China’s Quest to Dominate 21st Century Oil Supplies

A Chinese driver fills up at a state-owned gas station. (image: www.daxdesai.com)

China, through its national oil companies, has recently invested at least $40 billion in oil ventures in over twenty countries, the Journal of Energy Security reported earlier this month.  It’s bought large interests in oil fields in Nigeria, Sudan, and Kazakhstan; built pipelines in Myanmar, Sudan, and Kazakhstan; built refineries at home and abroad; bought a Canadian oil company; and engaged in closer partnerships with, while increasing imports from, Venezuela, Iran, and Saudi Arabia.

If you thought that China was trying to corner the market on oil in the 21st Century, you just might be on to something. The nation has been making strategic moves to bolster its crude oil reserves, access to foreign oil, and refining capacities, using the enormous leverage that $1.95 trillion in foreign exchange provides it at a time when global oil demand, and hence the price of petroleum-related assets, is down.

Why? China’s appetite for oil has been growing like something out of a horror movie.

Chinese oil consumption, 1990 – 2006. Not only is consumption growing, but the rate of growth is growing, too. (image: www.all-creatures.org)

Since 2004, nearly 40% of global increase in oil consumption has come from China. In 16 short years—or from Bill Clinton to Barrack Obama—China went from a net oil exporter to the world’s second largest importer, trailing only us. At present, China consumes almost 8 million barrels of oil per day, most of it imported. In 2004, it only needed to import around 3.4 million barrels a day to meet its needs. At the rate its oil thirst is increasing, though, China is on pace to drink in 9.6 million barrels a day of imported oil by 2010, 11.4 million by 2015, 13.5 million by 2020, and 16.1 by 2025.

The main drivers of its increasing consumption are domestic consumption and manufacturing for export. Historically, Chinese citizens have had a low standard of living. However, to keep its citizenry happy in an age of global interconnectedness (when it’s easy to see how the other half lives), China wants to raise its standard of living to Western levels. That means more cars and more roads (paved with asphalt, a petroleum product); more consumer goods; more use of energy. All that takes oil.

Similarly, oil is the lubricant for China’s export-powered economy—manufacturing and transportation take oil, as well. At present, the worldwide recession has depressed demand, but that doesn’t change China’s fundamental economy, which is structured around exports.

Another driver for China’s increased consumption is its military. China has been modernizing its armed forces, and a modern military machine consumes oil like nothing else. Even in peacetime, the fuel demands to keep your forces trained and ready is enormous—a tank, for example, might get 1 mile per gallon (or less!), and planes are even less fuel-efficient.
Moreover, China is building up its strategic petroleum reserves. This year, it will add 100 million barrels of capacity. With additional expansions believed to be in the works, China may have more than a half-billion barrels stockpiled by 2013. While that’s still smaller than the U.S. strategic petroleum reserve (currently a little over 700 million barrels), it is long enough to enable China to weather 60 days of international-crises-driven oil embargo, or to fuel extended military operations.

In addition, oil is power—or does anyone think that sparsely populated deserted kingdoms with small militaries would wield international clout other than through oil? The mere possession or control over oil reserves and production capacity will itself give China a more dominant role on the world stage.

But the main reason for China’s oil investments may be peak oil theory. As The HEAT Zone has reported, peak oil is the idea that at some point, the most accessible oil will be used up.  From that point forward, while there will still be oil, it will be harder to find, more difficult to extract, and more expensive to obtain, which will constrict supply. Not everyone believes in peak oil theory, though there is enough evidence and logic behind it to take it seriously. What happens if we cross peak oil theory with China’s growing oil demand?

Many versions of the theory project that we either have or will soon peak and oil production will decline.  At present, China consumes around 11 percent of world oil used. Total consumption and total production are currently in balance. Suppose that China doubles its consumption over the coming decades, while global production falls by 20 percent? The conjunction of those supply and demand movements would result in a more than 20 million barrel per day shortfall. That’s equal to current U.S. consumption—it would be like adding another United States to the oil-consuming world.

Should that happen—or indeed anything like that happen—then control of oil resources will be even more vital than they are today. The nations that have oil may be in a position to dictate to those that don’t—or at least, they will be better able to assert their independence and avoid being dictated to. And as with saving for a home, for college, or retirement, the time to begin acquiring the needed resources is now, before you need them.

Unlike us, proud of less than 250 years of history, China was a unified state more than two centuries before Christianity was born. It is a state for whom long-term planning comes naturally. It is not unreasonable to think that China is planning now for a mid-21st Century struggle over oil.