Strategic flaws in China's energy strategy

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See the Sol Sanders Archive By Sol Sanders SPECIAL TO WORLD TRIBUNE.COM

Among multitudinous questions about where Chinese Communist leadership thinks they are leading their country is their current energy policy. The Chinese are rushing around the world ø with diplomatic flourishes and oodles of cash ø buying up hydrocarbon properties.

It is being heralded in some quarters, including the increasingly suspect Hong Kong analysts [as the screws tighten on the media there], as proof of several things: It is said to reflect ChinaÕs increasing role in the world economy, rapidly moving toward No. 2 if not No. 2 hydrocarbons importer. It builds BeijingÕs stature as President Hu Jintao compensates for all the years he was isolated in domestic Communist Party maneuvering, feted on all five continents as deals are signed. It is also seen as offering more proof Chinese commercial rivalry is to be respected as it becomes the workshop of the world.

But it is also seen by some geopoliticians as part of ChinaÕs security strategy. ItÕs said lining up hydrocarbon ownership insures BeijingÕs industrialization and modernization of its military forces by eliminating energy vulnerability.

That is precisely where the argument falls apart. Owning oilfields is not necessarily the name of the energy game.

The long haul from the Middle East [or even Southeast Asia or Australia] as well as Africa and Latin America is extremely vulnerable. It is one of the reasons why [a bow in the direction of those who say AmericaÕs invasion of Iraq was only about oil] Washington considers a stable and market-oriented Persian Gulf with more than half the worldÕs known hydrocarbons as essential to its security. But the U.S, with the cooperation of its allies in the region and along the way, has the wherewithal to keep the pipeline open. Not only does Beijing not have that potential ø even the most ÒoptimisticÓ straight-line projectors of its modernizing military power do not see it for decades ø but its policies of aiding and abetting proliferation of weapons of mass destruction and aiding reactionary and unstable regimes [like the Sudan or Burma or Iran] is hardly congruent with that aim.

Leaving aside the issue of physical security, the economics of their strategy also is dubious. China is, despite its hoard of foreign exchange, a capital short country. It is using scarce funds to buy oil in the ground. In many instances, it is overpaying or buying into reserves more experienced competitors have thought marginal. Getting oil out of the ground will take technology Beijing does not have and require going to the oil majors cap in hand. Otherwise, Beijing will mess up as it did in the famous domestic Daqing field which is rapidly being depleted, decades before it should have been. The majors already outsmarted Chinese planners, by buying into domestic government oil, then dumping their equities at a huge profit. Meanwhile, they have withdrawn from what Beijing considers a strategic pipeline project to bring hydrocarbons from Singkiang to the industrial east because of questions about pricing and reserves. Even the Russians are pitting ChinaÕs appetite against Japan and the Pacific market for a pipeline Beijing has been willing to finance. [By the way, Putin did not invite the majors into Russia because of the color of their eyes, but because he needed their technology and capital.]

Of course, there is the argument hydrocarbons are finite and China has to line hers up. But hearing that argument for decades as the worldÕs proved reserves have increased, I am a little more than skeptical. Why has the real price of oil ø allowing for inflation ø plummeted so spectacularly over the past two or three decades, even with the incredible increases in consumption? True, China [and India] are coming on the market at an explosive rate. But then one of the most respected technology companies has just touted up RussiaÕs Western Siberian reserves two or three times earlier estimates. Russian Arctic opportunities are calling.

Furthermore, with each energy crisis, industry and machinery producers take a serious look and up efficiency ø something the Chinese have not yet tackled with energy ratios from three to five times even the wasteful U.S., much less Germany or Japan. Eventually as the market demands there will be breakthroughs in Òalternative energiesÓ.

Japan, with the same problem as China in its period of rapid growth, never invested in foreign oilfields. With control over its exchange [which Beijing is likely to have for a long time still], it allocated licenses to the importers every six months. With a formula rewarding those who gave the cheapest price for the best oil, it maintained the lowest imported energy costs ø one of the basis of the Japanese postwar industrial miracle.

True, ChinaÕs wheeling and dealering in the overseas oil market may be building political capital in some quarters. But the price is going to be high. And with so many chinks in its mushrooming economy, the energy [ouch!] might better be used for other economic problems at home.