China’s Oil Security: Diplomacy, Economics and the Prospects for Peaceful Growth
Author: Sigfrido Burgos Cáceres
Originally Published at Peace and Conflict Monitor on: 07/24/2013
China’s oil security is tightly linked to economic and foreign policies. Rapid economic growth requires resources, and the Chinese are prowling international markets for gas, oil, minerals, and timber. Beijing has worked relentlessly to establish ever-new supply relationships on every continent. Among its partners are the governments of Angola, Iran, Myanmar, Sudan, and Venezuela: not exactly hallmarks of liberal democracies.
Governments in all six continents—autocratic, authoritarian, or democratic—view oil security as an inherent component of their national interests. China’s quest to confidently secure foreign oil supplies support the dominant rationales behind its energy security policy largely because the country’s increasing dependence on foreign oil is perceived by Beijing as a weak spot—a strategic vulnerability. China has decided on a geostrategic and politically-driven approach to oil security that is based on (1) a pragmatic participation in the international oil market, while at the same time attempting to hedge against price volatility and supply disruptions, and (2) strong reliance on state-owned entities to attain national strategic interests and advantageous decision-making that take place within a tactical framework designed to deepen the dominance of the Chinese Communist Party (CCP) and Chinese energy companies.
To ensure political legitimacy and social stability, China must keep annual gross domestic product (GDP) growth at about eight percent and keep inflation below five percent. To sustain this rate of economic growth, CCP officials must ensure that oil supply disruptions are either eliminated or kept at a minimum. Beijing has responded to the challenge of potential oil shortages by undertaking a state-led effort to reduce its perceived vulnerabilities. It has relied mostly upon government agencies and state-controlled oil companies to mitigate risks or threats. As a result, China’s offshore and onshore operations in the oil sector are dominated by state-owned oil enterprises.
Attempts to control operations of oil sectors in foreign countries are facilitated by unimpeded access to national oil blocks and distribution pipelines. Chinese state-owned oil companies leverage comparative advantages to do so. They enjoy financing arrangements with state-owned financial institutions that offer them open access to abundant and inexpensive credit lines. China’s goal to achieve privileged access to or extraction rights in existing oil reserves for its oil companies motivates CCP officials to sweeten accords and agreements in overseas locations with a cocktail of economic, commercial, and diplomatic incentives. Also, in order to secure oil supplies even when Chinese oil companies do not actually own substantial stakes of productive oil assets in foreign countries, Beijing has agreed with Iran, Kazakhstan, Russia, Sudan, and two South American countries to engage in credit-for-oil and infrastructure-for-oil deals.
At present, the large majority of China’s oil demand is supplied through commercial transactions in international oil markets, so the most urgent threat to Chinese oil security are provincial, national, and regional disruptions in major oil-producing areas, which is why Beijing (along with Russia) is so sensitive to UN Security Council resolutions against Iran or military interventions in the Middle East. Tellingly, close to four-fifths of China’s oil imports come from Africa and the Middle East, all of which are shipped on foreign-owned tankers passing through the Indian Ocean into the Straits of Malacca and, then, through the South China Sea until they reach Chinese seaports. The fact that top CCP officials are also senior executives of state-owned oil companies lends further evidence to the intimate link between public and private sectors, and more so between energy and military policies: critical linkages that forcefully ensure oil security as part of an overarching national security rationale.
With regards to growth, it is no mystery to CCP officials in Beijing that the world’s pattern of progress is unsustainable. The way many countries produce and use energy and deplete natural resources is causing climate change, ecological imbalances, and other environmental problems. But, they also know that short of a worldwide collapse, there is no real need to put the break on the prosperity wave that is sweeping over China, especially if Western countries are not willing, first, to decidedly convert their orthodox growth models to more sustainable ones. Additionally, they waste no time in acknowledging that the world is becoming more unstable, as evidenced by the rapid spread of financial crises from country to country and region to region, political upheavals, economic insecurity, and a shared vulnerability to radicalism and terrorism.
The Chinese are quick to affirm that the modern world is far too unequal in incomes and wealth, in access to education, health, jobs, and markets. While China takes all these odd realities into account, it however moves forward with its national priorities: pursuing oil security, lifting millions of its citizens out of poverty, becoming the true locomotive of growth in Asia, enabling businesses and individuals reach their aspirations and dreams under an alternative growth model, and cherry picking the foreign affairs it wants to deal with—not as a global leader, but as a passive participant that calculates its potential gains and losses before inserting moral and sentimental considerations. China’s leaders have been selectively incorporating economic practices and the iffy behaviors with which old powers have achieved success. They are rapidly acknowledging that they are becoming more enmeshed in an interdependent world, one with more rising powers and more widely dispersed political influence. In short, China is conveniently utilitarian and evaluative, and the world is witnessing every step.
