Today's date:
Winter 2005

The Geopolitics of Oil

Jehangir S. Pocha is the Beijing correspondent for NPQ.

Beijing—Despite the bonhomie of recent diplomacy, China and India are locked in an increasingly aggressive wrangle with the United States over the world's most critical economic commodity: oil. The tussle will shape the economic, environmental and geopolitical future of these three countries, and the world, more than any other issue.

Ensuring a steady flow of cheap oil has always been one of the central goals of US foreign and economic policy, and Washington's pre-eminent position in the world is based in a large measure on its ability to do this. But China and India are increasingly competing with the US to secure oil exploration rights in Africa, Southeast Asia, Central Asia and Latin America.

India has invested more than $3 billion in global exploration ventures and has said it will continue to spend $1 billion a year on more acquisitions. China, which has already invested about $15 billion in foreign oil fields, is expected to spend 10 times more over the next decade.

The motive, says Zheng Hongfei, an energy researcher at the Beijing Institute of Technology, is that "there is just not enough oil in the world" to cover China's and India's growing energy needs.

By 2010 India will have 36 times more cars than it did in 1990. China will have 90 times more, and by 2030 it will have more cars than the US, according to the Energy Research Institute of Beijing.

Over 4.5 million new vehicles are expected to hit Chinese roads this year alone, a far cry from the time when families saved for months to buy a Flying Pigeon bicycle. The country is now the world's largest oil importer after the US, guzzling about 6.5 million barrels of oil a day; this figure will double by 2020, said Steven Roach, chief economist at Morgan Stanley.

India, the world's second-fastest growing economy after China, now consumes about 2.2 million barrels a day, about the same as South Korea, and this is expected to rise to 5.3 million barrels a day by 2025, according to the US Energy Information Administration.

With global oil production barely 1 million barrels over the global consumption rate of 81 million barrels a day, the surge in demand from China and India could eventually lead global demand to outstrip supply, causing fuel prices to shoot up beyond their recent highs of around $56 a barrel, said Roach.

The impact of this on the global economy, particularly in developing countries that import most of their fuel, would be severe. The International Energy Agency says that for every $1 increase in oil price, the global economy loses $25 billion.

Anxiety over this is already throwing the nervous oil market into further disequilibrium. In September, Michael Rothman, a senior energy analyst at Merrill Lynch, said rising oil prices were not so much a result of the Iraq war or political instability in Venezuela and Sudan, but of extensive "hoarding" by China.

According to Rothman's analysis, China and India are roiling oil markets by creating oil reserves, which are designed to provide the minimum cache the country needs to ride out a crisis, along the lines of the US' Strategic Petroleum Reserve (SPR).

With both countries flush with foreign exchange reserves that are threatening to infect their economies with inflation, creating an oil stock seems a sensible solution. But critics say Beijing's and New Delhi's timing, coming just as the global economy seemed to be recovering and the US was questioning the value of its own reserve, is unfortunate.

China and India, which are both nuclear states, are also taking advantage of the US' strained ties with Iran, Libya, Vietnam and Myanmar by extending these countries military and political support in exchange for energy supplies. And a Washington preoccupied with Iraq, the war on terror and nuclear crises in Iran and North Korea has been unable to checkmate either as successfully as it did earlier.

For example, US nervousness over China's intentions in Latin America had led it to use its leverage with Panama to impede China's access to the all-important canal that connects Pacific and Atlantic routes. But Beijing is close to signing a landmark deal with oil-rich Venezuela and its neighbor Colombia, under whose terms a pipeline would be constructed linking Venezuelan oilfields to ports along Colombia's Pacific coastline. This will allow Venezuelan oil to bypass the Panama Canal and create a new and direct route to China.

There are also signs that China is warming to the idea of a Russia-China-India axis, which, in cooperation with Iran, would turn the oil-rich Central Asia region into their domain. This proposal, which would put in place extensive military agreements and pipeline networks, was originally put forward by Russia's Asia-centric ex-Prime Minister Yevgeny Primakov. It seems to be gaining ground with all four nations.

China and India, which fought a brief war in 1962 and still have a disputed border, are moving steadily toward detente; they are growing bilateral trade and conducted their first joint naval exercises in November last year. Both have also signed multibillion dollar gas and energy deals with ex-Soviet Central Asia republics, such as Kazakhstan, and Russia, which is the largest arms supplier to both countries.

But what worries Western powers most are China's and India's growing ties with Iran, a country Washington is trying to isolate. Both Beijing and New Delhi have recently signed 25-year gas and oil deals with Iran that are collectively valued at between $150–$200 billion, and both countries are also deepening their defense cooperation with Tehran. Iran and India conducted their first-ever joint naval exercises in September last year, and India has agreed to modernize Iran's aging Russian-built Kilo-class submarines and MiG fighters.

Both China and India have also tried to thwart Western attempts to curtail Iran's nuclear program, which has largely been built with Russian assistance. In a departure from China's traditional neutrality on international issues that do not involve its own interests, Chinese Foreign Minister Li Zhaoxing flew to Tehran when the US was threatening to haul Iran before the Security Council this November and announced that China would oppose any such effort.

