One of the ironies of the current chaotic situation in the Middle East is that a country that could arguably be at risk of losing the most is standing aside.
While the US and some European powers agonise over whether – and how – they should intervene to prevent the disintegration of Iraq, China is absent. But China needs Iraqi oil in growing volumes. The country’s import dependence for crude and products now stands at 8m barrels a day and is rising. According to the latest International Energy Agency estimates, Chinese imports could be well over 11mbd by 2030. That is on modest assumptions about economic growth and generous assumptions about gains in efficiency and substitution out of oil, in sectors where a switch is possible. The figure could be higher if China cannot increase its own production.
The only country in the world likely to be able to provide such an increase in production is Iraq, and it is no accident that China is heavily invested in the development of fields such as Rumaila and West Qurna outside Basra in the South. On the Iraqi government’s own figures, China is the largest foreign investor in the country’s oil sector. As US oil consumption and import requirements decline, energy security has become a Chinese issue.
Timing is crucial. There is no immediate shortage of oil, which is why the price continues to fall – down steadily over the past month to $103 per barrel for Brent. Many companies expect prices to dip below $100 within weeks. Price uncertainty is compounding the pressure to defer new capital investment in order to improve short term returns. Most of the oil majors and many independents are reducing capital expenditure this year. The Middle East and north Africa, which seem to be entering a period of prolonged internal conflict, look like good places to avoid. Most oil executives might not be able to explain the religious differences between the Sunnis and Shia but they recognise a security risk when they see one, and after events such as the attack at In Amenas in Algeria, they know how easily oil and gas installations and their workforce can get caught in civil conflicts.
The problem for the Chinese is that 2030 is only 15 years away – that is within the timescale when developments should be designed and planned. If the large scale developments in Iraq are postponed they face a set of difficult choices.
The first option is to reduce demand by rigidly controlling vehicle numbers and use. The Chinese are one of the few countries in the world where such restrictions could be applied effectively, but they would still cut across the delicate balance around personal economic freedom and rising living standards which has enabled the government in Beijing to sustain 30 years of growth without any significant political challenge. The return to a culture of rationing could be very dangerous.
The second option is to rely on the open international market for supplies. China could certainly afford to pay, but by the mid 2020s the options could be limited. Many exporting countries, including some in Opec, will by then face severe constraints on their export capacity. Too many of the countries who do have the capacity to supply more lie within the crescent of chaos which runs from Tripoli to Tehran. Venezuela is another possibility and the Chinese have built strong links there – but the oil sector remains hamstrung by policies put in place by Hugo Chávez. None of these look like a safe bet. Equally it is hard to imagine that China will want to become ever more dependent on Russia. A greater reliance on gas is possible, widening the range of options to include imports from central Asia. But that will require the development, starting now, of more long distance pipelines and, crucially, the establishment of a whole new fleet of gas powered vehicles. The Chinese are experimenting with vehicle technology, including electric cars, but the numbers envisaged are as yet still tiny.
The third option is hardly more palatable. That is to recognise that as a trading nation China has a direct stake in the stability of the countries with whom it conducts its trade, especially in key raw materials. If, as seems likely, the US continues to resist the idea of putting American boots back on the ground in the Middle East, the Chinese could find themselves forced, however reluctantly, to become a guarantor of stability for the regimes which matter to them. From that starting point the slippery slope to greater engagement begins. But as the Americans – once the nation most hostile to imperialism – has found over the last century, empires are often created unintentionally, as the cumulative result of immediate responses to one event after another.
Intriguingly the Chinese People’s Daily published an article last week accepting that China is part of the international system and has responsibilities for its stability. The article is anything but clear on what that means and the debate in Beijing must be intense. For China the consequences of becoming one of the largest economies in the world are just beginning to emerge.
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