russian oil from Eastern Siberia. China’s plan calls for a pipeline running to the Manchurian city of Daqing, while Japan is insisting on a pipeline that would run to Nakhodka, the Russian coastal area opposite to Japan. This tense atmosphere is feeding popular and political animosity, which have already resulted in a wave of violent anti-Japanese demonstrations in April 2005, and are likely to deepen over time. In Africa Chinese oil companies turn a blind eye to the way petrodollars are used by the local governments. One place where such indifference impacts America’s effort to fight against corruption and human rights abuse is Sudan. The Chinese have invested more than $8 billion in joint exploration contracts in this country, including the building of a 900-mile pipeline to the Red Sea, deployed thousands of military personnel disguised as oil workers and provided arms to the Sudanese government to support it in the country's 20-year civil war. In September 2004, the United Nations Security Council passed resolution 1564, threatening Sudan with oil sanctions unless it curbed its support for belligerent militia groups in Darfur. To protect its oil interests in Sudan, which supplies seven percent of China’s oil imports, Beijing stated very clearly that it would veto any bid to impose such sanctions. In the Western Hemisphere China concluded oil and gas deals with Argentina, Brazil, Peru, and Ecuador. But its main country of interest is Venezuela, U.S.' fourth largest oil supplier. A series of oil agreements signed in early 2005 allow Chinese companies to explore for oil and gas and set up refineries in Venezuela. Chinese state-owned oil companies have also begun seeking ambitious oil deals in Canada, the top petroleum supplier to the U.S. China’s continued penetration into the Western Hemisphere could have profound economic and political implications for the U.S. Considering the fact that both U.S.’ and Mexico’s domestic crude production are falling, the U.S. cannot afford to lose chunks of the crude produced by the two countries that together supply a third of its oil imports. With less oil available to the American market the U.S. will be forced to seek this oil elsewhere, primarily in the Middle East, hence becoming more dependnet on this tumultuous region.

This IAGS Spotlight was written by Gal Luft

Further reading:
In Search for Crude China Goes to the Americas
US, China Are on Collision Course Over Oil
Commentary Magazine: The Sino-Saudi Connection
RAND: China's Quest for Energy Security
The Jamestown Foundation: The Sino-Saudi Connection
From Malacca to Hormuz: Chinese Energy Sea Lane Security

The Nixon Center: The U.S.-China Relationship facing international security crises: Three Case Studies in post-9/11 bilateral relations
Monograph Introduction, Monograph Chapters
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