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China’s Vulnerability to Oil Shocks Implies Need for Foreign Policy Re-think

March 2, 2011

It is quite possible that China’s addiction to oil which will be the cause of any policy shift in response to the Arab uprisings.

Conventionally, China’s foreign policy is one of non-intervention:  avoiding intefering in domestic and sovereign issues of other countries.  This gives them a free hand to wheel and deal with any regime and avoid inpolite censuring which may limit commercial intent.

Now is a moment – an opportunity – for China (and others) to change that position to be more supportive of stable Government with popular support.  If not because it wants to, then because it has to.

Molly-coddling nasty dictatorships may have secured China favourable resource and commercial investment terms in places such as Sudan and Libya, but it may well suffer in the long term for those positions if it is to the detriment of the local populace.  Gary Bass at Foreign Policy has written a great piece about China’s non-intervention foreign policy and implications for human rights and trade, including some pretty illuminating interviews with senior Chinese foreign policy officials.

China is a country thirsty for energy, and for oil in particular, to drive its massive urbanisation and economic growth.  Oil accounts for 20% of all energy consumption in China (coal represents a whopping 70%).  China’s demand is only going to get greater, as is its relative dependence upon oil imports.

Source: EIA (Washington)

China’s NDRC states that imports currently account for 55% of oil consumption.  It imported 5.15 m b/d in January. It is estimated that China will need to import 65% of its oil needs by 2020.

This thirst drives China to pursue crude in every corner of the world in an effort to secure supply. 

China’s stockmarkets have taken a hammering due to fears over energy prices, as reported in business week.

Will China now suffer greater relative loss due to their insouciance regarding the shortcomings of Mr Gadaffi’s odious regime?

It has been reported by China Daily that ‘Chinese construction company workers and sites have been attacked by protestors in Libya.  Indeed, that ‘nearly all Chinese companies in the country were attacked’.  Last week, CNPC (China’s largest oil and gas group) stated that their facilities and workers had been attacked. 

Libya has awarded China’s oil and construction firms very favourable opportunities in the country worth billions of dollars, with more such projects in the pipeline. 

The strategic interest for China in Libya is very much in the huge energy reserves it possesses.  It contributes some 1.5 million barrels per day of OPECs contribution – a very sizeable chunk.

Source: EIA (Washington)

It is not clear whether China’s interests are being singled out for retribution in the protests.  Certainly, the tendency of China’s contracters to ship in from China all their required workers has been known to leave a bitter taste in the mouths of local populations elsewhere in Africa (think of the copper mine riots in Zambia) – so such a scenario should not be unexpected in a low-employment, low-opportunity situation like that which exists in Libya.  Last week, the Financial Times implied in its report on the subject (‘Chinese Oil Interests Attacked in Libya’) the likelihood that Chinese firms are being targeted due to resentment.

While Libya’s oil exports to China represents only a few percentage points of China’s overall imports, any accumulated or further oil supply shocks will have very real impacts on China’s domestic fuel market. 

China’s contracts for energy, construction, and other economic interests may not be countenanced by more responsible and representative government in Africa and the Middle East.

Neither China nor India have substantial strategic oil reserves – unlike most in the OECD who hold 90 days.  The Financial Times again reports that this situation is under urgent review.  Building such a strategic oil reserve by both countries over the coming years will likely add substantially to global demand.

There is significant debate as to the availability of spare capacity in the global oil markets.  Without a strategic reserve, with rapidly-growing energy needs, and with threats to immediate and long-term oil contract losses due to popular revolts, China’s margin for supply shock is very tight, and is at great risk of supply and price volatility.

Domestically China has revised retail fuel prices upwards, which will stoke inflation.  An academic paper from researchers at ANU estimate that 27.7% of China’s energy consumption is attributable to household consumption both directly, and indirectly – through product and service purchases.  Therefore, fuel price inflation will have a tangible impact household budgets, which has the potential to destabilise economic growth and social stability.

China has supported latest UN actions vis-a-vis Libya – having abstained for decades.  Will China now act to review and amend non-interference policy more broadly, including a more nuanced approach to implicit support for despots, now that the strategic energy risks of that policy are becoming apparent?

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