What Resource Wars?

What Resource Wars?

Mini Teaser: Classic resource wars are good material for Hollywood screenwriters. They rarely occur in the real world.

by Author(s): David G. Victor

Oil rig

RISING ENERGY prices and mounting concerns about environmental depletion have animated fears that the world may be headed for a spate of "resource wars"-hot conflicts triggered by a struggle to grab valuable resources. Such fears come in many stripes, but the threat industry has sounded the alarm bells especially loudly in three areas. First is the rise of China, which is poorly endowed with many of the resources it needs-such as oil, gas, timber and most minerals-and has already "gone out" to the world with the goal of securing what it wants. Violent conflicts may follow as the country shunts others aside. A second potential path down the road to resource wars starts with all the money now flowing into poorly governed but resource-rich countries. Money can fund civil wars and other hostilities, even leaking into the hands of terrorists. And third is global climate change, which could multiply stresses on natural resources and trigger water wars, catalyze the spread of disease or bring about mass migrations.

Most of this is bunk, and nearly all of it has focused on the wrong lessons for policy. Classic resource wars are good material for Hollywood screenwriters. They rarely occur in the real world. To be sure, resource money can magnify and prolong some conflicts, but the root causes of those hostilities usually lie elsewhere. Fixing them requires focusing on the underlying institutions that govern how resources are used and largely determine whether stress explodes into violence. When conflicts do arise, the weak link isn't a dearth in resources but a dearth in governance.


Feeding the Dragon

RESOURCE WARS are largely back in vogue within the U.S. threat industry because of China's spectacular rise. Brazil, India, Malaysia and many others that used to sit on the periphery of the world economy are also arcing upward. This growth is fueling a surge in world demand for raw materials. Inevitably, these countries have looked overseas for what they need, which has animated fears of a coming clash with China and other growing powers over access to natural resources.

Within the next three years, China will be the world's largest consumer of energy. Yet, it's not just oil wells that are working harder to fuel China, so too are chainsaws. Chinese net imports of timber nearly doubled from 2000 to 2005. The country also uses about one-third of the world's steel (around 360 million tons), or three times its 2000 consumption. Even in coal resources, in which China is famously well-endowed, China became a net importer in 2007. Across the board, the combination of low efficiency, rapid growth and an emphasis on heavy industry-typical in the early stages of industrial growth-have combined to make the country a voracious consumer and polluter of natural resources. America, England and nearly every other industrialized country went through a similar pattern, though with a human population that was much smaller than today's resource-hungry developing world.

Among the needed resources, oil has been most visible. Indeed, Chinese state-owned oil companies are dotting Africa, Central Asia and the Persian Gulf with projects aimed to export oil back home. The overseas arm of India's state oil company has followed a similar strategy-unable to compete head-to-head with the major Western companies, it focuses instead on areas where human-rights abuses and bad governance keep the major oil companies at bay and where India's foreign policy can open doors. To a lesser extent, Malaysia engages in the same behavior. The American threat industry rarely sounds the alarm over Indian and Malaysian efforts, though, in part because those firms have less capital to splash around and mainly because their stories just don't compare with fear of the rising dragon.

These efforts to lock up resources by going out fit well with the standard narrative for resource wars-a zero-sum struggle for vital supplies. But will a struggle over resources actually lead to war and conflict?

To be sure, the struggle over resources has yielded a wide array of commercial conflicts as companies duel for contracts and ownership. State-owned China National Offshore Oil Corporation's (CNOOC) failed bid to acquire U.S.-based Unocal-and with it Unocal's valuable oil and gas supplies in Asia-is a recent example. But that is hardly unique to resources-similar conflicts with tinges of national security arise in the control over ports, aircraft engines, databases laden with private information and a growing array of advanced technologies for which civilian and military functions are hard to distinguish. These disputes win and lose some friendships and contracts, but they do not unleash violence.