Oil: What, Who, Where, and How Much
As China rises economically, the likelihood of future conflict over existing oil fields will increase. The explanation of this correlation is very simple. Oil is a non-renewable resource, and as emerging market economies continue to grow they will demand more of a critical input that is scarce, thus creating a scramble for what is left underground.
It is an uncontestable fact that there are no new untouched, vast reserves of oil sitting relatively close to the earth’s surface just waiting to be found. In fact, even with phenomenal advances in exploration technology, no one has made such a profitable discovery in more than forty years. This is not for lack of interest or trying. International oil companies have trotted the globe in search for oil at an incalculable cost. The easy oil that was available right under the surface has already been extracted.
In the interest of clarification, oil is a natural resource that cannot be renewed: when an oil field is emptied, no new oil emerges to take its place; that is, there is no renewal process. Since the 1960s, the rate at which the world has consumed oil has outpaced the rate at which it has discovered new oil fields. Today, a country finds only about one new barrel of oil for roughly every four it uses. This is called discovery deficit. Meanwhile it is estimated that the world population will consume 120 million barrels of oil a day by 2025, over 50 percent more than it consumed in 2001. All states are now forced to confront a bitter reality: the world is fast approaching the point at which conventional sources of oil will decline until they are forever gone. This is the rationale that informs China’s oil security and its hard push towards renewable energy sources—Beijing knows it will need all essential inputs to move the country forward.
Worldwide, extraction of conventional oil has reached or is nearing its peak. As conventional oil becomes harder to find, unconventional oil has emerged as a solution, but it can only be found in small quantities deeply embedded within other components such as clay, mud, rock, sand, and tar. Before it can be used in its liquid form, it must first be separated from these binding elements. Yet, oil extraction in the Middle East is not expected to peak until 2025. This means that a large percentage of the world’s remaining oil will be concentrated in a few Middle Eastern countries, with many embracing authoritarianism, like China. More than fifty percent of the world’s remaining conventional oil is found in five countries: Kuwait, Iraq, Iran, Saudi Arabia, and the United Arab Emirates. The rest of the oil is found in comparatively small amounts in fourteen others: Algeria, Angola, Azerbaijan, Brazil, China, Kazakhstan, Libya, Mexico, Nigeria, Norway, Qatar, Russia, the United States, and Venezuela. This rapidly depleting conventional oil has the added inconvenience that is found offshore below the world’s ocean waters, making extraction complex, risky, environmentally harmful, and detrimental to coastal communities and aquatic life. As if this is not enough, outside of the volatile Middle East, the oil that is left (i.e. the unconventional) is said to be much more expensive, environmentally destructive, and technologically difficult to extract. Among the largest unconventional source of oil are the tar sands of Canada and the shale regions of the Midwestern United States. In addition to the problems listed above, the process of removing the tar and shale from the earth, extracting the oil, converting into liquid, and refining it into gasoline is far more energy-intensive and ozone-depleting than traditional methods of oil production, thus contributing to climate change, pollution, health issues, and ecosystem deterioration.
Within approximately five to ten years, major international oil companies will have exhausted their own reserves unless major changes occur. In 2004, the Federal Trade Commission estimated that ExxonMobil and ConocoPhillips would most likely run out of oil in 2017, Chevron in 2016, and Shell and British Petroleum in 2015. Unfortunately for big oil companies, all of the world’s remaining oil is more or less spoken for. Governments own the vast majority of what is left in terms of accessible reserves. In addition to the paucity of sites to drill, there is new and growing competition for the oil that is left, from the rising powers of Brazil, Russia, China, and India, which are increasing both their consumptions and their pursuits of oil abroad.
As noted, China offers significant economic and political assistance to its state-owned oil companies to search for offshore oil in countries with questionable records, or by facilitating deals to secure guaranteed supplies from new oil fields. But Western commentators posit that Beijing’s oil security targets could be better served by active participation in global commodity markets, while others suggest that Beijing’s economic diplomacy is moving it closer to belligerent, undemocratic states—a move that may prove detrimental in the long run.
