China's risky scramble for oil





China's efforts to tie up oil and gas resources - in places such as Iran, Saudi Arabia, and Sudan - have not been cheap. But it has an unfair advantage, says Michael Lynch, president of Strategic Energy and Economic Research in Amherst, Mass. Its national oil firms have access to cheap capital from government institutions - and few limits on entering areas seen as sensitive for publicly held Western firms. (Think violence-prone Sudan.)




Oil has often influenced history. An American and British oil embargo on Japan, which was close to running out of fuel for its growing navy and empire, was one reason that island nation advanced a plan to attack Pearl Harbor to Dec. 7, 1941. That move brought the US into World War II, at a time when world oil output still was rising. A peak - when it comes - will be a major event shaping geopolitical policy and future prices.


Just when it will peak is intensely debated. Conventional oil production could top out in 2022, reckons Leo Drollas, chief economist of the Centre for Global Energy Studies in London. Non-OPEC oil could peak in five or six years. Other experts are more pessimistic.

But many of them, in government or outside, are counting on the market to solve the problem. As prices go up (now at $49 a barrel), the oil industry should increase supply by getting more oil out of old fields or finding new sources, they point out. At some price, Canada's oil sands and Venezuela's heavy oil will become even more commercially feasible.

Last fall, the International Energy Agency in Paris calculated the global oil industry would need to invest $3.1 trillion to keep up with the demand for oil through 2030. That assumes the oil can be found.

At the same time, higher oil prices should discourage the use of SUVs, force people to turn down their thermostats, and cut demand. They could also lower the economic growth that fueled the demand in the first place. Today's uncertainty-related rise in oil prices, up 44 percent in the past two years, will after two or three years reduce world economic growth from what it would be otherwise by a significant 0.8 percentage point, predicts Mr. Drollas.

But Dr. Nur says this faith in market forces is unlikely to pan out in adequate supply.

Nor have efforts to assure supply always worked. In 1970, the seven major international oil companies thought they owned and thus had tied up the huge Middle East reserves beyond the turn of the century. Within five years, the nations there had taken ownership of their own oil - and prices had quadrupled.

So China's best-laid plans may not succeed, especially if other nations outbid it.

"In our business there are no guarantees," says Drollas. Oil is a fungible commodity that is mostly sold to the highest bidder on world markets. "I personally don't buy the idea that this is a battle for resources and that China is going to win."

"The outcome doesn't have to be horrible," Nur adds. "But it will be horrible if we don't pay attention to it." By "attention," he means major conservation efforts, the development of alternatives to oil - now the major fuel used in powering transportation - and the use of diplomacy to avoid conflict.

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