US and China Slipping Into a Conflict Over Oil

Will Hutton
The Observer
Editorial published by Aljazeerah
10 Jul 2005

Occasionally, there are tipping-point moments and we are witnessing one at the moment. Seismic change is afoot. As oil prices breach $60 a barrel and pessimists warn that the world could be as little as 10 years away from a first-order resources crisis, China’s largest oil company, CNOOC, has launched a $18.5 billion bid for one of the US’s juiciest medium-sized oil companies, Unocal.

The world’s two biggest continental economies are suddenly head to head over who controls increasingly scarce oil. The stuff of pulp novels at airport bookstalls is a reality. The reaction in the US has been immediate, aggressive and hypocritical. Much Congressional sound and fury has been vented on Russia for not opening up more to US oil companies that want to buy strategic reserves. Now that the boot is on the other foot -- China buying an American oil company and its reserves -- US congressmen and senators are deploying President Putin’s arguments as their own. America’s oil, jobs and national security are at issue, they blaze, and an investigation is already under way to see whether China’s bid should be blocked on national security grounds. It is rigged to take months.

The Chinese, for their part, implausibly plead innocence. Assuming the improbable rhetoric of a Wall Street investment banker, the chairman of CNOOC, 71 percent owned by the communist People’s Republic of China, says that the bid will be good for shareholders on both sides of the Pacific. It certainly offers Unocal shareholders more cash than rival American oil company Chevron was offering, but only because the Chinese government has lent CNOOC a $2.5 billion interest-free loan to support the loan and subsidized billions more. This is hardly fair play but Unocal shareholders aren’t complaining.

Nor will CNOOC sack any Unocal workers in America as Chevron plans, it says, and promises not to export any oil and gas from the US to China. It portrays itself as a benevolent, wronged and misunderstood good fairy. What it wants, and is paying well over the odds for, is Unocal’s oil reserves. It plainly calculates that today’s $60 a barrel oil price is just the beginning of a sustained rise in oil prices that will make Unocal, even at $18.5 billion, a snip. China’s interest is obvious. After the US, it is now the world’s largest oil importer and acquiring some strategic reserves is vital.

CNOOC’s full name is telling; the China National Offshore Oil Company -- an organization committed to offshore exploration. China is the world leader in developing robotic underwater exploration submersibles; in 1994, it built a robot capable of working at depths of 3,000 feet. Now, according to the People’s Daily, it has one that can work at up to 20,000 feet. The Chinese want oil very badly.

And they want it to be imported into China by oil pipeline and not by tankers from the Middle East under the watchful eye of the US navy. The US controls the sea lanes and thus the viability of China’s economy, as it regularly lets the Chinese know by shadowing Chinese oil tankers.

The US has pre-empted China’s attempts to build oil pipelines from the Caspian into China. Unocal’s attraction is that its oil reserves are all in Central and Southeast Asia, and once owned by China can be moved into China overland.

This is a new great geopolitical game and neither the Chinese nor American military are impressed by arguments that the market must rule and that great powers in today’s globalized world no longer need strategic oil reserves. The US keeps six nuclear battle fleets permanently at sea supported by an unparalleled network of global bases not because of irrational chauvinism or the needs of the military-industrial complex, but because of the pressure they place on upstart countries like China.

Japan’s decision this year to abandon its effort to build its own oil company and attempted strategic reserve was an overt acceptance of its dependent position. China is not ready to make the same admission of defeat. No country has offered such a comparable challenge to the world order since Germany’s rise at the end of the 19th century. Like China today, it wanted markets and raw materials; like China today, it confronted a world ordered around the needs of the existing powers; like China today, its gigantic size and explosive growth could not be ignored. Germany built fleets and scrambled for colonies in Africa. Today, China builds fleets and scrambles for oil reserves. The open question is whether it will end in another 1914.

The optimistic reply is that China is being much cleverer than the Kaiser’s Germany. It has expanded by opening up to the world, so giving its great power rivals a stake in its growth; 400 of the US’s top 500 companies manufacture in China. Wal-Mart, the US’s largest retailer, is founded on cheap Chinese imports. China may have built up immense foreign currency reserves, but it judiciously lends them to the US, so financing the US’s trade deficit.

Although oil prices are troublingly high, some experts like Erasmus University’s Professor Peter Odell believe that, far from oil reserves running out, the earliest world production might peak is well after 2050, and that takes no account of more efficient energy use. Today’s upward oil price spike won’t last long. There is more than enough oil for China.

The pessimistic reply is that’s not how it feels or how the game is currently being played. Even if there is enough oil, it is in parts of the world that are endemically volatile. As Paul Roberts points out in The End of Oil, the geological formations that create oil have already been identified and the easily exploitable reserves are rapidly depleting.

There is a Panglossian tendency to overstate oil reserves by oil-producing countries and oil companies alike, as we have learned from Shell. Oil production is set to peak much earlier. In any case, what matters is less reality than perceptions of reality; the European powers didn’t need colonies in Africa to ensure their prosperity, they just believed they did, as China believes it needs oil reserves in Asia today. And there are the third, fifth and seventh US fleets as a constant reinforcer of its instincts.

Nobody knows how this drama will play out. The optimists could be right. But judge the vitriolic tone of the letter from 40 congressmen to President Bush complaining about CNOOC’s bid; look at the disposition of US naval power; recognize the force of China’s conviction that it must never again be humiliated as it was in the 19th century and its will to catch up with the West; and plot the growth of China’s oil demand as its economy doubles again.

The best way of avoiding war is not to dismiss its possibility as outlandish; it is to recognize how easily it could happen and vigilantly guard against the risk. Too few in Washington or Beijing are currently doing that.