China's Oil Security Faces Tests of War: News Analysis

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Last updated at: (Beijing Time) Monday, October 21, 2002

China's Oil Security Faces Tests of War: News Analysis

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China's dependence on the import of oil has been growing ever larger. Under a special circumstance, the source and route of China's oil import are likely to come under others' control. With the Gulf situation becoming more intense, war may break out at any moment. China's oil security is waiting to be tested in war.

On the early morning of October 11, US Senate passed a resolution on authorizing US President George W. Bush to use force against Iraq; prior to this, US House of Representatives had adopted a similar resolution on the afternoon of October 10, after Bush was granted the right by Congress to launch armed attack on Iraq, a war to be waged by the United States against Iraq is imminent.

With the Gulf situation becoming increasingly intense, oil price rose to a new high on September 23 over the past 19 months, with the price standing at US$30.48 per barrel. At the same time, Iraq and some other countries had for a while threatened that they might again use the "oil weapon". Regarding this, experts cried out in alarm: the Gulf situation is threatening China's oil security.

Planning to Have 8 Million Tons of Strategic Oil Reserves

A person in the oil circle who does not want to be identified disclosed that China's current strategic oil reserve is almost zero, the present strategic oil reserves are mainly commercial reserves of oil enterprises, and their quantity is very limited. Therefore the Gulf situation is likely to produce major influence on China's oil security and even China's economy.

Many experts hold that in light of developed countries' experiences, China should also establish its own strategic oil reserves, so as to deal with unexpected suspension of oil supplies, because only strategic oil reserves are the irreplaceable core of oil security. It is reported that various plans have been passed around for perusal in decision-making departments, but in the end no project had been formally established.

It is the general view of experts that the scale of China's strategic oil reserves must be commensurate with its economic strength. According to estimate, China's strategic oil reserves should start with the storage level for 15 days, which should gradually reach the level for 30 days. Calculated according to the processed amount of 200 million tons a year, the starting storage level should at least be 8 million tons, which should reach 20 million tons in 10 years, it will take 20 years for the entire system to become completely mature. Calculated on the basis of the price of US$20 per barrel, 8 million tons of oil will need over 13 billion yuan (one US dollar v. 8.3 yuan) of funds, this, plus the 10 billion yuan of the auxiliary systems project, at least adds up to well over 20 billion yuan. Experts propose that we can solve the problem of funds by using the methods of Japan, Germany and some other countries for reference and through the issuance of long-term State treasury bonds, financial allocations, the establishment of reserve funds and the design of new items of taxation, but the problem of funds should not be shifted to oil businesses and production enterprises.

Besides, there exists some contradiction between the variety of oil reserve and the location of storage in regard to different plans for strategic oil reserves. Finished oil products lag behind the updating of products, for instance, gasoline produced 30 years ago can no longer be used in any car, therefore, the oil stored by various countries is mostly crude oil. Such being the case, the location of China's crude oil reserves cannot be far removed from oil refineries and oil-product processing factories. However, another problem arising therefrom is that although eastern and southern coastal areas have strong oil-processing capabilities, strategically they are vulnerable to attack. In view of this, some experts suggest that taking these two aspects into consideration, the location of oil reserves should be distributed in multiple spots.

The three major oil enterprises-the China National Petroleum Group Corp., PetroChina and the China National Offshore Oil Corp., as well as China National Chemical Import and Export Corp., and other companies with the right to handle the import and export of oil and related products can all participate in the projects of strategic oil reserves. The State Development Planning Commission may set up a macro administrative organ similar to a "State Oil Storage Office", with the State Bureau of Material Reserves taking charge of plans for oil storage and operation.

Safety Anxiety for Two Decades

Beginning from 1993, China has changed from a pure oil exporter to a pure oil importer. In 2001, China's pure import of oil reached as high as 64.9 million tons. With China's growing dependence on oil import, "oil security" has gradually become the keyword in the frequent discussions among oil enterprises and government decision-making departments.

Actually as early as the 1980s, China had already had such anxiety. Oil is a limited resource, although China is a large oil producer ranking fifth in the world, it is at the same time a large oil consumer, oil output lags behind the rapid economic growth demand for oil. Since 1984, the average annual growth of crude oil output has come to 1.7 percent, but the average annual growth of oil consumption has reached 4.9 percent in the same period. In 2000, the import of oil and oil products reached 70 million tons, an all-time high (a slight drop in 2001), accounting for 30 percent of the amount of the nation's consumption in that year. Based on such a rate, by 2010, China will need to import 40 percent oil from abroad, and this proportion will reach as high as 50 percent by 2020. Any sign of disturbance in the international oil market will immediately exert negative effect on the economy of China with so high a degree of dependence on imported oil.

Recently, China's stock market has all along been in a slump. An analysis made by the newspaper, Shanghai Securities News, says that "judged from the situation in surrounding markets, which, affected by the worries about a rise in oil price caused by the approaching Middle-East war, have recently experienced a downward trend, with the daily economic number setting a new low in the past 19 years, the economic number of Germany also set a new low in the last six years, the Wall Street stock market of the United States plummeted again on October 9, the downfall of stock markets in surrounding bazaars also produces certain influence on the development trend of domestic markets."

Experts on the issue of oil point out that oil is the blood of the national economy, presently it holds 39.97 percent in the world energy consumption pattern, and it will remain the most important energy in the world in the foreseeable future. Data show: Consumer will suffer a loss of US$12 billion a year if oil price rises by one US dollar; if oil price rises by US$10 and remains so for one year, the annual growth rate of the world economy will drop by 5 percentage points, while the annual economic growth rate of the developing countries will fall by 0.75 percentage point.

