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China eyes post-Chavez oil axis

Tuesday 19 March 2013

By Brendan P O’Reilly

China is set to overtake the United States as the world’s largest importer of oil this decade. While the expansion of China?’s economy has slowed from a breakneck 10% yearly rate to a still-formidable 7% per annum, the economic metamorphosis of the Middle Kingdom is having huge impacts on global energy markets.

The growing ranks of China’s middle class increasingly aspire to a lifestyle - and level of consumption - that approximates the patterns of their counterparts in the world’s richest countries. The death of Venezuelan president Hugo Chavez has further highlighted China’s need for the lifeblood of a modern economy and the economic and geopolitical threats China’s dependence on imported energy hold for the leadership in Beijing.

In 2012, China imported an average of 5.4 million barrels of oil per day, while the United States imported an average of 7.41 barrels every day during the same period. As the United States expands domestic extraction of gas through new fracking technologies, and China’s current economic growth rate remains impressive, China is set to overtake the US as the largest single importer of oil. Indeed, during certain months of 2012, China’s oil imports surpassed America’s. [1]

China was a net oil exporter until the early 1990s and still has significant reserves of petroleum. However the rapid growth of its economy in the past two decades has led to a demand for petroleum that has surpassed domestic supply. According to China National Petroleum Corporation, 59.4% of the oil used in China will come from abroad this year.

Increasing consumer demand now drives China’s growing appetite for oil. Beijing has a stated goal to decrease its economy’s dependency on exports of consumer goods by boosting domestic consumption. One market in which this aim is being realized is in automobiles. China surpassed the United States as the largest market for new vehicles in 2009. As ownership of a personal automobile is increasingly seen as a necessary indicator of middle-class status in China, one can expect China’s roads to become more crowded, and the air in China’s cities to be further grayed by the residue of fossil fuels extracted abroad.

The international energy markets will continue to fluctuate based on macroeconomic trends and the discovery of new deposits. However, the growing middle class of China (and India) and the diminishing reserves in some of the world’s most important oil fields mean that, in the absence of a radical push to utilize renewable alternatives, the price of petroleum should rise over the long term.

The spice must flow

Beyond the economic realm, China’s increasing dependence on imported oil has immense geopolitical implications. First, China’s deepening political relations with energy-rich nations are driven primarily by the all-important Chinese Communist Party goal of ensuring domestic stability through continued economic growth. Chinese ties with Russia, Iran, and Venezuela are motivated more by the thirst for energy than a desire to form some sort of anti-Western axis.

China’s expanding presence in the Indian Ocean is also primarily driven by energy geopolitics. New Delhi (understandably) fears a strategic encirclement by China’s ties with Pakistan and Myanmar. However, China’s involvement in those two countries is motivated, at least in part, by a need for reliable overland energy supplies. A pipeline running from the Myanmar coast to China’s southwest is due to start operations this year, and China’s investment in Pakistan’s Gwadar port is largely inspired by a wish for more direct access to Middle Eastern oil.

Nearly three-quarters of China’s crude oil imports come from the Middle East and Africa. These supplies must at present pass through the bottleneck of the Strait of Malacca, and the contested South China Sea. The United States is very publicly repositioning the majority of its fleet to the Pacific, and tensions are mounting between China and its neighbors over sovereignty over the waters of the East China and South China Sea, where the extent of oil and gas reserves is still being estimated but could be considerable. Beijing fears that any armed confrontation in the maritime region could threaten supplies of imported energy.

The B(oil)ivarian Revolution

China has taken a keen interest in Venezuela, and in the wake of Hugo Chavez’s passing China’s state-run media has featured extensive coverage of the mourning masses of the socialist Chavistas, in scenes reminiscent of China’s heady revolutionary days. China has much at stake in Venezuela - a country that recently overtook Saudi Arabia as the holder of the world’s largest oil reserves.

Beijing has lent Venezuela US$42 billion in recent years. These funds are being repaid with Venezuelan oil at below-market rates. China is already Venezuela’s number two trading partner (after the United States), and is set to increase imports of Venezuelan oil. However, any political transition that sees Chavez’s supporters lose power could threaten China’s massive investments in the South American nation.

Nicholas Marudo, Venezuela’s acting president and Chavez’s former foreign minister, called for continued cooperation with China: "The best tribute that we could give to our comandante Chavez is to deepen our strategic relationship with our beloved China".

Meanwhile, Zhang Peng, the chairman of China’s National Development and Reform Commission, struck an unusually spiritual note of mourning for a member of the officially-atheist Chinese Communist Party: "We must join efforts to continue developing and deepening relations between China and Venezuela. It’s the only way to comfort the soul of president Hugo Chavez."[2]

On the other end of the Venezuelan political spectrum, opposition leader Henrique Capriles has promised that, if he is elected, he will review and challenge the special deals Chavez struck with China, Russia and Cuba. It is important to note that Venezuela has had numerous attempted coups in the past several decades.

The financial heft of China’s state-owned oil firms has allowed it to make major energy investments in the last decade, leading to serious concerns amongst the US leadership. There are fears that China is seeking to "lock down" oil reserves before the advent of "peak oil" and a subsequent exponential rise in petroleum’s value. The China National Offshore Oil Corporation (CNOOC) recently bought Canada’s Nexen, a major stakeholder in Canadian oil sands and the Gulf of Mexico. CNOOC’s 2005 bid to buy Unocal was heavily opposed in Washington. There are Western concerns that China’s state-owned firms could use their control over petrochemicals for their own exclusive strategic purposes.

CNOOC chief executive Fanrong Li recently sought to dispel such fears at an energy conference in Houston. He dismissed the notion that China intends to exclusively "hold each barrel" it extracts: "This notion does not make any commercial sense. We sell our products at [the] best available distribution systems to maximize commercial value." [3] Essentially, Li has stated that CNOOC’s acquisitions are driven more by a desire for profit than a Chinese yearning for strategic energy ascendancy.

Li’s reassurances seem to ring true, at least for the time being. Most of the oil that Venezuela owes to China never arrives in China’s ports. According to Kevin Jianjun Tu of the Carnegie Endowment for International Peace, "Chinese NOCs [national oil corporations] sell most of their Venezuela-sourced oil in the open market in order to avoid the high logistic costs associated with long-haul shipping to China." [4] In other words, China receives Venezuelan oil at a discount, and then sells this oil at market prices - presumably to refineries in the United States.

For the time being, China’s state-owned enterprises are being very economically practical with their global energy heft. Indeed, due to China’s heavy dependence on oil imported under the nose of America’s navy, China could stand to lose the most in an energy confrontation.

In order to lessen its dependence on imported fossil fuels, Beijing has made significant investments in renewable energy technologies, particularly in solar power and hydroelectricity. However, a dramatic reappraisal of China’s development model would be necessary to wean China from oil. So long as Beijing continues to follow the standard development course charted by other nations, its dependence on imported energy will only increase.

Beijing will continue an economically ambitious - and strategically conservative - effort to secure its share of the world’s limited fossil fuels. Expect China to outstrip the United States as the world’s largest importer of petroleum, with important economic and political ramifications for the entire planet.

Notes:

1. "China well on way to becoming largest oil importer", China Daily, March 7, 2013.

2. "Venezuela, China vow deeper ties after Chavez death", Global Post, March 9, 2013.

3. "Chinese oil exec attacks ’misconception’ about country’s global intensions", The Hill, March 5 2013.

4. "China Oil: An Evolving Strategy", Carnegie Endowment for International Peace, April 24, 2012.

Brendan P O’Reilly is a China-based writer and educator from Seattle. He is author of The Transcendent Harmony.

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