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Demand for Oil in China a Factor in Rising Global Prices

Posted on: Monday, 23 January 2006, 12:00 CST

By Craig Simons, The Atlanta Journal-Constitution

Jan. 22--BEIJING -- When Saudi Arabian King Abdullah bin Abdul-Aziz arrives in Beijing today for a three-day visit, the first by a Saudi ruler since the countries established diplomatic relations in 1990, Chinese officials will roll out the red carpet.

Besides meetings with Chinese President Hu Jintao and Premier Wen Jiabao, unspecified "other leaders of China" will talk with Abdullah about "mutually beneficial cooperation in the field of energy," Chinese government spokesman Kong Quan said last week.

The royal treatment highlights China's growing demand for oil to fuel its rapid economic growth and ensure national security.

For Washington, the visit could come as a wake-up call, experts said: Growing Chinese demand is one factor pushing up global oil prices, and competition over oil already has created tension between the world's only superpower and its fastest-growing economy.

The bid by China National Offshore Oil Corp., 70 percent owned by the Chinese government, for Unocal last summer triggered a hostile reaction in Congress and sparked debate within the foreign policy community about competition between the United States and China for global oil.

China's quest for new energy sources is being driven by rapid economic growth as the nation of 1.3 billion people shifts to a capitalist and urban system. On Jan. 9, Beijing revised upward to an average of 9.6 percent figures for annual economic growth between 1979 and 2004, the Xinhua news agency reported.

That growth has spurred energy consumption.

"Ten to 12 years ago, China didn't import oil or participate in the world's energy system at all," Beijing energy consultant James Brock said.

Today China is the world's second-largest oil consumer, after the United States, and the third-largest oil importer, behind the United States and Japan. China imports 3.4 million barrels of oil a day, 4.5 percent of the world's demand, and with Chinese energy use "doubling every seven to 10 years," China will account for roughly 8 percent of world demand in 2015, Brock said.

"[China] went from being a non-player to being a significant importer [of oil]," he said.

U.S. consumers can feel the impact at the pump: China's oil imports have had an outsized effect on gasoline prices because while most oil is sold through long-term agreements between exporting and importing nations, China buys most of its petroleum on the spot market, creating a "disproportionate effect on the price," Brock said.

Instability in the Middle East, particularly in Iraq and Iran; the disruption of American domestic supply due to hurricanes last year; and growing demand from other nations, particularly India, also drove up the price of oil.

More important than increasing consumer costs may be the national and economic security implications of securing long-term petroleum supplies.

"The amount of energy is finite, up to now in relation to demand, and competition for access to energy can become the life and death for many societies," said former Secretary of State Henry Kissinger, London's Financial Times reported.

An increasing number of oil experts believe that world oil production will peak sometime over the next several decades.

While the world is not running out of oil, "it's getting harder and harder to get it out [of the ground]," Brock said. The cost of finding barrel of oil has more than doubled in the last 10 years and will double again in the next 10 years, he added.

A more important factor may be where the remaining oil is located. Saudi Arabia, Russia, Iran and Iraq together produce almost 30 percent of the world's oil. Other major oil states include Venezuela, Nigeria, Kazakhstan and Libya.

By 2015, nearly 70 percent of the world's oil "is going to be controlled by people who think it should go where they want it to go because they need tanks or whatever," Brock said.

Diversifying sources of imported petroleum is "of top priority" for Beijing, China University of Petroleum professor Dong Xiucheng said.

"If one country relies too heavily on another and there is a [political] problem, it could have a major impact on the economy," Dong said.

In the past year Beijing has signed billions of dollars' worth of deals to secure oil rights around the world -- often with countries eschewed by Washington and Europe.

CNOOC announced on Jan. 9 that it would pay $2.25 billion in cash for a large stake in a Nigerian oil field. If the deal is approved by the Nigerian government, it would be the largest ever for the Chinese company.

China National Petroleum Corp., the country's largest state-owned oil company, paid $4.2 billion last October for PetroKazakhstan, and in December the company inaugurated an oil pipeline running from Kazakhstan to northwestern China.

Chinese petroleum companies have also signed deals with companies in Sudan and Iran, where Washington has restricted U.S. operations.

Beijing is also eager to improve relations with Saudi Arabia, which produces 13 percent of the world's oil.

"Most Middle Eastern countries have long-standing relationship with the U.S., so it is very hard for China to enter those markets," Dong said.

But Saudi Arabia is "adjusting its policies" he said. "The government [of Saudi Arabia] doesn't want to rely only on the U.S. or Europe," he said.

Dong, who helped draft China's energy policy, expected Saudi Arabia's oil minister to travel with King Abdullah to Beijing and said that the two governments might reach agreement during the trip on building refineries or reserve facilities in China, both of which might allow the Saudis to profit from China's economic growth.

Total trade between the two countries -- most of it Saudi oil bought by China -- grew by 59 percent in the first 11 months of 2005.

China's efforts to woo Saudi Arabia may also be helped by recent complications in the long-standing relationship between Washington and Riyadh.

The Saudi leadership "was disturbed by the anti-Saudi backlash in Congress and in U.S. public opinion following the Sept. 11, 2001, attacks" and by "what they perceived as President Bush's less-than-vigorous public defense of the U.S.-Saudi relationship," Brookings Institution scholars Flynt Leverett and Jeffrey Bader wrote in The Washington Quarterly.

They wrote that "it will not be possible for the United Sates to exclude China from [the Middle East]" and said that a better policy "would be to try to work with China to give it both a sense of energy security and a shared interest in a stable Middle East."

-----

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Source: The Atlanta Journal and Constitution

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