The diverging interests between the rising Asian giants and the established powers were also brought into relief by NATO's attempts to build a presence in Central Asia, as well as by Japan's attempts to exert influence in the region through the creation of the Central Asia Plus Japan forum. "Japan's move is in full harmony with American interests in Central Asia, and represents a step toward the creation of a 'concert' of interested powers," Frederick Starr, the influential American strategic thinker on Central Asia, said recently.

The potential volatility from such aggressive oil politics could bring China and India into conflict with Western, Japanese and other regional interests, says Robert Karniol, the Asia editor of Jane's Defense Weekly.

As proof, diplomatic sources in Beijing complain that China's extensive oil interests in Sudan, where, along with India, it is part owner of the Greater Nile Oil Project fields, are leading it to rein in the United Nations Security Council from passing sanctions against the government in Khartoum. The government there was recently accused by US Secretary of State Colin Powell of abetting genocide in Sudan's Darfur province.

But such murky deals have long defined oil politics, and Roach acknowledges that there is a tendency to unfairly blame China for any disturbance in world affairs. "Last year, people said China was driving deflation (because of its cheap manufacturing) and now they are saying it's driving inflation. In reality, the Chinese are very responsible economic players," says Roach.

"Even if China's oil consumption doubles by 2020, it will still only be half that of the US'" said Zheng, the energy researcher at Beijing Institute of Technology. And at 175 million barrels and 25 million barrels respectively, China's and India's estimated oil reserves are just a fraction of the 700 million barrels held by the US in its SPR.

Yet the sheer size of the Asian juggernauts and the prospect of them indiscriminately swallowing global resources scare economic planners and consumers alike.

The biggest concern is the environment. A majority of the world's most polluted cities are in China and India. Human costs aside, the World Bank estimates that pollution costs China and India about $50 and $15 billion a year respectively, or about 10 percent of their GDP.

With even medium-sized Chinese and Indian towns now sprawling out as far as some cities, the prospect of two-hour commutes is leading many middle-class people to pursue the dream of owning a car. And car ownership in turn is fueling suburban sprawl that is creating deforestation and destroying vast tracts of arable land.

To tamp down on consumer demand for gas, both New Delhi and Beijing, which control domestic energy prices, have taken the unpopular step of raising prices. They are also investing in public transportation and using incentives and subsidies to support the development of electronic vehicles and renewable energy sources. Both New Delhi and Beijing say 10 percent of their total energy needs will come from wind and solar power by 2010.

But that's easier said than done. The promise of alternative technologies—which, theoretically, could produce infinite, environmentally-friendly energy from renewable resources—sounds good on paper. But nowhere have these technologies replaced traditional power plants by generating cheap and reliable energy in meaningful quantities.

In the foreseeable future, the bulk of China's and India's energy will continue to come from fossil fuels, and investments in coal, oil and gas far exceed investments in alternate energies.

State-owned Indian and Chinese oil companies are investing heavily in local energy fields, such as the 200,000-square-mile Ordos Basin that stretches across the provinces of Shaanxi, Shanxi, Gansu, Ningxia and Inner Mongolia in northwestern China, and is reported to have oil reserves of up to 60 billion barrels.

To defray the substantial costs of exploration, both China and India are privatizing state-owned oil companies, and using the billions raised to restructure and modernize their operations. Other public sector oil units are also undergoing massive re-capitalization and restructuring, including the retrenchment of thousands of workers.

Sharon Hurst, a Beijing-based executive with ConocoPhillips, the largest refiner in the US, says, "Western investment is helping Chinese oil companies morph into world-class players."

Whereas giant exploration and pipeline deals were once almost exclusively the domain of Western and Japanese oil companies, Chinese and Indian dealmakers are bidding for, and winning, contracts with governments all over the world. Western energy industry officials complain that they are being elbowed out of deals by Chinese and Indian firms that operate at lower costs and observe few environmental standards. This is particularly true in Africa, where transparency is low, regulation almost nonexistent, and government officials easily bought. Though Western and Japanese oil companies are hardly paragons of virtue, they must deal with a higher level of public scrutiny than Chinese or Indian firms.

Significantly, both nations are also opening up their domestic oil industries—previously considered strategic and therefore off limits to foreign and private investors. Companies such as ExxonMobil, which owns a 19 percent stake in China's giant Sinopec company, are being wooed not just for their capital but also for their refining and marketing capabilities. For example, ExxonMobil is helping Sinopec establish over 500 gas stations across the country and build at least two refineries in southern China.

Optimists—mostly people from the corporate world such as Warren Buffet—say such common opportunity will lead to greater cooperation rather than competition between the West and China and India. The pessimists—mostly people from the security establishment—say two energy-hungry giants seeking resources will ultimately clash with established interests.

The truth, as always, will probably lie between these extremes, with China's and India's relations with the West fluctuating unpredictably from cooperative to contentious. Over time it is likely that China, India and the Organization for Economic Co-operation and Development nations will cement a more or less common energy agenda, and develop a model of competition within an agreed framework.

Standing at the periphery of an amateur stockcar racing track in Beijing, the prospect of geopolitical conflict seems far away to a freshly minted graduate. "I can't wait to get my own," he says, as he watches his friends tinker with the engine of a souped-up Volkswagen Jetta. "It's my dream."