China's Angst over Iran Sanctions

Article:To Appear in Middle East Economic Survey (MEES)- Op-Ed http://www.mees.com/cms/
China's Angst over Iran Sanctions
Beijing’s go-it-alone oil security could fail during any U.S.-Iran conflict
Thomas W O'Donnell, PhD

China isn't happy with the fact that the U.S. has "targeted" sanctions on Iran's nuclear program, which have the potential to interrupt oil supplies to China. This poses a problem because 50% of China's oil comes from the Persian Gulf. If China decides to side with the U.S. and sanction Iran it could cut china's supply which amounts to about 500,000 barrels per day.

China is in the process of building two storage facilities that will hold 100 million barrels of oil in anticipation of possible supply loss. The problem with the reserves is that they amount to only about a month's worth of China's imports.

As a fall back China needs to decide if it wants to join the IEA reserve system. This has the potential to undermine China's "Go Abroad" strategy, the idea of this strategy is for China to be completely independent of all other countries, including OPEC and the OECD which would make China subject to the U.s.

China's Need for Naval Army

Article: Lee Jae-Hyung, "China's Expanding Maritime Ambitions in the Western Pacific and the Indian Ocean", Contemporary Southeast Asia, Vol.24, no.3, Dec 2002.

Though this article is somewhat outdated, it nevertheless sheds light on the basic imperatives for China to strengthen its military base in order to complement economic growth with adequate security.

(1) The article stresses the fact that "Beijing has recognized the importance of sea-lines of communication from the Persian Gulf to China, as it became a net oil importer in 1993"

- hence, there has been an almost existential incentive for China to expand its military capabilities, especially the naval force. With China's exponential economic performance, there is every reason to believe that the simultaneous militarization of international waters will continue.

(2) The South China Sea sea lanes are vital for the Chinese as exercising control over this area speaks directly to safeguarding imports of oil from the Persian gulf.

- it seems imperative for the Chinese to first ensure that the waters closest to the China mainland will be controlled by the Chinese navy. In addition, a heightened presence of China in the South China Sea could enable Beijing to get more leverage over Taiwain, which remains protected by the U.S.

(3) By going further west, China embarked on securing support of major regional players, such as Myanmar and Pakistan, partly to maintain balance of power vis-a-vis India. The two countries share favorable relations with Beijing, the latter acting as a welcome alternative to the perceived regional hegemony of the U.S.

- in this respect, is this a worrying sign for the international community given China's poor democratic and human rights record? Or, is it that neither the U.S. nor China have done anything meaningful to support democracy in the region and, hence, the fact that China is increasingly asserting itself should not be too alarming?

(4) The author also touches upon China's currying favor with Iran. As he asserts, "Iran seeks to enhance its political and military influence over the Middle East and to reduce interference form foreign powers, especially the United States, in the Persian Gulf region."

Furthermore, he stresses that "China anticipates that its close ties with Iran would guarantee its growing requirement for oil from the Middle East, and help to restrain radical Islam in China’s western provinces. Iran is viewed as a potential counterbalance to U.S. influence in the Persian Gulf; and China also views Iran as a market for its military hardware."

- Iran's present-day hostility toward the West in general, and the U.S. in particular, points to a likely continuation of this policy from the Chinese side. But to what extent can the U.S. pressure Beijing to give up on its growing engagement in the region, considering the fact that the U.S. is still straight-jacketed by the lingering economic recession and, on the contrary, China is enjoying a positive balance of trade and a steady growth?

- Overall, the intent of Beijing to gradually build its military base can undoubtedly be detected. By conceiving of itself as a superpower equal to the U.S., this military build-up should also be viewed as an attempt to challenge the U.S. military (and esp. naval) supremacy.

- As a next step, it could be perhaps useful to take a look at China's military involvement in the Middle East and what reactions has it elicited from the side of the U.S.

A Possible Roadmap

Hi,

these are just some of the brief thoughts of mine regarding how we might go ahead with this project.

