Race for fuel: China's growing thirst for fuel has led the Communist country to search aggressively for oil outside its borders. That search may sow the seeds of conflict with the West.

Just a few years ago, China was a nation of bicycles. Its 1.3 billion people suffered in abject poverty while being reflexively oppressed by their Communist rulers.

Despite its predilection for oppression, the Communist Party of China has not only retained power but has begun, with the assistance of the West, to transform China into the industrial center for the world. To facilitate this revolutionary process, China's Communist leadership has, among other things, departed from the economic madness of Karl Marx and allowed some private ownership of property. Gradually, state-run enterprises were partially privatized, permitting investors to run businesses and corporations for profit. But this was not done in a completely free environment. In a system that some commentators have described as neo-fascist, the Communist government of Beijing retains a controlling interest in many corporations, exerting control while earning an immense profit for the Communist Party coffers.

Though this system is not exactly based on the free enterprise ideal as understood in America, it has nevertheless given the Chinese people a degree of prosperity never previously experienced. As a result, the nation has rapidly industrialized. Factories have been built, expanded, and modernized at a breakneck pace, while millions of people who could never before dream of owning an automobile have now been able to purchase one of their own, making the bicycle nation a thing of the past.

All this industrialization and modernization is powered by one primary fuel: oil. China is now the world's second largest importer of crude oil (the United States being the first). According to the Institute for the Analysis of Global Security, "China's need for energy is projected to increase by 150 percent by 2020. To sustain its growth China requires increasing amounts of oil. Its oil consumption grows by 7.5% per year, seven times faster than the U.S." To feed this insatiable appetite, China is becoming increasingly active in its search for oil. It is not alone. India, the world's second most heavily populated nation, is undergoing a similar transition to an industrialized, oil-based economy. These two nations are now competing against each other and against the established industrial economies of the West for oil resources. At best, the likely outcome will be higher prices as increased demand competes for the same supply. At worst, the increased competition for oil might plant the seeds of war.

China's Search for Oil

In the last decade, China has changed from a net exporter of oil into the world's second largest importer. "Oil demand is exploding in China as people embrace automobiles and as factories, apartment towers and office buildings proliferate," reported the Washington Post on July 13. "For the third summer in a row, China is rationing energy, limiting production in industrial areas."

Faced with an energy crunch, China's oil industry has begun an aggressive search for oil outside its borders. The U.S. Energy Information Agency reports that the Chinese government-run oil industry has made a large number of agreements to procure oil from sources outside its own country:

   With China's expectation of growing
   future dependence on oil imports,
   the country has been acquiring interests
   in exploration and production
   abroad. CNPC [China National
   Petroleum Corporation] has acquired
   oil concessions in Azerbaijan, Canada,
   Kazakhstan, Venezuela. Sudan,
   Indonesia, Iraq, and Iran. The Greater
   Nile Petroleum Operating Company
   (GNPOC), the Sudanese oil project
   in which CNPC owns a stake, began
   exports in August 1999, and CNPC's
   equity oil from the project is around
   150,000 bbl/d. Sinopec [China Petrochemical
   Corporation] also has
   begun purchasing overseas oil assets,
   with its most notable success being a
   contract for the development of Iran's
   Yadavaran oil field signed in November
   2004. Yadavaran may eventually
   produce 300,000 barrels per day.
   Sinopec also acquired a 40 percent
   stake in Canada's Northern Lights oil
   sands project in May 2005, which is
   expected to produce around 100,000
   bbl/d by 2010. CNOOC
   [China National Offshore
   Oil Corporation] also has
   purchased an upstream
   equity stake in the small
   Malacca Strait oilfield in
   Indonesia.

China's most significant and aggressive move to date was the failed CNOOC bid for the American oil company UNOCAL. The Chinese firm, 70 percent owned by the Communist government, offered the staggering sum of $18.5 billion for California-based UNOCAL, some $2 billion more than a competing offer from Chevron. Some pundits argued that the deal was just business as usual and had no relationship to geopolitics or oil security for Beijing. The deal, though, had everything to do with Beijing. John Tkacik, the former Deputy U.S. Consul General in Guangzhou, China, pointed out that the move was not initially favored by CNOOC's foreign directors. Writing in Capitalism Magazine. Tkacik observed that in April, "one of CNOOC's four independent, nonexecutive directors (Kenneth Courtis), dismissed the notion of bidding on Unocal as something that made little economic sense for the company." CNOOC made the bid, in the end, because the executive directors of CNOOC's board, representing as they do the Communist government in Beijing, were ordered to make the offer. "There can be no doubt that the Chinese Communist Party Politburo in Beijing ordered CNOOC to move on Unocal," writes Tkacik.

A Dangerous Future

In the West, the future of energy and of the Western economies is inextricably tied to the might of the United States. The entire Western bloc, its satellite nations, and its dependencies depend for security on access to oil. That access is guaranteed by the business, diplomatic, and military efforts of the United States, particularly in the Middle East. China, though having for years been courted and cajoled both covertly and in plain sight by the West, may not be willing to play ball. China has long considered itself "the Middle Kingdom." This is essentially a Chinese doctrine of Manifest Destiny in which it is believed that Chinese culture is intrinsically superior to all others.