Most importantly, China's going-out strategy is unlikely to spur resource wars because it simply does not work, a lesson the Chinese are learning. Oil is a fungible commodity, and when it is sourced far from China it is better to sell (and buy) the oil on the world market. The best estimates suggest that only about one-tenth of the oil produced overseas by Chinese investments (so-called "equity oil") actually makes it back to the country. So, thus far, the largest beneficiaries of China's strategy are the rest of the world's oil consumers-first and foremost the United States-who gain because China subsidizes production.

Until recently, the strategy of going out for oil looked like a good bet for China's interests. But, despite threat-industry fear-mongering, we need not worry that it will continue over the long term because Chinese enterprises are already poised to follow a new strategy that is less likely to engender conflict. The past strategy rested on a trifecta of passing fads. One fad was the special access that Chinese state enterprises had to cheap capital from the government and by retaining their earnings. The ability to direct that spigot to political projects is diminishing as China engages in reforms that expose state enterprises to the real cost of capital and as the Chinese state and its enterprises look for better commercial returns on the money they invest. Second, nearly all the equity-oil investments overseas have occurred since the late 1990s, as prices have been rising. Each has looked much smarter than the last because of the surging value of oil in the ground. But that trend is slowing in many places because the cost of discovering and developing oil resources is rising.

And the third passing fad in China's going-out strategy is the fiction that China can cut special deals-such as by channeling development assistance to pliable host governments-to confer a durable advantage for Chinese companies. While there is no question that the special deals are rampant-by some measures, most of China's foreign assistance is actually tied to natural-resources projects-the Chinese government and its overseas enterprises are learning that it is best to avoid these places for the long haul. Among the special havens where Chinese companies toil are Sudan, Nigeria, Chad, Iran and Zimbabwe-all countries where even Chinese firms find it hard to assure adequate stability to reliably extract natural resources.

As China grapples with these hard truths about going out, the strategy will come unstuck. It won't happen overnight, but evidence in this direction is encouraging. China already pursues the opposite strategy-seeking reliable hosts, multiple commercial partners and market-oriented contracts-when it secures natural resources that require technical sophistication. China's first supplies of imported natural gas, which started last year at a liquefied natural gas terminal in Shenzhen, came from blue-chip investments in Australia, governed by contracts and investments with major Western companies. With time, China will shift to such arrangements and away from the armpits of governance. At best, badly governed countries are mediocre hosts for projects that export bulk commodities, such as iron ore and raw crude oil. These projects, however, are least likely to engender zero-sum conflicts over resources because it is particularly difficult to corner the market for widely traded commodities, as China has learned with its equity-oil projects. Resources that require technical sophistication to develop tend to favor integration and stability, rather than a zero-sum struggle.


Pernicious Rents

THE SECOND surge in thinking about resource wars comes from all the money that is pulsing into resource-rich countries. There is no question that the revenues are huge. OPEC cashed $650 billion for 11.7 billion barrels of the oil it sold in 2006, compared with $110 billion in 1998, when it sold a similar quantity of oil at much lower prices. Russia's Central Bank reports that the country earned more than $300 billion selling oil and gas in 2006, about four times its annual haul in the late 1990s. But will this flood in rents cause conflict and war?

There is no question that large revenues-regardless of the source-can fund a lot of mischievous behavior. Iran is building a nuclear-weapons program with the revenues from its oil exports. Russia has funded trouble in Chechnya, Georgia and other places with oil and gas rents. Hugo Chávez opened Venezuela's bulging checkbook to help populists in Bolivia and to poke America in ways that could rekindle smoldering conflicts. Islamic terrorists also have benefited, in part, from oil revenues that leak out of oil-rich societies or are channeled directly from sympathetic governments. But resource-related conflicts are multi-causal. In no case would simply cutting the resources avoid or halt conflict, even if the presence of natural resources can shift the odds. Certainly, oil revenues have advanced Iran's nuclear program, which is a potential source of hot conflict and could make future conflicts a lot more dangerous. But a steep decline in oil probably wouldn't strangle the program on its own. Indeed, while Iran still struggles to make a bomb, resource-poor North Korea has already arrived at that goal by starving itself and getting help from friends. Venezuela's checkbook allows Chávez to be a bigger thorn in the sides of those he dislikes, but there are other thorns that poke without oil money.

Essay Types: Essay