Dependence on Middle Eastern Oil: Now It's China's Problem, Too

By Damien Ma

As America imports less energy from the region and China imports more, it risks becoming the "new U.S." in the Middle East.

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(Retuers)

Energy security is a big concern for both the United States and China, though the latter typically sees it as a supply side issue: secure as much as possible to fill what it sees as endless future demand. For the U.S., having tied much of its energy fate to the Middle East for the last several decades, energy security meant building robust military capabilities to defend its interests and maintain open sea lanes for trade. The Chinese, of course, also depended on the U.S. provision of security as its energy imports from the Arab world expanded dramatically.

But the prevailing dynamic is changing rapidly, and it seems to be unnerving Beijing. Here is why (h/t to Alexis Madrigal's post):


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This graphic, from the latest Energy Information Administration (EIA) report, shows the tremendous growth of natural gas in U.S. electricity generation. This has come at the expense of coal and oil-fired power. Natural gas consumption has increased since about 2005, as petroleum declined from a historic high of over 20 percent to nearly zero percent of generating electricity. Oil is being written out of power generation. The EIA provides this explanation:

Beginning in 2005, natural gas production from domestic shale gas formations began to rapidly increase, which has led to a relatively sustained period of low natural gas prices. Natural gas spot prices at the Henry Hub averaged $7.70 per million Btu during the first quarter of 2006. After a brief spike in 2008, natural gas prices quickly tumbled to a low of about $3.20 per million Btu by the third quarter of 2009. In 2010, prices averaged a little more than $4.00 per million Btu. A continued decline in natural gas prices during 2011 and the early part of 2012 has further encouraged power plant operators to use combined‐cycle units to fulfill baseload power demand, displacing some coal generation. Between 2005 and 2010, the average capacity factor for natural gas combined‐cycle units running during off‐peak hours (between 10 p.m. and 6 a.m.) rose from 26 percent to 32 percent (EIA, 2011). 

In other words, the U.S. shale gas boom is one, though not only, major factor in reducing the country's use of oil and gradually weaning the country from relying on the Persian Gulf. Another chart from EIA corroborates the recent downward trend in U.S. oil imports, now primarily originating within the Americas, with Canada leading the way.  


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China, on the other hand, is heading in the opposite direction. Its oil import dependence now stands at about 55 percent, or importing about 5.3 million barrels per day (BPD) out of total demand of 9.9 million BPD, according to PetroChina estimates. This is roughly equivalent to the peak of U.S. import dependence, and much of China's oil comes from the same places that had been such a big part of the American supply. As of 2010, nearly half of China's imported oil arrived from the Gulf, including Libya and Iraq. In short, China risks becoming the "new U.S." in the Middle East, a direct result of its energy-intensive growth model and the rapid expansion of the transport sector.          

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But the difference is that China does not have an adequate foreign policy or the capabilities to accommodate the unavoidable economic realities. Moreover, some in China fear that increasing U.S. energy independence, particularly its enormous shale output, will make the Middle East is strategically dispensable for the U.S., providing Washington with more flexibility to "disrupt" the region in a way that would indirectly damage Chinese interests. In other words, if Middle Eastern oil no longer matters quite so much to the U.S., then it would have more freedom to do things that would risk disrupting Middle Eastern oil output, such as forcing "regime change" in unfriendly countries.

As simplistic as this may sound, such a view seems to be gaining some traction. One Chinese commentator, pointing out that U.S. oil imports from the Gulf have plummeted to 15 percent and that domestic gas production rose from 20.2 to 22.4 trillion cubic feet in just three years, argued that these developments give Washington more leverage to push around China through, for instance, Iran sanctions. Meanwhile, a researcher at CNOOC, one of China's big three national oil companies, echoed similar sentiments about America's diminishing role in the Arab world:

We understand that the United States' presence and influence in the Middle East is a key factor behind that region's stability, but China is the single greatest purchaser of Middle Eastern oil. The major reason that the United States is seeking energy self-sufficiency is its desire to reduce or even end imports of Middle Eastern oil...

...Nor do we wish to see the United States completely withdraw from the Middle East. We really don't want to see the Americans "transform" the Middle East or allow the region to fall into disorder once they are no longer reliant upon its petroleum. China has but little influence on the Middle East and even less power to control the region, but we need its oil, and we need a stable Middle East.

The discoveries of American shale gas, Canadian oil sand and Brazilian oil beneath salt beds has made the Americas into the "new Middle East" of the 21st century. In the foreseeable future, it is entirely possible for North and South America to become energy self-sufficient. In other words, the Middle East will no longer be an indispensable source of oil to the United States...  

Ever suspicious of U.S. motives, this line of reasoning points to an inevitable conclusion that the United States, via its energy independence, is once again using economic weapons to constrain China's behavior. Of course, that's a bit more of a China-centric view of American policy than is probably warranted.

Such a logic also belies a fundamental distrust of the markets. There is little acknowledgment that decades of technological development and market evolution eventually culminated in successful and scalable U.S. shale production. Instead, some Chinese opinion leaders seem to ascribe a more sinister grand U.S. plot to achieve energy independence so that it can continue to assert dominance over China. For a certain set of Chinese elites, the market is to be dictated and manipulated to achieve political outcomes; it is not something to submit to.

This article available online at:

http://www.theatlantic.com/international/archive/2012/07/dependence-on-middle-eastern-oil-now-its-chinas-problem-too/259947/