Actually price is only one aspect of oil security. China's present oil import mainly comes from the Middle East region, so the source of imports is limited, and there is not much choice in respect to oil transport routes. So, when a special circumstance emerges, normal oil import will be hardly guaranteed, domestic people's livelihood, economic operation and national defense will sustain major influence.

Seeking Oil Security through Multiple Channels

In his article, Zhu Xingshan, a staff member with the Energy Research Institute under the State Development Planning Commission, indicates: China's petroleum resources still have certain potentials, and through efforts China can basically achieve a domestic supply-demand balance. Domestic oil resources must be exploited economically, we must consider cost and cannot blindly pursue output at the expense of economic benefits and thus augmenting the cost of China's oil products as a whole.

In addition, the diversity of oil products and the multiplicity of oil product import channels are a practical way of guaranteeing China's oil security-reducing dependence on single product and single region. According to the data released by the State General Customs Administration of China, the nearly 60.26 million tons of crude oil China imported in 2001 came respectively from about 30 countries, doubling that of 1996. It can be seen from the statistics that among the amount imported in 2001, 56.2 percent came from the Middle East region, next from the African region, while the current ratio of oil imported from Southeast Asia and Russia is not high enough.

In order to diversify oil import channels, the China National Petroleum Corp. has developed oil cooperation with the Sudan, bringing in 5 million tons of share oil from the country. At present, China adopts the share oil method for cooperation with many countries abroad, this means that China buys shares or makes investment in local oil construction projects and it will obtain a definite share from the output of the oil project each year. What is comparatively beneficial is that the thing China obtains is material object, so the amount of oil import is not much affected by price fluctuation. It is reported that the holding company had a half share of the 16 million tons of oil recovered in 2001.

In regard to the transport route, the oil China currently imports from the Middle East and Africa is still transported through sea lines: the Suez Canal-the Indian Ocean-the Strait of Malacca, such relatively single route will bring certain strategic risks. Once China and Southeast Asian countries or the United States fall foul of each other, oil transportation will be impeded. For this reason, experts call on China to develop oil and natural gas imports by opening up another three channels:

First, strengthening Northeast Asian energy cooperation, constructing the East Siberia-China-the ROK-Japan natural gas pipeline, as well as the construction of the West Siberia-China and Central Asia-China-Japan oil pipeline.

Second, strengthening cooperation in exploiting petroleum in the South China Sea. The South China Sea has 23.5 billion tons of oil resources 1 billion cubic meters of natural gas resources, both Indonesia and Vietnam are forcibly exploiting oil and natural gas in the territorial sea belonging to China. While "putting aside disputes", China should engage in active exploitation. Besides, it should maintain good relations with Southeast Asian countries, so as to guarantee the safety of oil transportation.

Third, making full use of the SCO (Shanghai Cooperation Organization) to strengthen energy cooperation with Central Asian countries as well as Russia. Russia and Central Asian countries are rich in petroleum resources, possessing 9 billion tons of recoverable oil and 50 trillion cubic meters of natural gas.

The Forthcoming War a Severe Test

From "major world events and the chart of oil price fluctuation" it can be seen that oil price is liable to be affected by international contingencies. The best known fact is the first oil crisis in 1973 caused by the oil embargo imposed by Arab countries on Western countries because of the Middle East War, this dealt a heavy blow to Western countries which heavily depended on oil imports, as a result, Japan experienced economic chaos, the United States suffered a loss of 2.5 percent of its GDP, almost triggering a serious economic depression; In the second oil crisis triggered by Iran's religious revolution in 1979, Japan was not much affected thanks to its fairly large domestic oil reserves, whereas the United States suffered a loss of 3.5 percent GDP because it did not have enough oil reserves.

Having gone through the hardships caused by the lack of sufficient strategic oil reserves, the United States began to enrich its strategic oil reserves. During the Gulf War period, because America and Japan used oil reserves, they not only guaranteed oil supplies during the war period, but also kept down oil price, thus working the miracle of bringing about an oil price reduction instead of an oil price hike for six days after the start of the war.

The increase in the globalization degree, the discovery of new oilfields, the increase in OPEC countries' oil output, technological upgrading, the deepened economic cooperation made it possible to control Middle East oil price. OPEC's oil output decreased from 80 percent of the world total (in the 1970s) to 40 percent, making it increasingly difficult for OPEC to use the oil weapon. Saudi Arabian Prince appraised the oil embargo motion tabled by Iraq this year when he said, "the person who raises the oil weapon will harm himself".

After the "September 11" incident, the international political pattern underwent major changes, various major countries around the world, including Arab countries, all improved relations with the United States, even the OPEC ceased timely starting the "oil price automatic balance mechanism". Even if an Iraq war, which Arab countries do not want to see, broke out, its influence on oil price would not be as big as it was during the Gulf War so long as large-scale war did not break out. Although oil price has kept rising recently due to war news, insiders estimated (monthly analysis of the "International Oil Economy") that oil price would quickly fall after war was really started, except otherwise the war range went beyond the Iraqi boundary.

As far as China is concerned, China's present ability to resist non-wartime fluctuation of the world oil price is not strong, more often than not, the price rise of oil products at home has nothing much to do with current international events, instead, it has something to do with domestic oil enterprises' slow reaction to the international oil market price, the continued price rise of plane tickets has caused people to feel the pressure in this respect. The forthcoming Iraq war is indeed a test to China's domestic oil market which is not yet perfect.

By People's Daily Online

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