Report 153 / Asia 3 minutes

China’s Thirst for Oil

China’s need for energy is growing faster than any other country’s. Record economic growth results in demand that outstrips domestic supply, leading Beijing to look outward to ensure growth and stability.

Executive Summary

China’s need for energy is growing faster than any other country’s. Record economic growth results in demand that outstrips domestic supply, leading Beijing to look outward to ensure growth and stability. Concerns about the global oil market have led state firms to buy stakes around the world, often in countries shunned by Western firms. The investments are an important factor in Beijing’s foreign policy. They also drive concerns that China’s actions fuel or exacerbate conflict in the developing world and cause tensions with other major oil-importing countries as it locks up energy resources. China’s energy needs have led it to play a more prominent role in international markets in recent years. This has generated concerns about the potential impact on other countries’ energy security, and global and regional security generally. These are largely overstated, but China could take a number of steps, as its policymaking and implementation evolves, which would help create a more cooperative international environment on both energy and wider security issues.

Chinese companies cannot dominate international oil supplies. They are small players outside of China, and the oil they bring online expands global supply, benefiting all consumers. The majority of oil they produce is sold on the open market, not shipped back to China. Furthermore, Beijing’s idea of energy security is showing signs of evolving from a mercantilist approach based on distrust of international markets, and therefore a desire for physical control of oil supplies, to a more open approach favouring international energy markets and cooperation. Chinese leaders are coming to understand that their state companies’ investments abroad have contributed far more to those companies’ profits than to improving the country’s energy security.

Industrialised countries are also worried about China’s subsidised lending to its state-owned oil companies, use of tied aid and support for repressive regimes. China has a long way to go to harmonise its investments and foreign assistance practices with those recommended by the World Bank and the International Monetary Fund (IMF), particularly in regard to transparency. But such fears are often also overblown. While China’s energy investments in countries in or at risk of conflict have sometimes contributed to prolonging or making conflicts more difficult to end, their effect is exaggerated. Nor is China alone in these practices.

In some cases, Chinese support to unsavoury regimes indeed makes conflicts more difficult to resolve, as it softens or thwarts international action. At the same time, China is starting to play a less obstructive, and even constructive, role in multilateral processes and supports some forms of international intervention. Chinese officials are finding that their long-cherished concept of non-interference in the domestic affairs of sovereign states is not always practical or in line with national interests. As it seeks increased legitimacy for its rise as a great power, China does not want to be seen as heading a league of the world’s worst dictatorships. It has been embarrassed by the levels of criticism it has faced in the world media over Darfur and for its backing of problem regimes more generally.

The direct economic, political and security risks are at least as important as the reputational ones. While unquestioned support for problem regimes such as Sudan has been useful to state companies in signing initial energy agreements, it is less helpful in securing Beijing’s long-term energy interests, especially as it is confronted with mounting risks to its investments, citizens and security. Simply consolidating ties to the leadership of a regime without cultivating broader relationships in the country can alienate segments of both public and elite opinion, and lead to instability that threatens investments. In Sudan, for example, the bulk of the Chinese oil fields are in the South, which anticipates a self-determination referendum in 2011, following which it could secede. In addition to its stakes there, China’s new investments in Chad give it an even greater interest in the region’s stability. While Beijing’s interests also increasingly converge with the West’s on issues such as nuclear non-proliferation and stability in the Middle East, its overseas investments are exposing tensions between its energy concerns and diplomatic aims.

China’s quest for resources abroad is also strongly linked to its internal energy policy. To achieve energy security, the leadership recognises that domestic policy must focus more on conservation, raising efficiency, reducing pollution, diversifying the energy mix, upgrading clean technologies and allowing energy prices to send proper signals to suppliers and consumers. However, both policymaking and implementation in China are hindered by competing interests at the central, state, provincial, local and private levels. The central government has great difficulty enforcing energy regulations and policies. With inflation expanding at its fastest pace in more than a decade, Beijing is also fighting to control the prices of energy and food. The need for a coherent energy policy and institutional apparatus to manage energy is more urgent than ever.

All countries share an interest in ensuring an adequate oil supply, oil prices conducive to economic growth and a stable international environment. They can help shape the way in which China’s quest for energy security develops by encouraging cooperative rather than competitive behaviour.

Seoul/Brussels, 9 June 2008

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