Diplomatic Overtures, Calculated Outcomes
China’s economic transformation has altered its geopolitical landscape and foreign policy options: an efficient, reliable, secure, and stable mechanism to attain oil security is not possible unless all diplomatic tools are fully utilized. Beijing is now giving more importance to transnational cooperation and intergovernmental coordination. Because of the perception of oil as a critical-strategic input, it has emerged as a type of pseudo-weapon in international politics (and in the resolution of diplomatic conflicts), which leaves military interventions a little further behind in achieving peace and stability.
In China, oil security is a driver behind its foreign policy, diplomatic overtures, and military strategy adjustments. But it must not be forgotten that Chinese foreign policies are based on the principles of sovereignty and non-intervention in the internal affairs of others, which explains why its oil companies prowl for oil overseas without asking to reform freedoms or governance. Also, the decline in America’s worldwide reputation has reduced pressures on China to improve its record. Because China’s foreign policies have exhibited diverse and contradictory stances, it is perceived as a deeply conflicted rising power with a series of competing international identities.
Around the world, the Chinese systems of authoritarian growth (as opposed to democratic growth) is admired by leaders who want their countries to find a niche in the world economy but who do not want to risk losing their own power. As noted earlier, this alternative model for growth is supported by Chinese financing, which helps governments in Africa, for example, to undertake capital projects without the kind of accountability and transparency that is required by international banks.
In China, the CCP is credited with advancing the economic prospects of its people, which are considered more important by many who are destitute and poor than the right to vote or speak freely (criticizing the government is not part of the birthright of every Chinese). In Beijing, the lesson learned from a volatile world is very clear: stability is the ultimate goal. It is for these reasons that in China dissident movements are crushed, religious liberties circumscribed, artists critical of national policies are imprisoned, political organizations prohibited, the Internet is monitored and censored, and foreign criticism is not allowed to jeopardize internal order.
Diplomatically, Southeast Asian leaders have voiced their security misgivings beginning with the fact that the gap in international stature that has existed between the U.S. and China has narrowed consistently over the last three decades. In the years after World War II, most Asian nations felt closer to a benevolent and powerful Washington than to an impoverished and turbulent Beijing. Today, however, China is associated with vibrant dynamism and economic success, to the point that is has been attracting a growing number of highly-educated immigrants who perceive it as the next land of opportunity; much like the U.S. was perceived back in the 60s and 70s. To give context to this point, Beijing demonstrates its assertiveness and independence by organizing regional events from which Washington is excluded: an African summit, an East Asian conference, military exercises, and Shanghai Cooperation Organization.
In order to gain a better understanding of Chinese diplomacy and its tools, I will shortly examine two situations: (1) Beijing wants to recover Taiwan because it was part of China from the mid-seventeenth century until the end of the nineteenth. The fact that the island was lost to the Japanese only deepens China’s determination to recover it, even though the Japanese are long gone. Washington is not formally committed to rescuing Taiwan in the event of an attack directed by Beijing because Americans do not want the Taiwanese to be so sure of protection that they provoke Beijing. Similarly, Americans do not want the Chinese to think they can attack Taiwan and get away with it without recrimination. Either way, a regional conflict initiated by China will only validate suspicions by neighbors of a non-peaceful rise to power; (2) Beijing shields Pyongyang from Western vituperations given that the North Korean leadership is more likely to remain belligerent and dangerous if it feels threatened, and more likely to become a law-abiding state if engaged collaboratively and respectfully. Clearly, the ultimate rationale in keeping American military forces deployed in the Asia-Pacific region is to deter potential aggressions. This presence is all the more necessary once the U.S. became aware of the strong domestic pressures that could drive Beijing to behave belligerently. The conceptual construct is that, if a crisis arises, Chinese leaders will look out to the Pacific and be confronted by a mighty American military force with the ability, capacity, and determination to defend its national interests, as well as Japan, Taiwan, South Korea, and other Asian allies and friends.
Throughout history, the rise of a new power has often led to war, whether caused by the desire of that power to spread its wings or the attempt by rivals to smother it. Neither China nor Japan seem possessed of imperial ambitions in the region, yet neither will be appreciative of being seen as the junior partner or the lesser state. China’s rise need not lead to wars, but this doesn’t mean contention or violent clashes will not happen. Beijing’s oil security will partly depend on tactful approaches and calculated outcomes—a juggling of commitments, proposals, and solutions. The world will be stable provided one country does not try to bully or intimidate another into doing something it does not want to do. The Beijing-World relationship will be based on a wary balancing of interests, a tiptoeing act not too small on assurances and not too big on sensitivities.
