US oil dominance fuels China’s Unocal bid

If the Iraq war is not about oil, somebody forgot to tell the editors of the New York Times and, it seems, the leadership of the People’s Republic of China. On June 27, the Times runs a front-page story on the current $18.5 billion bid to purchase Unocal by the China National Offshore Oil Corporation (CNOOC), which the Bush administration is considering barring on national security grounds. Drawing an unsettling analogy “with Japan in the 1930’s,” the Times says China’s bid for control of a US oil major is also seen by Beijing explicitly in terms of national security—an inexorable result of growing Chinese energy consumption combined with US military control of the Persian Gulf:

Just a decade ago China exported more oil than it imported, but last year it passed Japan to become the world’s second-largest importer, after the United States. Its booming but grossly inefficient economy consumes three times as much energy per dollar of output than the world average, and oil use has surged along with the country’s auto industry, sprawling cities and new network of superhighways built on the American model.

Unlike Japan and European nations, which are also big oil importers, China does not have a strategic alliance with the United States. Beijing has grown increasingly wary of depending heavily on imports when its companies do not control major reserves abroad and its navy does not patrol the sea lanes through which those supplies must pass to reach Chinese ports….

Shortages of imported oil could threaten China in the event of a conflict with Taiwan. The United States, which has said it would defend Taiwan if the Chinese were to attack it, could potentially block shipping in the East China Sea, crippling Chinese trade.

Partly for that reason, China has scrambled to diversify its oil and gas imports and transport routes, pursuing oil deals with Russia and Central Asian nations and signing a preliminary, $70 billion commitment to buy Iranian oil and natural gas. All of these supplies could be delivered overland if expensive pipelines that Beijing favors are built.

More generally, China has sent CNOOC and its two bigger state-controlled oil companies, Sinopec and PetroChina, on a worldwide shopping spree to secure rights to proven reserves.

This effort has already created diplomatic complications for Washington. For example, China opposed moves to punish its oil partner Sudan for atrocities in Darfur and blocked efforts to bring the issue of Iran’s nuclear weapons program before the United Nations Security Council.

Determined to improve ties with Russia, China recently settled a long-festering border dispute on terms widely seen as favorable to Moscow. Russia, in turn, has promised to greatly increase oil shipments to China by rail and has revived discussion of a pipeline to Daqing after earlier arguing that the project made little economic sense.

Oil is one factor that has plagued relations between China and Japan, which have jostled for control of natural gas deposits in disputed waters of the East China Sea. Talks about the issue have stalled, and a Chinese submarine incursion in that area contributed to a downward spiral in diplomatic ties this spring.

In public, Chinese officials portray their country as a relatively minor player in global energy markets that seeks cooperative ventures with any country or major company on commercial terms.

But privately, Chinese officials and analysts say oil is treated as a strategic crisis. They have sounded the alarm about Western and particularly American domination of oil supplies and influence over the major oil-exporting nations, including Saudi Arabia and now Iraq, which has made China dependent on what many here refer to as American economic and military hegemony.

Beijing this year began construction of a American-style strategic oil reserve on the coast of Zhejiang province. The first phase includes 52 tanks that can each hold 25 million gallons of gasoline. Ultimately, officials aim to create a reserve large enough to allow China’s economy and military to function for at least three months without imported oil…

It has also imposed tough new fuel-economy standards on cars, put some industries on notice that they will have to become less wasteful users of energy, and backed an aggressive search for new coal, oil and gas supplies on Chinese territory to slow the growth in imports…

Proposed pipelines connecting China to Iran, Kazakhstan and Russia and a Chinese-backed pipeline project in Brazil will cost the country dearly, pushing the price of oil from those sources to double or triple spot-market prices.

CNOOC’s bid for Unocal, which would be financed primarily by loans from state-run banks and the company’s state-owned parent, offers a substantial premium for the company’s assets. But the extra cost is worth it for the sake of political security, many Chinese argue.

See our last post on the global oil crisis, the petro-politcs behind the Sino-Japanese tension, China’s new military ambitions, regional war jitters, and the domestic political fallout of China’s industrialization.