(1) Based on last week's comments and suggestions by Tom, I think it might be helpful to look more closely at China's policy of 'self-reliance' during Mao (and perhaps even some years later). I believe this could give us a basis for better a understanding of China's current oil policy. By looking at this China's past experience, we could perhaps better evaluate how important it is for the Chinese to establish various new networks on the global oil market. For, on one hand, while it is obvious that China needs an increasing amount of oil to sustain its rapid economic growth, this sole premise itself may not be enough to examine the true importance China places on reaching out to far-flung oil markets. It is possible that by shedding more light on this particular element, we will be better equipped to properly assess China's simultaneous developments in the field of security, and potential challenges to the present U.S. military hegemony, especially in the Middle East.

(2) This brings me to my second major point - how does China's increasing presence in oil-exporting regions translate into the changing balance of powers there. Is there any threat for the U.S. if China keeps on importing steadily increasing amounts of petroleum from hitherto U.S.-dominated markets? And, if yes, what could a likely U.S. response be?

I believe it is certainly not in the U.S. interests to pass on its military control over the most significant oil regions to China. The U.S. is still going through an economic recession, while the Chinese have been enjoying an unprecedented economic growth for the past couple of years. This, however, has been yet to translate into a military leverage, which remains firmly under the grips of the U.S. army.

For me, the major question could be as follows: would the shifting geopolitical balance of powers worldwide, and especially in the Middle East and other oil-rich regions, lead to a conflict between the U.S. and China? If not, what are the indicators supporting it; if yes, can we already see signs of heightened tensions between the two superpowers?

Sino-African vs. Sino-U.S. Energy Relations

An article accessed at: http://www.globalpolicy.org/component/content/article/198-natural-resources/40248.html states:

China currently derives 25% of its oil imports from Africa, with interests in Algeria, Angola, Chad and Sudan and increasing stakes in Equatorial Guinea, Gabon, and Nigeria.

China's growing energy partnership with Sudan represents one of a number of areas where Sino-U.S. energy interests diverge in Africa. China National Petroleum Corporation established oil exploration rights in Sudan in 1995. Two years later when Washington cut ties with Sudan, China filled the vacuum making Sudan China's largest overseas production base. More than half of Sudan's oil exports go to China, accounting for five percent of China's total oil imports. C.N.P.C. owns a 40 percent stake in the Greater Nile Petroleum Operating Company and pumps over 300,000 barrels per day in Sudan. Another Chinese firm, Sinopec, is constructing a 1500 kilometer (932 miles) pipeline to Port Sudan on the Red Sea, where China's Petroleum Engineering Construction Group is building a tanker terminal.

In recent years China's political, economic and military relations with Africa have been subordinated to its quest to secure energy resources in the African continent as energy resources are being secured in exchange for aid, arms or infrastructure investment. China's relations with Africa have shifted from holding a strong ideological bias in support of communist regimes and Marxist insurgencies to being led by market and resource considerations.African states are drawn to China by its non-ideological, non-interventionist approach, which contrasts with the Western approach that places an emphasis on democracy, governance, human rights and humanitarian intervention.

With Sudan and Iran together supplying China with 20 percent of its oil imports, U.S. attempts to contain these regimes bring it into direct confrontation with China's energy security policies.

The United States and China are not the only states vying for energy resources in Africa. Recently, Korea National Oil Corporation obtained 65 percent oil and gas production rights in two Nigerian offshore blocks, while India's Oil and Natural Gas Corporation Videsh obtained a 25 percent stake. South Korea and India are the world's fourth and sixth largest energy consumers respectively. India and China both hold stakes in the Greater Nile Oil Project in Sudan with India having invested US$700 million in Sudan's oil sector. China and India have also been engaged in direct competition for African energy resources, as seen in October 2004 when China outbid India to buy an interest in an offshore block in Angola. [See: "Economic Brief: China's Energy Acquisitions"]

While there have been gestures of rapprochement in Sino-U.S. relations such as the recently initiated Sino-U.S. Strategic Dialogue and both states along with India, Australia, Japan and South Korea establishing an energy partnership known as the Asia Pacific Partnership on Clean Development, the competition to secure energy resources on the world stage could fuel their already shaky relationship. The recent failed bid by Chinese energy company China National Offshore Oil Corporation to acquire U.S. energy company Unocal is evidence of this. Facing a plethora of internal crises ranging from poverty to poor governance and civil war, Africa is likely to emerge as a volatile stage of Sino-U.S. energy competition. African states have been drawn to China by its non-interventionist, non-ideological approach in conducting relations, although China's attempts to secure energy resources in conflict-ridden states by offering aid or arms-for-oil could heighten instability in the region.