Broken Economic Models and What the World Can Learn from China
As the world witnesses the never-ending woes of American and European economies, and the potentially catastrophic consequences if the euro dissolves, it has become evident that we are living in a world of broken economic models. The conventional pathways that China, Europe, and the United States have used to achieve rapid economic success no longer seem to work. For instance, the vaunted U.S. model of consumer-led growth has now been demolished by the constant stream of reports suggesting stagnant wages, widening inequalities, and declining household net worth.
As things stand, it has become clear that the U.S. economy can no longer rely on Americans’ lavish borrowing and spending to deliver growth and prosperity. This is particularly so because there is no clear sense of what might replace consumer spending as the engine of the global economy. Europe and the U.S. cannot export their way to rapid economic expansion given that weak economies abroad lack demand for Western products and services. Additionally, Europe and the U.S. cannot turn to more government spending, as that would result in even larger, politically unsavory deficits—with the added disadvantage that it would not bring relief to the long-term debt problems. Politicians in the United States refuse to jumpstart the economy with a massive jolt of fiscal stimulus because that might ignite inflation and pose a threat to retirement savings. Specifically for European Union countries, the traditionalist approach of managing a fragile equilibrium between slow economic growth and expensive welfare states has, at last, completely unraveled. This leaves a gnawing uncertainty about what may be next in terms of growth models.
Even China, with its much-heralded investment-driven, export-dependent growth model that propelled it from impoverished backwater to the world’s second-largest economy in just three decades, is running out of steam. The new goal, as set out in Beijing, is to shift growth away from investment in polluting, energy-intensive, unsustainable industries and towards domestic consumption, particularly of services and green goods, such as energy-efficient vehicles, electricity-saving appliances, and environmentally friendly building materials. In terms of collateral damage, as China’s reliance on export industries and investment-intensive capital goods is reduced, countries such as Japan and Germany will probably be substantially hurt because they have specialized in selling machinery and the equipment needed to build Chinese factories and heavy industry. Today, world citizens keep asking this question: How did China lift more than 600 million people out of poverty? The answer is simple; by quadrupling its carbon emissions—but that approach will not be sustainable for long.
Overall, the world’s traditional models of growth and prosperity are under assault on all angles. While the wrecked models of growth differ from region to region, the breakdowns are occurring simultaneously and feed on each other (i.e. there is an umbilical connection between the sovereign debt crisis hovering over Europe and the economic recovery of the United States). At its climax, the abrupt erosion of wages and wealth has impoverished the global middle class, which is the main reason for the huge inequality gaps that have arisen. National leaders face a painful and, possibly, inconclusive economic stalemate ahead…or the emergence of novel ideas.
While not really novel, some ideas that have been tweaked from traditional models already exist in North America. In Canada, for instance, tight banking regulations helped insulate the country from the worst effects of the global financial crisis. Sound policymaking allowed it to preserve the sacred trust on its publicly funded education and health-care systems. From 2010 to 2012, the record number of Americans heading to Canada in search of work and better living conditions is proof that the Canadian systems of governance is working for its citizenry.
Also, the world can learn some valuable lessons from the Chinese. First, Beijing won’t say how it invests its foreign-exchange reserves—which have grown rapidly over the past decade—but it is known that China spends nine percent of GDP on infrastructure development; compared with four percent for Canada and only 1.7 percent for the U.S.—a long-term boost to jobs and development prospects. These investments partly explain why Chinese industrial centers have become irresistible to foreign investors. Second, the CCP has used its control over the exchange rate as a key plank of its economic-development strategy and has racked up immense trade surpluses. Third, it is important to understand that China’s success is not merely due to its plentiful supply of low-wage labor. Today, China is producing an increasing number of academics, engineers, scientists, and technicians. In 2003 it became the third country to launch a man into space. Fourth, its research and development budgets are growing; it is experimenting with new designs, techniques, and procedures in such fields as bioengineering, civilian nuclear power and environmental technology.
Lastly, China’s global search for energy and resources and its ambitions for oil security may end up continuing to raise the living standards of its people and cutting poverty rates in rural areas. However, the widening income gap between high and low classes in China clashes acutely with socialist values, which for long have emphasized egalitarianism—inequality breeding resentment, especially when people suspect the rich obtained their wealth not through diligent hard work, but through corruption and cronyism. Also, the Chinese are angry about pollution, bitter about industrial projects that drive them off their land, and worried about uncontrolled disease outbreaks.
