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    China Business
     Jul 24, 2010

China turns on demand power
By Sreeram Chaulia

American journalist Matt Taibbi employed a grotesque analogy last summer to describe the Wall Street titan Goldman Sachs as a "great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money".

In the energy industry, a similar phenomenon has arisen to invite respect, admiration and fear - China's appetite for oil. No survey of the oil sector's present and future can now afford to omit the China factor and its multiple ramifications.

This major new reality in geo-economics has just been underscored by a report from the International Energy Agency (IEA) that reveals that China has overtaken the United States as the world's largest energy consumer. With a total usage of 2.25 billion tons of oil equivalent in 2009, China has forged ahead of the US, whose figure stands at 2.17 billion tons, according to the report. Zhou Xi'an, an official with China's National Energy Administration, later rejected the IEA report, according to the Shanghai Daily.

Even allowing for the economic slump since late 2008, which considerably reduced US oil demand, China's continued growth means the country is well placed to stay on top of the energy list of customers.

The IEA's disclosure marks a second major milestone in contemporary energy history since 2003, when China left Japan behind to become the second-biggest oil consumer. Clearing the field of even the US is testimony to the fast growth of China's economy, which is poised to supercede Japan soon in size of gross domestic product (GDP).

The "rise of China" genre of opinion has rightly been focused on China's exports, its record foreign exchange reserves and its fast modernizing military, but the flip side is the power that China is accumulating by virtue of the scale of its imports of raw materials and commodities.

Consider China's equation with Australia, which is now defined by the utter dependence of the latter's mining multinationals like BHP Billiton, Rio Tinto and Xstrata Coal on the former's demands for minerals.

Had China not maintained galloping economic growth based on extractive commodities at home, Australia would have struggled to escape the great recession after 2008. This is the same Australia that once assumed that it would catch a cold if the US sneezed. However unpalatable it might sound in Canberra, China's gargantuan demand has made it an arbiter of Australia's destiny.

Despite China's environment-friendly pledges that it is going to invest nearly $738 billion in the next decade to develop cleaner sources of energy, its high-octane economic machine is not yet an efficient user of fossil fuels. Chinese heavy industry recorded some energy efficiency improvements between 2006 and 2009, but the first quarter of this year witnessed a 3.2% increase in the use of energy per unit of GDP. This is great news for energy exporting companies around the world whose revenues and profit margins thrive on wasteful but thirsty Chinese demand.

But it is not reason for complacency from a national security standpoint of an exporting state whose fate is tethered to China's economic vicissitudes and policy shifts. China, the demander, gains too much leverage on exporting countries that have not managed to diversify their clientele.

With a grim scenario of minimal economic growth and decreased energy consumption in store for the US, the European Union and Japan for some time to come, energy exporting states dominated by a single sector hope to spread their risks by selling fossil fuels in Africa and Latin America, not to mention non-Chinese Asian players with robust growth like India.

But economies of scale and the instant attraction of a bottomless Chinese market imply that Beijing has the power to become kingmaker for many energy supplying countries, with far-reaching political and diplomatic consequences.

For instance, Saudi Arabia - the world's second-largest crude oil producer - used to rely on the US as its single-largest customer for petroleum liquids up to 2008, averaging 1.53 million barrels per day.

In 2009, this figure fell to 989,000 while Saudi oil exports to China surged to above 1 million barrels a day. With overall net crude imports of around 5.4 million barrels a day and a projected uptick of 900,000 more barrels a day in the next two years, China is set to keep the US displaced for good as Saudi Arabia's number one destination.

Until now, the domestic politics and foreign policy of the kingdom bore a distinct American influence, which in turn was linked to oil interests in the US. This whole political economy of a US-Saudi special relationship is now being upended by the entry of China. The day China develops a more interested and active policy position on Middle Eastern conflicts and alignments will be momentous because the two oil-producing arch-enemies of the region - Saudi Arabia and Iran - are both predominantly dependent on the Chinese market for their economic fortunes.

Repeatedly sanctioned Iran exported 460,000 barrels per day of crude oil to China in 2009, an amount exceeding exports to Iran's previous top market, Japan. While energy or resource exchanges are not the sole determinants of foreign relations, it is logical to expect that China will seek to convert its hold over oil-selling countries into strategic advantages that matter for its oft-stated goal of sustaining a "multipolar world" (read challenging American hegemony in every region).

While it is reasonable to believe that both the US and China can coexist as equally influential powers in shaping the foreign and security policies of Saudi Arabia and smaller authoritarian Arab sheikhdoms, the dice is loaded against Washington in Latin America.

The fastest-growing destination for Venezuela's crude oil exports is China, which now buys 460,000 barrels a day from the former, up from 120,000 in 2008. For the staunchly anti-American President of Venezuela Hugo Chavez, China is a massive alternative market that will reduce his country's dependence on the US (which still consumes around 60% of Venezuelan crude exports). After China pledged a record $20 billion for a joint venture in Venezuela's oil sector, Chavez thundered that "this is a mutating world in transition".

Venezuela presents the best model for an energy exporting country that is flying towards China's demand-pull magnetism but is still capable of maintaining its own self-reliance in foreign policy. The high level of popular mass mobilization and radical independence that Chavez has imbued in Venezuela's body politic leaves little room for China, if it attempts, to meddle in the country's strategic or diplomatic affairs.

In Africa, Angola is another example of a proudly anti-imperialist country that is reliant on China's oil demand but impervious to Chinese big-brother tactics that critics have decried as a form of Asian neo-imperialism. All is therefore not lost for energy exporting countries that find themselves yoked to China's fuel demands.

As a great power with a strong emphasis on energy security, Beijing may have patented a checkbook diplomacy of its own to tap into oil-producing channels and, by extension, play politics with authorities controlling the fuel flows.

But energy sellers need not despair about losing their independence in a new Chinese global dominion, because there are proven non-economic means by which societies and states can defend themselves against the "vampire squid" of the commodities world.

Sreeram Chaulia is associate professor of world politics at the OP Jindal Global University in Sonipat, India

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