Brief summary of current post

Current post are our groups attempt to highlight sources of China’s oil, and the amount of consumption within china. This is a good start into looking into researching China’s policies and why it is so intent on expansion.

Here are a few facts from last week’s articles that we learned:

Currently Angola exports more oil than Saudi Arabia into China

Due to the United States ambition to curtail imports of oil from Saudi Arabia, China has begun to pick up the slack- The Saudis now sell over a million barrels a day to China. This represents about a quarter of China's total imports. China is becoming a competitor on the oil market, particularly towards the United States, which could affect the relationship between China and the United States.

China is rapidly expanding and investing worldwide, including countries in Russia, Brazil, Venezuela, Kazakhstan, Ecuador and Turkmenistan.

Other countries Such as Venezuela and Russia recognize the potential market and China and are also looking to capitalize. Although for these particular countries it seems that dealing with foreign trade is turning out to be more difficult than expected.

The Growing Role of Angolan Oil

From the Finance China article: "Angola Becomes Largest Oil Import Source." Accessed 5 April, 2011 http://news.fnchn.com/Angola_becomes_largest_oil_80450.aspx According to this article from last year, Angola topped Saudi Arabi in crude oil exports to China. - The imports for the first half of 2010 were at 21.7m metric tons, up 75.86% from the same period in 2009 - Saudi Arabia exported 20.26m metric tons of crude tons for the same period (up 12.49 from 2009)

- This contradicts the chart we posted earlier. It would be great to find some reliable source of data that might serve as a point of departure, at least in terms of statistics.

- In any case, this introduces a whole new debate - China's involvement in Africa

China & Saudi Arabia Oil Dynamics

From NY Times' article: "China's Growth Shifts the Geopolitics of Oil." Accessed 5 April, 2011 http://www.nytimes.com/2010/03/20/business/energy-environment/20saudi.html?_r=1&pagewanted=2 Few Highlights pointed out in this article: (1) The 2009 global economic recession, which resulted in a notable decrease of the U.S. consumption of Saudi oil (10% less than the 2005-7 peak), simultaneously brought about a change in the Saudis' global oil market policies. The kingdom's exports now tend to go more to China and India. A chief CEO of Saudi Aramco said he believes "this is a long-term transition" - among other things, this might represent a blow to the U.S. oil imports as the ever-growing market in China already made the Saudis scrap its hitherto applied discount for exports to the U.S. The Saudis now have a choice whom to export their oil to, and hence do not need to maintain certain special privileges vis-a-vis the U.S. - on the other hand, as the article also mentions, the diminishing share of Saudi Arabia's U.S. exports might tap into the country's regional security, historically guaranteed by the U.S. However, I do not think this should bother the Saudis too much as the exports to the U.S. are still relatively substantial and very core for the U.S. from long-term perspective. (2) The Saudi-China cooperation at the oil-and-gas market has several dimensions and is by no means short-term. - The Saudis now sell over a million barels a day to China. This represents about a quarter of China's total imports - Several projects run by Saudi Aramco and other companies are already underway in China. They concern primarily a construction of new refineries and other oil-related facilities. (3) The enormous potential of China's future oil demand. - Today, the U.S. is still the top consumer with 18.5 million barrels a day in 2009 - In per-capita terms, this amounts to 22 barels a day per one American. - In comparison, the current per-capita oil consumption in China is only 2.4 barrels a head. - This points to the formidable heights the Chinese demand for oil might turn to in the future years.