China needs to ensure its economic growth, political stability, and socio-cultural development in the more competitive, complex, fragmented, and fast-changing world of the 21st century. Chinese leaders recognize their ever-rising resources needs. They assiduously seek to secure foreign oil deliveries by proactively pursuing strategic bilateral relations with key energy producers and resource-rich countries. This approach, while not at all different from the ones being pursued by other emerging market economies, can turn out to be problematic in a world of finite resources and a rising number of actors pursuing them. In essence, the aim of China’s oil security is to lock up critical supplies to sustain growth, stimulate jobs, and reduce vulnerabilities.
Whether global citizens like it or not, because the world is still organized around nation-states, the decisions that leaders make and the ones citizens support today determine the possibilities of tomorrow. If this is indeed so, the CCP in Beijing could very well claim that their formula for prosperity, peace, and security is a balanced cocktail of a strong, effective private sector and an assertive, coherent public sector (i.e. government) that work together to promote a vibrant economy that includes job creation, rising incomes, low inflation, increasing exports, and greater energy and resource (e.g. oil) supplies. For example, the prosperous Chinese cities of Guangzhou and Shanghai have been, for some time, deeply committed to building networks of cooperation involving the public, private and civil society sectors, and are now creating economic opportunities and charging into the future with confidence.
As in major cities in Europe and the United States, Beijing dreams of sustained economic growth and social progress—new businesses, well-paying jobs, affordable education and healthcare, and progressive leadership in new industries, like biotechnology, microprocessors, and clean energy. While moving forward with its dreams, Southeast Asian neighbors can end up benefiting too. For example, countries are increasing their presence in Myanmar, with China and Thailand very much in the lead because they have the roadways and business connections, as well as being on the ground already. Additionally, for economic aid and technical assistance, developing countries can now turn to China, a generous donor that despite its superpower status seems to treat its partners with fairness and respect, never asking sensitive questions.
Importantly, as the Chinese government recognizes constraints and limitations it has identified five sources of new, well-paying jobs: increasing exports, improving the country’s manufacturing base, leading the world in the production of renewable energy and energy conservation technologies, build a 21st century infrastructure, and boost its military capacity by upgrading the country’s army and navy. With regards to renewable, China has installed more wind capacity that the U.S.; has about half the global market in solar cells, and is racing ahead with tens of billions of dollars in new investments and incentives, in a determined effort to lead the world in both the installation and the export of clean-tech products. In parallel, Chinese cities are independently tinkering with grants, incentives, and loans to increase the manufacturing of new clean-energy products and more energy-efficient technologies.
At this moment, it is true that China—boosted by its economic performance and military buildup—has been reshaping its strategic priorities and, for the first time since the Sino-Soviet rupture in 1956, it is actively seeking to extend its clout and influence through the construction of a stable alliance network and has been eyeing Russia, an oil-rich country, for that purpose. But ultimately, the CCP will recognize that it must support a stronger focus on green technology, which will change the way China produces and consumes energy, and is the strategy most likely to ignite a fast-growing economy while strengthening its natural security and vital strategic interests.
As former U.S. president Clinton noted, “We live in the most interdependent age in history. People are increasingly likely to be affected by actions beyond their borders, and their borders are increasingly open to both positive and negative crossings: travelers, immigrants, money, goods, services, information, communication, and culture; disease, trafficking of drugs, weapons, and people, and acts of terrorism and violent crime.” This being said, Beijing is acutely aware that pursuing a multi-pronged approach to oil security with rogue, undemocratic states, along with incessant carbon emissions, is largely unsustainable and unpalatable in international forums.
Altogether, China is set to come around with forward-looking policies that incorporate modern conceptualizations on growth, politics, and the environment. They will soon learn that studies on economic and social mobility have concluded that the successes of nations are due to government policies that equalize opportunities and prepare people to seize them. The Chinese government, with its push on oil security, education, research and development, entrepreneurship and job creation, is leveling the playing field for its young citizens to take advantage of existing opportunities and structural strengths.
Bio: Sigfrido Burgos Cáceres works at the University of South Alabama and is a consultant specializing in international development, political economy, and foreign affairs. From 2007 to 2012 he was based in Italy at the Food and Agriculture Organization of the United Nations. He has published peer-reviewed journal articles on China’s natural resource quests in Africa, Southeast Asia, and South America, and has authored two books: The Hungry Dragon: How China’s Resource Quest is Reshaping the World (with Sophal Ear) and Cambodia: Selected Writings on Avian Influenza, Livelihoods, Poultry, Politics, and Socioeconomics. He holds six academic degrees, speaks four languages fluently and enjoys traveling.