China's Middle Kingdom beliefs are often forgotten or ignored by the West, but received recent comment nonetheless in the Guardian newspaper in the UK in a report entitled "The Middle Kingdom Mentality." The Chinese, said the Guardian report, "tend to acknowledge the historical achievements of the west, but at the same time resent western hegemony and despise aspects of western culture, many believing that at some point in the future the innate virtue of Chinese civilisation will again assert itself." It is possible that China will decide to depend on the West for its energy future. That possibility is unlikely, though, given its historic cultural belief (a belief, it should be pointed out, that survived decades of Communism) in its destiny as the Middle Kingdom to which other nations must eventually supplicate themselves. In fact, recent events seem to indicate that both China and the West have begun a phase of increased competition for oil.

The opening move in this competition was the U.S. invasion of Iraq. The Iraqis have the second largest oil reserves after Saudi Arabia. Knowing that the Saudis were already tied to the U.S. and the West, prior to the U.S. invasion China had begun cultivating Iraq with an eye toward gaining increased access to its important oil fields. China's potential investments in Iraq included a $1.3 billion contract for the Al-Adab oil field in central Iraq. China was also looking to buy into the Halfayah field. According to the Washington Post, "those two fields might have delivered quantities equivalent to 13 percent of China's current domestic production." The U.S. invasion changed all that. "Iraq changed the government's thinking," Pan Rui, a scholar at Fudan University in Shanghai, told the Post. "The Middle East is China's largest source of oil. America is now pursuing a grand strategy, the pursuit of American hegemony in the Middle East. Saudi Arabia is the number one oil producer, and Iraq is number two [in terms of reserves]. Now, the United States has direct influence in both countries."

As it is developing now, China's oil situation is not entirely unlike that faced by Imperial Japan in the 1930s. Especially in the latter part of that decade, Japan's growth and ambitions made it heavily dependent on foreign oil that was becoming increasingly difficult for the Japanese government to acquire. The result, eventually, was war. Now China is beginning to see itself in that same position. The U.S. invasion of Iraq "has reinforced China's fears that it is locked in a zero-sum contest for energy with the world's lone superpower, prompting Beijing to intensify its search for new sources."

It is noteworthy in this context that Beijing considers the United States the nation against which it is most likely to go to war. In 1994, as authors Edward Timperlake and William C. Triplett II note in their book Red Dragon Rising, then-Chinese president Jiang Zemin remarked: "I am aware of the fact that the West remains our chief enemy." Alarmingly, Chinese dissident Wei Jingsheng, who spent 18 years as a political prisoner in Chinese prisons, warns that the Chinese government is now considering nuclear war as a viable option. "Sino-U.S. relations are reaching a crucial point and most of the American public does not know about," Wei told the Washington Times on September 1. "The United States needs to pay more attention to the possibility of nuclear war with China." The warning comes just months after a top Chinese general warned that China would use nuclear weapons against the U.S. in the event of conflict over Taiwan. "If the Americans draw their missiles and position-guided ammunition on to the target zone on China's territory, I think we will have to respond with nuclear weapons," General Zhu Chenghu said, according to the Financial Times of London.

India's Role

Thrown into this volatile mix is India. China and India have never been on particularly friendly terms. The two nations fought a war in the past, and China, more recently, provided much needed help to Pakistan as that nation sought to develop nuclear weapons to deter what it perceived as a nuclear threat from India. Now, India too needs oil, and it's competing for supplies. It just lost to China in a bid to take over a promising oil operation in Kazakhstan. In August, CNPC closed the deal on a $4.18 billion purchase of PetroKazakhstan against a competing bid from India's Oil & Natural Gas Corp. The Indian firm lost to CNPC again weeks later in Ecuador when the Chinese government-run firm purchased oil and pipeline interests in Ecuador from EnCana, a Canadian firm, for $1.42 billion. The competition for oil between China and India is likely to intensify, according to experts. "Obviously, both countries are net importers of crude oil, and for strategic reasons they want to have access to foreign reserves," Adrian Loh, an oil analyst for Merrill Lynch, told the San Jose Mercury News. "They certainly will be locking horns in terms of overseas mergers and acquisitions."

Hopefully, the strategic need to supply the demand for oil in the U.S., China, and India will not lead to conflict in the future. But even in the best-case scenario, U.S. consumers will be affected by the tripartite scramble to secure oil. Assuming that India and especially China will continue to import ever-greater quantities of oil, it is likely, and probably certain, that prices will continue to trend upwards.

Even though there is now plenty of oil worldwide, it is imperative that the United States reduce its dangerous dependence on foreign oil by eliminating the governmental regulatory roadblocks and land lockups now preventing our entrepreneurs from more fully developing all of our energy resources--not just oil--as dictated by a tree market.