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Op-Ed

Oil-Hungry China Belongs at Big Table

Erica S. Downs and Jeffrey A. Bader

A year ago, the China National Offshore Oil Corporation Ltd. withdrew its unsolicited bid for Unocal in the face of vitriolic opposition from the U.S. Congress, dampening the anti-China furor that had engulfed Capitol Hill and highlighting the need for Washington and other world capitals to come to terms with China’s emergence as a major oil consumer.

China’s ravenous appetite for oil to fuel its economic growth presents challenges for the United States and Canada, but they should be manageable if we all keep our heads, something easier said than done for some of our politicians.

The response of the U.S. Congress to CNOOC’s attempt to acquire Unocal is an example of how we should not react to China’s growing oil demand. Seeing CNOOC’s hostile bid for Unocal as a threat to U.S. energy security, Congress passed a resolution demanding unprecedented congressional oversight over the tendering of Unocal, effectively killing CNOOC’s offer.

The result was to send an unintended message to Beijing that Washington: 1) is hostile to the foreign acquisitions of China’s National Oil Companies (NOCs); 2) will attempt to block such purchases; and 3) views energy as a source of zero-sum competition between consumers.

The sheer magnitude of growth of China’s oil consumption shows why we need to be clear-headed in our reactions. Self-sufficient in oil until 1993, China became the world’s second largest consumer of oil behind the U.S. in 2003 and the world’s third largest importer of oil after the U.S. and Japan in 2004.

We should recognize the concern of some Washington politicians that China could somehow “lock up” a disproportionate amount of the world’s oil supplies is a myth from a bad movie.

First, 77 per cent of the world’s oil reserves are controlled by governments that do not allow foreign investors to acquire equity positions. Consequently, China’s NOCs compete with other companies for access to the remaining 23 per cent.

Second, the oil market is “one great pool.” Even if China’s NOCs were to ship to China all of the equity oil they produce abroad (about 450,000 bpd in 2005), these barrels would merely displace oil that China imports from elsewhere.

Third, “energy security” is one of several motivations propelling China’s NOCs abroad, and it is also the subject of some controversy in China, with some analysts recognizing that the foreign investments of China’s NOCs will do little to help China deal with a possible supply disruption and its consequences.

China’s oil interests, like those of other countries, influence its policies on non-energy foreign policy issues. The risk is that China could undermine the ability of the international community to effect change in obnoxious policies in energy-rich countries.

The most obvious case is Iran. China is Iran’s largest trading partner, and China’s NOCs are working on deals that could make them substantial investors in Iran. If interdependence between China and Iran grows, it could make China more reluctant to countenance tough international measures that could be needed to halt Iran’s nuclear weapons program.

Similarly, China is the largest foreign investor in Sudan’s oil industry. China can help or hinder the world’s effort to halt the genocide in Darfur, and the investments of China National Petroleum Corporation may continue to tilt the balance the wrong way.

Beijing’s successful efforts to facilitate investment opportunities for China’s NOCs in Angola through billions of dollars of loans with generous terms have undercut efforts by the International Monetary Fund to pressure Luanda for greater transparency about how it spends its oil revenues.

China’s relationship with other energy producers of dubious repute, such as Myanmar and Venezuela, could provide those countries with a hedge against external pressure to halt internal repression.

In response to China’s growing oil appetite, the West, especially the U.S., should seek to further integrate China into the global oil market by giving China a seat at the table where decisions about the “rules” governing that market are made.

Authors

We should encourage Beijing to use China’s growing influence in oil-rich countries in ways that enhance the interests of the international community.

Finally, we should learn from the fallout of CNOOC’s bid for Unocal the importance of leading by example: if we want to dissuade China from politicizing oil deals, we should do the same.

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