The oil that troubles US-China waters

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Early this month, crude oil futures prices peaked at a 21-year high, reaching US$42.45 a barrel. In conjunction with terrorist risk premiums, China's surging demand for oil is a major driver behind the soaring prices. In fact, since the beginning of 2000, China has accounted for 40% of the growth in world oil demand.

Oil is an essential ingredient in China's successful formula for economic growth. It is critical for driving industrial activity, generating power, constructing infrastructure projects and fueling the rapidly growing number of automobiles on China's roads. Today, imports comprise one-third of China's total oil consumption, growing 31% last year, and by 2020 some estimates put China's dependency on foreign oil as high as 70%.

Oil consumption in the United States, the world's largest consumer of petroleum, is expected to grow nearly 50% over the next 20 years. Beijing, also on the fast track to oil dependency, is on a search to secure energy sources across the globe. This quest, in addition to China's heavy reliance on Middle Eastern oil, suggests a potential rivalry between the US and China over access to oil-rich regions. Many analysts argue that the trajectories of the world's two most voracious oil consumers will inevitably lead to a clash over the scarce resource.

Will the US and China actually square off in a war for resources some time during the first half of the century? Although the idea for a coming collision over the world's limited oil reserves may sound rather intriguing, several essential considerations must be examined before drawing such a conclusion.

First, until recently, China's energy strategy has appeared disjointed, often fixed on multiple, mutually exclusive objectives and quite often designed to meet political ends at the expense of economic considerations. However, as a result of instability in the Middle East and the need to maintain economic growth as a means to achieve social stability, Chinese authorities have recently approached the nation's energy policy in two fundamentally new ways.

Foremost, Beijing has embarked on a diversification strategy both in terms of the development of alternative fuels and the establishment of new oil-import markets.

For example, Beijing recently moved to solicit bids on four newly proposed nuclear power reactors from international organizations, increased oil imports from Central Asia, Russia and Africa and is constructing three large liquefied natural gas projects along the Chinese coast.

The other major policy swing is one toward an energy strategy based on market principles as opposed to political considerations. One example that clearly illustrates Beijing's shift is the recent decision to move forward on construction of the Kazakhstan-China oil pipeline. In 1997, at the time the original agreement was made, the 3,000-kilometer pipeline from Kazakhstan to China made little commercial sense. Instead, the deal was part of Beijing's strategic efforts to partner with Central Asian nations to protect against potential pro-independent uprisings along the Xinjiang boarder and to counter growing US presence in the region. In fact, after seven years, only the first 400 kilometers of the pipeline have been completed. The recent push to complete the second, much larger, section of the project demonstrates Beijing's latest yearning to lock in new energy supplies and diversify away from Middle Eastern oil.

Second, technological advances in the oil industry and the development of alternative energy sources will allow, over time, energy users to become more efficient and decrease their overall reliance on oil. No one knows when Earth's remaining oil deposits will dry up, but almost all experts agree that before mid-century the world's oil supply will "peak" - marking a change from an increasing supply of cheap oil to a dwindling supply of expensive oil. Therefore, the technological advances required to shift away from oil reliance toward substitutes such as natural gas, hydro power, biomass and other renewables are not only welcome but necessary. In the future, when the cost of developing and utilizing alternative energy sources equalizes with the cost of oil use, simple economics will drive rapid progress in these areas. Oil dependency will decline as it becomes more economical to take advantage of alternative energy sources.

The third factor to be contemplated when analyzing the likelihood of a future US-Sino oil clash is the dynamic relationship these two powers share. Since dialogue began in the early 1970s, progress on strategic, political, cultural and commercial levels has flourished and resulted in a very strong, mutually beneficial relationship. The large number of shared interests not only provides incentives for avoiding a showdown over a single limited resource, but also provides multiple spheres in which cooperation and diplomatic arrangements can be worked out. In fact, last month the two nations agreed to launch the US-China Energy Policy Dialogue, which will expand energy-related interactions and cooperation between the world's two largest energy consumers.

Will growing demand for oil sour the US-China relationship to such a degree that a collision is inevitable? China's newly evolving energy strategy, technological progress in the oil industry and the increasingly robust bilateral relationship make this claim unlikely.