Tensions rise as superpowers compete for oil
April 26, 2006Australian Financial Review
By Peter Kiernan
Chinese President Hu Jintao's recent visit to the White House has highlighted the economic and trade issues that complicate relations between China and the United States. But the thorny issue of Sino-US competition for oil resources is an underlying tension that also strains relations between the two world powers.
In fact, China's growing role in global oil markets and the American response to it is a dynamic that may potentially ignite a confrontation between the US and China in the longer term.
With oil prices recently peaking at $US75 a barrel, the prospect of emerging Sino-US competition for oil is alarming. But conflict is not inevitable, and both the US and China can avoid it with the right strategies in place.
An outcome of China's emergence as a global economic power is that it has become a significant consumer of oil. Representing a huge market of 1.3 billion people, China became the second-largest consumer of oil in 2004, now behind only the US.
No less than 40 per cent of the increase in worldwide oil consumption has come from China over the past four years, according to the US Department of Energy. Today, China consumes about 6.6 million barrels a day (b/d) of oil while the US consumes more than 21 million b/d (total global demand is 83.5 million b/d).
As China's domestic petroleum production is stagnant it is becoming increasingly dependent on imports to meet its rapidly expanding thirst for oil. And this will continue as China's population becomes more affluent.
US oil production is flat while demand is also rising, meaning that both the US, the world's largest economy, and China, one of the world's fastest growing economies, are becoming increasingly dependent on oil imports every year.
These trends have significant geopolitical implications. Since the end of the Second World War the US has been the dominant power in the oil-rich Middle East, reflected largely through its oil-for-security relationship with Saudi Arabia, the world's largest oil producer. Although the US actually depends less on Middle East oil than Europe, Japan, and now China, the guaranteed flow of oil to global markets from a region that hosts two-thirds of the world's petroleum reserves is an intrinsic US interest.
As China becomes increasingly dependent on oil imports to supply its energy needs, it is becoming more reliant on the Middle East as a source for oil, a region where the US plays a dominant security and political role. China is therefore wary about its energy needs being vulnerable to US policies and actions in the region.
As a response, China has developed closer relations with significant oil producers in the Middle East such as Saudi Arabia and Iran, as well as with emerging oil producers such as Sudan and Kazakhstan. The US is keeping a watchful eye on how some of these relationships develop.
Iran and Saudi Arabia are now the two major suppliers of oil to China, and in 2004 China signed a huge energy deal with Iran involving development of a major oilfield and guaranteeing supplies of Iranian liquefied natural gas. China's energy interests in Iran are seen to be a stumbling bock to tougher moves pushed by the US against Iran over its nuclear activities, and oil sanctions against Iran are unlikely given China's veto-wielding power at the UN Security Council.
China's closer economic relations with Saudi Arabia, including a huge deal to develop Saudi natural gas, are seen as a move by the Saudis to diversify from their relationship with Washington given the fallout from the September 11, 2001, terrorist attacks. Meanwhile, China is a prime developer of Sudan's burgeoning oil sector, moving in after US sanctions were placed against strife-torn Sudan because of domestic conflicts. China also competes with American oil interests in the Caspian region, particularly through acquiring oilfields in Kazakhstan and in building an oil pipeline from Kazakhstan to China.
The US is more concerned about how Beijing is building ties with oil producers rather than the fact that China needs to import more oil per se. But Beijing's tensions with Washington will rise as China buys up oilfields around the world and cultivates closer ties with oil producers. Reflections of this include the hostility from the US Congress towards Chinese state-owned oil company CNOOC and its ultimately failed attempt to buy American energy firm Unocal and US scepticism about Chinese-Iranian relations.
A Sino-US military showdown over oil resources is not inevitable, even though tensions will flare up from time to time. China's growing role in global oil markets is not an existential threat, but treating it as such will make this view a self-fulfilling prophecy.
Instead, China can be assisted to ease its own sense of insecurity about oil supplies, such as through providing technologies to curb its oil consumption and to diversify from oil use.
With oil market fundamentals likely to remain tight for some time, the US and China have more interests in common as big energy consumers than they probably realise. A conflict over oil is in neither of their interests.