The announcement on the sidelines of the National People’s Congress (NPC) that China would start to fill its new strategic oil facilities later this year was a timely reminder of the precarious balance of supply and demand in the global oil market. The plan is that over the next 10 years China will build a strategic stockpile of six months’ consumption. Meanwhile, it will be exposed to the dangers of global energy upheavals, especially in the Middle East.
China has good reason indeed to worry about western military adventurism in that region. It was all the more poignant that the NPC meeting coincided with the reference of the Iranian nuclear program to the UN Security Council by the board of the International Atomic Energy Agency (IAEA). There was also a suggestion by hawkish US ambassador to the UN John Bolton that the US might use force to halt Iran’s nuclear development.
The situation is difficult enough given the chaos in Iraq and extremist threats to security in Saudi Arabia. Iran has said that it does not intend to use oil as a weapon in dispute. However, if attacked it could well retaliate by attempting to block the Strait of Hormuz. It controls one side of this entrance to the Persian Gulf, through which flow all oil exports from Kuwait and the UAE and most of the exports of Saudi Arabia, Iran and Iraq.
Compared to most Asian countries, China is quite fortunate. It imports only about 35% of its oil needs, of which about 60% is from the Gulf, thanks to the rapid growth in its imports from Africa. Japan and Korea are entirely import-dependent and rely on the Gulf for more than 70% of their supplies. India is only 25% self-sufficient and buys 80% of its imports from the Gulf.
Fears of unrest
But the simple fact that demand in China is rising more rapidly than domestic production means Beijing has good reason to fear the impact of any significant disruption, not only directly but on trade generally. At the very least, another Middle East conflict would drive the price past the US$100-a-barrel mark and also increase freight and insurance rates. While China (unlike India) has the foreign reserves and fiscal strength to shield its domestic economy for a while from such an event, it would still hurt badly, and the impact on its export markets would be much greater.
In contrast to Asia’s dependence on the Gulf, Europe gets only 35% of its imports from that region and the US just 20%, which represents a mere 12% of its total oil needs. This may explain why Washington is much less concerned about the possible economic consequences of its actions in the Middle East than are Asian countries. These states are also mostly sympathetic to Iran’s desire for nuclear independence as the right of a large and ancient nation adjoining two nuclear powers – Russia and Pakistan – and with three others, India, Israel and the US fleet, not far away.
In the short run, other Asian countries have an even greater interest than India and China in regional peace. But as the main sources of additional global demand over the next decade, both are more concerned about future supply security. Both are looking to the Gulf in general as the most likely source of additional oil, and India (and Pakistan) is looking to Iran for gas.
As it is, alternative sources such as the Caspian and Russia are proving either less bountiful or higher-cost than once hoped, and developments in Africa are held back by political instability. Meanwhile, the prospects within Asia itself are modest, with the South China Sea unlikely to yield deposits large enough to make an impact on the region.
This helps explain the determination of both India and China to press ahead with energy projects in Iran as well as in other locations such as Sudan and Myanmar despite the pressures exerted by the US. China’s Sinopec is pressing ahead with a 200-300,000-barrel-a-day venture in Iran and India maintains that its nuclear agreement with the US will not influence its determination to buy Iranian gas, preferably by pipeline through Pakistan, which also needs the gas.
There has been some skepticism that India and China can cooperate on energy security as they have promised to do. For sure, they have at times been in competition to buy into existing or prospective oil and gas fields, bidding up prices. However, both realize that ownership of a foreign field does not in itself provide security of supply. The key issues are political security, local and international. Both have the same overriding interests in security of supply whether or not CNOOC is competing with India’s ONGC for rights in a third country.
Both, meanwhile, will do whatever is necessary to keep the peace in the Gulf. For now that seems to mean going along with the US with diplomatic pressures to buy as much time as possible and avoid giving the US any excuse for unilateral military action. China and India will do the maximum to avoid conflict and the minimum to offend an Iran which is both future supplier and valued market for their goods – a difficult but necessary balance.