China's Oil Addiction Is Its Main Weakness As A Superpower

Authored by Tim Daiss via Oilprice.com,

For decades, the U.S. was so reliant on foreign crude oil imports that it dictated much of the country’s foreign policy spanning numerous presidential administrations. As far back as the 1970s, especially after the 1973-74 Arab oil embargo that threatened economic survival, foreign policy decisions became increasingly subservient to OPEC, and mostly Saudi oil imports. This dynamic can still be felt currently as yet another president, this time Donald Trump, juggles another Middle Eastern geopolitical dilemma with no easy answers over the killing of Saudi journalist Jamal Khashoggi likely at the hands of Saudi agents inside Turkey.

Now, however, the U.S. has positioned itself among the top three global oil producers, and it has also removed the vulnerability that saw the U.S. embroiled in several middle eastern conflicts. Additionally, it still has the U.S. Navy’s 5th fleet guarding oil exports leaving the Middle Eastern region, including the volatile and strategic strait of Hormuz.

While the U.S. still has to figure out its game plan going forward amid a record 11 million barrels per day (bpd) of oil production, and the increasingly complex relationship with long term key ally Saudi Arabia and other Arab states, China is now also finding itself in an increasingly vulnerable spot as it relies more on both foreign crude oil and natural gas imports to fund its growing economy.

Gas thirst

Just the numbers coming out of China should be cause for concern for Beijing energy planners. First, China’s gas consumption in 2017 soared to new record highs, reaching 235.2 billion cubic meters (bcm), marking an increase of 17 percent or 34 bcm from the previous year. However, the real story has been China’s LNG demand spikes. China bypassed South Korea last year to become the world’s second largest LNG importer, after Japan, while China’s LNG demand increased by more than 50 percent in 2017 compared with the previous year to around 38 million tonnes. The Paris-based International Energy Agency (IEA) said earlier this year that China will become the world’s top overall imports of natural gas sometime in 2019.

In its Gas 2018 annual report, the IEA said Chinese demand for natural gas will rise by almost 60 percent between 2017 and 2023 to 376 bcm, including a rise in its LNG imports to 93 bcm by 2023 from 51 bcm in 2017. Last week, energy consultancy Wood Mackenzie said that China already accounts for 50 percent of overall growth in global LNG demand.

Oil majors, particularly forward-thinking Royal Dutch Shell, the world’s largest LNG producing company, are going long again on projected LNG demand and China's gas thirst. As a consequence of that growing demand, Wood Mackenzie now predicts 2019 will see a record number of final investment decisions on new LNG projects in Russia, the U.S., Qatar and Mozambique.

China’s LNG demand will also shorten the ongoing supply overhang in LNG markets by several years from a previously predicted time frame of 2022-2023. Moreover, China's gas demand has also seen it blink in the face of ongoing trade tensions with Washington as it lowered a possible LNG tariff to 10 percent from as high as an initial 25 percent.

Oil addiction

Even as China’s growing dependency on imported gas continues, both in the form of LNG and pipeline gas, its oil thirst is even more problematic. In 2017, China's apparent oil demand rose 5.5 percent year on year to 11.77 million bpd. So far this year, in-spite of a bitter trade war with the U.S. and other economic headwinds, refinery throughput in China, the world's largest oil importer, increased in September to a record 12.49 million bpd, government data showed earlier this month. A CNBC report said that the refinery throughput data feeds hopes about oil demand in China, even though economic growth slowed in the third quarter to its weakest since the global financial crisis.

While ongoing trade tensions between Washington and Beijing could dent Chinese oil demand in the short term, long term demand will nonetheless continue to grow in lock step with the country’s economic growth, projected above 6 percent per annum for the next several years. And, it’s this very economic growth that will see China increasingly reliant on crude oil imports from friend and foe alike, including greater reliance on lighter sweet crude imports from U.S. shale producers once ongoing trade tensions recede.

The correlation between foreign oil dependency and national security will be one of Beijing’s greatest and most complex issues as the next decade approaches. It will increasingly dictate the government’s foreign policy decisions as it juggles both its own hegemony goals in the Asia-Pacific, extending to Africa and beyond.

Lessons from U.S. oil dependency

Just since the late 1970s, U.S. oil dependency dedicated American foreign policy, ranging from Washington’s response to the Iranian revolution in the late 1970s, American support of Baghdad in the Iran-Iraq war for most of the 1980s, Iraq’s invasion of Kuwait in 1990 and the subsequent two Gulf Wars, while financing the second Gulf War is in large part to blame for the country’s now massive national debt.

Though Beijing will likely not be as heavily involved in geopolitical affairs as the U.S., it will nonetheless find itself hampered by its own oil needs, while its rapidly growing blue ocean navy may one day also be called on to defend global shipping lanes just as the U.S. has done for decades.

Several years ago Washington think-tank the Brookings Institute said that amidst the many uncertainties looming over China’s future political and economic circumstances, “one thing is evident: whatever the pace of economic development may be, China must address its rapidly growing demand for natural energy and resources. Oil will be at the top of this list.”