Increasing Oil Demand in China: Rising Risks and International Consequences

The Chinese economy’s ability to emerge from the Global Financial Crisis seemingly unscathed while the United States remains mired in recession bolsters a widespread image of a (strong) People’s Republic of China (PRC) rising against the backdrop of a declining (weak) United States of America. Receiving less attention however, are the profound domestic concerns facing the Chinese government today. Policymakers in Beijing place a heavy premium on internal political stability, and the potential unrest that can result from some of these internal issues has spurred a debate in China on how to address them. According to Woodrow Wilson Center Public Policy Scholar, Dr. Elizabeth Wishnick, one such concern focuses on energy security; specifically, China’s increasing need for oil in order to sustain its unprecedented economic growth (and therefore the legitimacy of the Chinese Communist Party). In a talk hosted by the Kissinger Institute on China and the United States, and the Asia Program on April 24, 2012, Dr. Wishnick looked at the various measures Beijing is currently taking to manage its oil risks, which she concludes are leading to concern among its neighbors and thus creates a security dilemma. It is this security dynamic Dr. Wishnick aims to explore further in a larger book project in which she examines “China as a risk society,” the risks caused by the weaknesses of its political and economic system, and the foreign policy and security consequences of transnational risks in China.

What are the risks of China’s increasing oil demand? Although coal (for now and the foreseeable future) is China’s main source of energy, oil fuels many important sectors of the Chinese economy (e.g., the petrochemical industry and transportation). Not surprisingly, since the early 1990’s China’s growing appetite for oil has outgrown domestic production. In 1993 and 1996 the PRC became a net importer of oil products and crude oil respectively. Today, China is second only to the United States in oil imports and it is estimated that 75 percent of its oil will be imported by 2030. This heavy reliance on imported oil raises concerns in Beijing over possible supply interruptions as well as the transportation of those supplies to China.

This uneasiness translates into words and actions that are, in turn, viewed with suspicion by China’s neighbors and beyond.  In November 2003 President Hu Jintao expressed concern that “certain major powers” had designs of controlling the Malacca Strait, (a waterway which about 80 percent of the PRC’s oil comes), and called for the adoption of measures to mitigate this perceived vulnerability. One such measure is the modernization of the People’s Liberation Army Navy (PLAN) in an attempt to expand its capabilities beyond coastal defense to reach more distant areas. The PRC’s first aircraft carrier program was inaugurated less than a year ago with the purchase of a Soviet carrier, the Varyag. Furthermore, the building of both bases and ports, (a so-called “string of pearls” that includes strategic locations such as Burma, Pakistan, and Yemen), is causing concern both among its neighbors and in the United States. Lastly, China’s ambiguous yet controversial claims over the South China Sea, (which is reported to be rich in oil resources), has made this area one of the most contentious hot spots in the world today. In response to criticism of Chinese behavior in the South China Sea at the July 2010 ASEAN Summit in Hanoi, Chinese Foreign Minister Yang Jiechi stated that, “China is a big country and other countries are small countries and that’s just a fact.” 

In addition to a security threat, the economic reality of China’s (big) size elicits concern over its potential impact on the world oil market as well. Questions over China’s ability to “lock up” oil supplies and therefore dictate oil prices, or how Chinese oil demand affects price stability are worrisome not only to its neighbors, but the rest of the world as well. Dr. Wishnick argues that although this is a legitimate concern, the PRC is part of the global oil market and is just as vulnerable as others to price fluctuations. Moreover, with respect to the United States specifically, China is locked into a situation of “mutually assured dependence” in which both have common risks in terms of needing to focus on cost, efficiency, and conservation.

Another area causing uncertainty is the opaque relationship between the Chinese government and the PRC’s national oil companies (NOC). Are NOCs just another arm of the Chinese Communist Party? What are the intentions behind NOCs’ investments abroad? Dr. Wishnick contends that the relationship is much more complicated than at first glance. Oil companies in China have a certain degree of autonomy and, like their counterparts elsewhere, are driven by profit. Owing to such, the Chinese government and NOCs do not always see eye-to-eye. The case of pipeline projects is a prime example. Many geopolitical and domestic factors come into play, (i.e., the East Siberian Pacific Ocean pipeline is considered a centerpiece of Sino-Russian partnership), that result in pipelines being built in locations that are not cost-effective.

This (mis)perception of China’s NOCs as pawns of the government can be remedied with more transparency and participation in global and regional institutions. Unfortunately, the international energy organizations China is a part of play a limited role in addressing major oil issues. For instance, China is active in the APEC Energy Working Group and the ASEAN +3 Energy Ministers’ Meetings, but neither addresses many of the issues—such as those above—that concern China’s neighbors.  The PRC is not a member of key international organizations such as the International Energy Agency (IEA), whose purpose is for member countries to coordinate a collective response to major disruptions in oil supply. China has an associated relationship with the IEA in that it provides information to the agency and participates in some workshops, but it is not bound by its requirements of being an OECD country and maintaining a 90-day stockpile of oil reserves.

As noted at the onset of this piece, what is most concerning to the Chinese government is how to deliver on its promise of building a moderately well-off society. As the PRC developed, a middle class emerged within which owning a car is a prerequisite—which only adds to Chinese oil demands.  What this and the examples highlighted above illustrate is that characteristics of China’s economic and political model perpetuate risks—risk of conflict caused by misperceptions of its neighbors to risks associated with an unsustainable development model—that will be increasingly difficult to deal with in the future. Dr. Wishnick argues that in addition to encouraging China to be more transparent in its energy projects overseas, there needs to be more dialogue with Beijing—both at the regional and global levels.

By Sandy Pho

Douglas G. Spelman, Deputy Director, Kissinger Institute on China and the United States