Fuel market flux as China shuns bikes

By Stewart Fleming

Date: 20/10/05

In the last twenty years China has moved from being East Asia's leading exporter of oil to being the world's second largest importer.

Last year, as oil prices began their upward spiral, China alone accounted for just under one third of global growth in oil demand.

This year its voracious demand for oil, which reflects not only China's rapid industrialisation but also the way the more affluent Chinese have fallen in love with car ownership, is growing more slowly.

But China is now well established on the world stage as a competitor for a resource whose supply is limited, a development which is affecting not only its foreign policy but also both the US' and the European Union's attitudes to energy supply security too. The stand-off between China and Japan over gas reserves in the East China Sea is just one indication of how fraught relations could become.

It was Iraq's despot Saddam Hussein, in an interview with CBS News anchor Dan Rather on the eve of the second Iraq war, who highlighted the growing competition between China and the US for access to oil supplies in the Middle East. Since then, China, which last year drew 45% of its oil from the Middle East, has become one of the biggest oil trading partners of Iran, a country whose relations with the US have been tense since the fall of the Shah and the 1979 hostage crisis.

China now imports around 11% of its oil from Iran and its major oil companies have signed oil and natural gas agreements with Tehran worth &036;70 billion (EUR 58.5bn).

In scouring the world for natural resources and especially oil, China has sought to strengthen its relationships with other governments, which are beyond the pale so far as Washington is concerned - Myanmar, Sudan and Venezuela for example.

It has also built up goodwill among traditional US allies such as Australia, and in South America with countries like Brazil and Argentina which have both granted China "market economy" status, putting pressure on the EU to follow suit.

The US has just faced, and from China's perspective, failed, a big test of its attitude towards China's search for energy supplies. Earlier this year, Chinese oil giant China National Offshore Oil Corporation (CNOOC) bid for Unocal, a Houston-based oil company with valuable reserves in Asia. US oil giant Chevron had no difficulty stirring up political opposition to the Chinese bid.

The House of Representatives overwhelmingly approved a statement saying the bid would "threaten to impair the national security of the United States".

Chevron secured Unocal for itself, and at a lower price, by presenting state-owned CNOOC as an arm of the Chinese government and stirring up Washington's fears about the power of a nation, which is emerging as a geo-political and oil-thirsty rival.

For the EU, which is heavily dependent upon oil imports, the emergence of a major new player in the Middle East and Africa, which are key oil suppliers, is a significant development.

No less significant and complicating, is the fact that China is developing its energy links with Russia too, a country which is also expanding its influence in the Middle East and upon which the EU is increasingly dependent for energy.

China's impact on global oil and gas demand will affect prices.

Availability, particularly in periods of supply shortage, could also be adversely affected.

More broadly, China's growing role in world energy markets must be fed into EU foreign policy calculations, not just bilaterally but also in the context of the EU's broader foreign policy strategies.

Article takes a look at China's growing role in world energy markets