China and the U.S. in a Changing Energy Landscape
Summary
China's growing dependence on foreign energy markets could force it to rethink its historical policy of nonintervention, at least in major energy producing regions. The U.S. Energy Information Agency released data Oct. 9 showing that China had officially passed the United States as the world's largest importer of oil. While the precise moment that the United States passed the torch to China is insignificant, the data highlights a growing trend that will continue over the next decade: The United States is becoming less of a global oil importer while China's appetite for oil imports is rising.
Analysis
Underlying the Chinese economic miracle has been the rapid growth in China's demand for all forms of energy. China is by far the world's largest coal consumer and is well on its way to passing the United States as the world's largest oil consumer. China's oil consumption rose from 2.3 million barrels per day in 1990 to 4.7 million barrels per day in 2000 and is now approaching 11 million barrels per day. The United States consumes roughly 15 million barrels per day.
Even though the growth of China's economy is slowing and will not return to sustained rates above 10 percent, the country's rising oil demand should be quite resilient. Much of China's population is entering the phase of economic development in which it can afford passenger vehicles; when most economies reach annual per capita levels between $10,000 and $20,000, the ratio of cars to people rises dramatically (before slowing once income levels exceed $20,000). Although the ratio of cars to people in China is unlikely to reach what it is in the United States, the sheer size of China's population means that even small changes in the percentage of car owners will translate into large absolute change in the volume of fuel needed. Simply put, China's oil imports will continue to increase over the next decade, cementing its position as the world's top oil importer.
What It Means for China
This will have several implications for Beijing. China's three major national oil companies -- China Petroleum & Chemical Corp. (also known as Sinopec), China National Offshore Oil Corp. and PetroChina -- will continue their aggressive international expansion. Particular attention will be paid to countries where oil production levels have the potential to increase, such as Iraq, Brazil and Venezuela, despite the high political and logistical complications surrounding energy development in these countries.
While part of this expansion is intended to secure oil supplies for China, it is also about minimizing risk and becoming a globally integrated oil company. This means that the companies will also continue to expand into places such as the United States and Canada, where oil production will likely be destined for markets other than China. For instance, China National Offshore Oil Corp. and Sinopec have invested several billion dollars into U.S. shale formations. These investments also serve to increase the companies' technological capabilities, which perhaps one day -- probably at least 15 years away -- could lead to a rejuvenation of Chinese oil production.
Additionally, with the growth of China's domestic economy slowing down and the country undergoing a shift from an export-oriented economic model to one that Beijing hopes will be more dependent on domestic consumption-led growth, there will be a decline in China's trade balance. Increased imports of oil and other forms of energy will only hasten the erosion of China's positive trade balance, although that shift will play out over several years. It also increases Beijing's vulnerabilities to external forces -- not only economic forces but also maritime supply risks. Beijing has attempted to mitigate these risks by increasing imports from land-based routes such as Russia and Central Asia, but ultimately it will depend on whoever secures the sea lines of communication, a role long occupied by the United States.
Reduced U.S. Energy Dependence
At the same time that China's increased consumption is leading to higher imports, the United States is reducing its dependence on foreign oil imports. The U.S. oil industry has experienced a dramatic technological revolution that has increased the country's oil production by nearly 40 percent over the past three years, sending domestic production to levels not seen since before the first Gulf War. While that alone has contributed to a dramatic drop in U.S. oil imports, Canada has dramatically increased its oil production and is exporting to the United States by land. The result has been an even greater decline in maritime oil imports by the United States. These trends are expected to continue throughout the rest of the decade as the United States and Canada continue to increase their own production.
However, U.S. and Canadian oil production is unlikely to reach levels high enough that Washington will no longer have to import oil from other partners. Moreover, the United States is highly integrated into global trade flows and financial markets. As a result, the United States will remain highly interested in the international oil market as well as in securing sea lines of communication for not only energy transit but also other commodity trade flows. For example, even if U.S. energy imports from the Middle East are reduced, any significant disruption in the Middle East will result in catastrophic economic consequences in China and other Asian countries, thus eventually hurting the United States.
Nevertheless, the United States will continue to import Middle Eastern crude for structural reasons. For instance, California and other West Coast states are not connected to the rest of the continent by pipeline, and building pipelines in these areas has been difficult. As a result, refiners there will continue to seek Middle Eastern crude, even as the United States continues to produce oil at increasing rates.
OPEC's Diminished Influence
The increases in U.S. energy production can be attributed in part to high oil prices. This is not the first time high oil prices have led to technological revolutions in developed economies, unlocking vast amounts of production. During the 1970s oil shocks, high oil prices led oil producers to develop more expensive areas -- the Gulf of Mexico, Alaska and the North Sea -- leading to sustained growth in non-OPEC supplies during most of the 1980s. As a result, the price of oil crashed and stayed low even during a geopolitically turbulent time in the Middle East -- a time that included a war between Iraq and Iran. Saudi Arabia and other OPEC producers initially attempted to restrict oil output to increase the price, but they were unable to significantly affect oil prices because non-OPEC production was rising too quickly. This ultimately broke when Saudi Arabia ramped up production in order to gain market share, setting up oil prices to remain relatively low until the 2000s, when a new trend emerged -- massive demand increases from emerging countries.
Today, increased production in the United States, Canada, Russia and Brazil has eroded OPEC's ability to influence prices. However, contrary to historical examples of increased production, the sustained, strong growth of demand in China, India and other emerging markets has so far mitigated the impact of increased non-OPEC production, and continued strong growth will be needed in order to keep oil prices at current levels.
This is important for many Middle Eastern countries because their ability to restrict oil output is now in question. Not only have Saudi Arabia, Oman and other Middle Eastern oil producers increased their own domestic consumption, but in response to the 2011 Arab uprising, many of these countries relied on increased social spending -- financed by oil revenue -- to weather the storm. These countries all need oil prices to remain at current levels in order to finance their budgets and may even need prices to continue to increase.
China's increased dependence on foreign energy markets will also require China to become increasingly more interested in geopolitical developments in the Middle East and other energy producing regions. Beijing's historical policy in such disputes has been not to intervene, but with rising dependence, this policy could become less tenable. The United States will remain highly interested in global energy markets and significant geopolitical events that affect those markets, but decreased dependence on foreign oil imports does give Washington greater freedom in conducting its foreign policy in strategic oil and natural gas producing regions.
Natural Gas Europe is pleased to provide this article in cooperation with Stratfor, a Natural Gas Europe Knowledge Partner. For more visit http://www.stratfor.com/ Follow Stratfor: @stratfor on Twitter | Stratfor on Facebook