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China's Thirst for Oil Driving World Prices Higher - 2004-09-28

The dramatically increasing demand for oil in two emerging giants in Asia, China and India, has contributed to rising oil prices worldwide. Petroleum industry experts believe rapid growth in China, in particular, could increase competition for scarce energy resources and undermine global peace.

Within the past decade, China has gone from being a nation with a modest amount of oil exports to being one of the world's largest importers. To some extent, Chinese imports are finished products from outside refineries, but there is no question that overall demand for energy in the world's most populous nation is growing fast.

Matt Simmons, a Houston-based investment banker with three decades of experience in the energy sector, says he has been impressed with the rapid pace of economic expansion during his recent visits to China.

"At the end of 1993, China had 733,000 passenger cars," he said. "By the end of this year, they will have exceeded eight million. There are some studies that show that it will not be many more years before China has 300 million people with the wealth to afford a car."

Mr. Simmons says the growing demand for fuel to power these automobiles cannot be met by China's own resources.

"While their oil consumption, which has grown from three to over six million-barrels-a-day in the last decade is on its way to ten or some number in that range, their oil production is set to fall from 3.3 to about two-million-barrels of oil over the same time," he said.

Matt Simmons went on say that Chinese leaders are facing a great challenge in finding the energy necessary to continue their drive towards greater prosperity.

"The think-tank people in China seem to be acutely aware of the fact that this is a show-stopper (essential issue) for them," he said. "They have got to figure out some way to cope with the implied energy consumption of the path they are totally committed to go down, which is to rid themselves of poverty. But it is really hard to figure out how they are going to do that from an energy standpoint."

One way China is meeting its energy needs is by looking far and wide for energy supplies in Africa, Latin America, Russia and the volatile, but oil-rich Middle East. This concerns strategic analysts like Gal Luft, director of the Institute for the Analysis of Global Security.

He said, "I am afraid that over the years we will see China become more involved in Middle East politics and they will want to have access to oil by cutting deals with corrupt dictatorships in the region and perhaps providing components of weapons of mass destruction, ballistic missiles and other things they have been involved with and that could definitely put them on a collision course with the United States."

Mr. Luft says that if even a fraction of China's 1.3 billion people reach the level of per capita U.S. oil consumption it could cause a crisis.

But energy expert Amy Jaffe of the Baker Institute at Rice University, says China need not follow the profligate energy use pattern of the United States.

"Japan is the second largest economy in the world and their oil use has not gone up hardly at all," she pointed out. "Europe, as a whole, the EU, has an economy that is not quite as large as that of the United States, but extremely large, and their oil use has actually gone down. Why is that? That is because they have an effective policy to prevent economic growth coming at the cost of rising energy use. The United States does not have that. China is now grappling with whether they need one. I hope for the sake of all of us that they choose to follow the Japanese and European model instead of following what the United States is doing."

China might curb some of its demand for oil by building automobiles that are more fuel efficient as well as adopting a wide range of conservation measures. But Matt Simmons believes the Chinese will ultimately have to find some new source of energy if they want to continue their phenomenal eight-to-ten percent annual growth.

"It is really important that the bright minds in China get their hands around this issue so that they actually start down the path of figuring out a brand new form of energy," he said. "In the 20th century, with all the fabulous technology we had come along we only invented one form of energy that we did not have in 1900, nuclear. And it took the better part of 50 years to figure out how to do that."

Mr. Simmons says it is worth the effort to seek new forms of energy, but he sees nothing on the horizon so far that can come anywhere near replacing oil.

Gal Luft, on the other hand, thinks a Chinese advance in developing alternative energy could also pose a problem for the United States.

"One of the concerns is that the Chinese might decide to move into the next generation of energy sources, leaving the United States behind," he said. "One day we may wake up to find that we are lagging behind China and that we have to import Chinese technologies to keep up supplying our energy demands."

Alternative energy development in China or anywhere else would ease worldwide dependence on oil, a finite resource that also produces air and water pollution. But there is no guarantee that the Chinese will be any better than anyone else at developing alternative fuels. So, in the meantime, China's thirst for oil is likely to grow, putting ever greater pressure on the world market.