The Axis of Oil
[India and China]
by Jehangir Pocha
In These Times magazine, February
China and India are locked in an increasingly
aggressive wrangle with the United States over the world's most
critical economic commodity: oil. More than any other issue, this
tussle will shape the economic, environmental and geopolitical
future of these three countries, and the world.
Ensuring a steady flow of cheap oil has
always been one of the central goals of U.S. foreign and economic
policy, and Washington's preeminent position in the world is based
in large measure on its ability to do this. But China and India
are increasingly competing with the United
States to secure oil exploration rights
in Africa, Southeast Asia, Central Asia and Latin America.
India has invested more than $3 billion
in global exploration ventures and has said it will continue to
spend $3 billion a year on more acquisitions. China, which has
already invested about $15 billion in foreign oil fields, is expected
to spend lo times more over the next decade.
The motive, says Zheng Hongfei, an energy
researcher at the Beijing Institute of Technology, is that "there
is just not enough oil in the world" to cover China's and
India's growing energy needs.
By 2010 India will have 36 times more
cars than it did in 1990. China will have 90 times more, and by
2030 it will have more cars than the United States, according
to the Energy Research Institute of Beijing.
More than 4.5 million new vehicles are
expected to hit Chinese roads this year alone, a far cry from
the time when families saved for months to buy a Flying Pigeon
bicycle. The country is now the world's largest oil importer after
the United States, guzzling about 6.5 million barrels of oil a
day; this figure will double by 2020, says Stephen Roach, chief
economist at Morgan Stanley.
India, the world's second-fastest growing
economy after China, now consumes about 2.2 million barrels a
day-about the same as South Korea-and this is expected to rise
to 5.3 million barrels a day by 2025, according to the U.S. Energy
With global oil production barely 1 million
barrels over the global consumption rate of 81 million barrels
a day, the surge in demand from China and India could eventually
lead global demand to outstrip supply, causing fuel prices to
shoot up beyond their recent highs of around $56 a barrel, says
The impact of this on the global economy,
particularly in developing countries that import most of their
fuel, would be severe. The International Energy Agency says that
for every $1 increase in oil price, the global economy loses $25
Anxiety over this is already throwing
the nervous oil market into further disequilibrium. In September,
Michael Rothman, a senior energy analyst at Merrill Lynch, said
rising oil prices were not so much a result of the Iraq war or
political instability in Venezuela and Sudan, but of extensive
"hoarding" by China.
According to Rothman's analysis, China
and India are roiling oil markets by creating oil reserves, which
are designed to provide the minimum cache the country needs to
ride out a crisis, along the lines of the United States' Strategic
Petroleum Reserve (SPR).
With both countries flush with foreign
exchange reserves that are threatening to infect their economies
with inflation, creating an oil stock seems a sensible solution.
But critics say Beijing's and New Delhi's timing is unfortunate,
coming just as the global economy seemed to be recovering and
the United States was questioning the value of its own reserve.
At 175 million barrels and 25 million
barrels respectively, China's and India's estimated oil reserves
are just a small fraction of the 700 million barrels held by the
United States in its SPR.
China and India, which are both nuclear
states, are also taking advantage of the United States' strained
ties with Iran, Vietnam and Myanmar by extending these countries
military and political support in exchange for energy supplies.
And a Washington preoccupied with Iraq, the war on terror and
nuclear crises in Iran and North Korea has been unable to checkmate
either country as successfully as it did earlier.
For example, U.S. nervousness over China's
intentions in Latin America had led it to use its leverage with
Panama to impede China's access to the all-important canal connecting
the Pacific and Atlantic. But in December, Beijing signed a landmark
deal with Venezuela and its neighbor Colombia, under whose terms
a pipeline would be constructed linking Venezuelan oil fields
to ports along Colombia's Pacific coastline.
This will allow Venezuelan oil to bypass
the Panama Canal and create a new and direct route to China.
There are also signs that China is warming
to the idea of a Russia-China-India axis, which, in cooperation
with Iran, would turn the oil-rich Central Asian region into their
domain. This proposal would put in place extensive military agreements
and pipeline networks. Originally put forward by Russia's Asia-centric
ex-Prime Minister Yevgeny Primakov, the proposal seems to be gaining
ground with all four nations. China and India have already signed
multibillion-dollar gas and energy deals with Russia, which is
the largest arms supplier to both countries, and with ex-Soviet
Central Asian republics such as Kazakhstan.
What worries Western powers most are China's
and India's growing ties with Iran, a country Washington is trying
to isolate. Both Beijing and New Delhi have recently signed 25-year
gas and oil deals with Iran that are collectively valued at between
$150 and $200 billion, and both countries are also deepening their
military cooperation with Tehran. Iran and India conducted their
first-ever joint naval exercises last September, and India has
agreed to modernize Iran's aging Russian-built Kilo-class submarines
and MiG fighters.
Both China and India have also tried to
thwart Western attempts to curtail Iran's nuclear program, which
has largely been built with Russian assistance. In a departure
from China's traditional neutrality on international issues that
do not involve its own interests, Chinese Foreign Minister Li
Zhaoxing flew to Tehran last November when the United States threatened
to haul Iran before the U.N. Security Council and announced that
China would oppose any such effort. And in January, the State
Department imposed penalties against some of China's largest weapons
manufacturers for their support of Iran's ballistic missile program.
The potential volatility from such aggressive
oil politics could bring China and India into conflict with Western,
Japanese and other regional interests, says Robert Karniol, the
Asia-Pacific editor of Jane's Defence Weekly.
"Even if China's oil consumption
doubles by 2020, it will still only be half that of the U.S."
says Zheng, the energy researcher at Beijing Institute of Technology.
Yet the sheer size of the Asian juggernauts
and the prospect that they might indiscriminately swallow global
resources scare economic planners.
State-owned Indian and Chinese oil companies
are investing heavily in local energy fields, such as the 200,000-square-mile
Ordos Basin that stretches across the provinces of Shaanxi, Shanxi,
Gansu, Ningxia and Inner Mongolia in northwestern China, and is
reported to have oil reserves of up to 6o billion barrels.
To defray the substantial costs of exploration,
both China and India are privatizing state-owned oil companies,
and using the billions raised to restructure and modernize their
operations. Other public sector oil units are also undergoing
massive recapitalization and restructuring, including the retrenchment
of thousands of workers.
Sharon Hurst, a Beijing-based executive
with ConocoPhillips, the largest refiner in the United States,
says, "Western investment is helping Chinese oil companies
morph into world-class players."
Significantly, both nations are also opening
up their domestic oil industries-previously considered strategic
and therefore off limits to foreign and private investors. Companies
such as ExxonMobil, which owns a 19 percent stake in China's giant
Sinopec company, are being wooed not just for their capital but
also for their refining and marketing capabilities. For example,
ExxonMobil is helping Sinopec establish more than 500 gas stations
across the country and build at least two refineries in southern
Optimists-mostly people from the corporate
world such as Warren Buffet-say such common opportunity will lead
to greater cooperation rather than competition between the West
and China and India. But pessimists-mostly people from the security
establishment-fear that China and India, two energy-hungry giants
seeking access to limited world resources, will inevitably clash
with the West. U
JEHANGIR POCHA is the Asia correspondent
for In These Times.
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