The Axis of Oil

China and India are locked in an increasingly aggressive wrangle with the United States over the world's most critical economic commodity: oil. More than any other issue, this tussle will shape the economic, environmental and geopolitical future of these three countries, and the world.

Ensuring a steady flow of cheap oil has always been one of the central goals of U.S. foreign and economic policy, and Washington's pre-eminent position in the world is based in large measure on its ability to do this. But China and India are increasingly competing with the United States to secure oil exploration rights in Africa, Southeast Asia, Central Asia and Latin America.

India has invested more than $3 billion in global exploration ventures and has said it will continue to spend $1 billion a year on more acquisitions. China, which has already invested about $15 billion in foreign oil fields, is expected to spend 10 times more over the next decade.

The motive, says Zheng Hongfei, an energy researcher at the Beijing Institute of Technology, is that "there is just not enough oil in the world" to cover China's and India's growing energy needs.

By 2010 India will have 36 times more cars than it did in 1990. China will have 90 times more, and by 2030 it will have more cars than the United States, according to the Energy Research Institute of Beijing.

More than 4.5 million new vehicles are expected to hit Chinese roads this year alone, a far cry from the time when families saved for months to buy a Flying Pigeon bicycle. The country is now the world's largest oil importer after the United States, guzzling about 6.5 million barrels of oil a day; this figure will double by 2020, says Stephen Roach, chief economist at Morgan Stanley.

India, the world's second-fastest growing economy after China, now consumes about 2.2 million barrels a day – about the same as South Korea – and this is expected to rise to 5.3 million barrels a day by 2025, according to the U.S. Energy Information Administration.

With global oil production barely 1 million barrels over the global consumption rate of 81 million barrels a day, the surge in demand from China and India could eventually lead global demand to outstrip supply, causing fuel prices to shoot up beyond their recent highs of around $56 a barrel, says Roach.

The impact of this on the global economy, particularly in developing countries that import most of their fuel, would be severe. The International Energy Agency says that for every $1 increase in oil price, the global economy loses $25 billion.

Anxiety over this is already throwing the nervous oil market into further disequilibrium. In September, Michael Rothman, a senior energy analyst at Merrill Lynch, said rising oil prices were not so much a result of the Iraq war or political instability in Venezuela and Sudan, but of extensive "hoarding" by China.

According to Rothman's analysis, China and India are roiling oil markets by creating oil reserves, which are designed to provide the minimum cache the country needs to ride out a crisis, along the lines of the United States' Strategic Petroleum Reserve (SPR).

With both countries flush with foreign exchange reserves that are threatening to infect their economies with inflation, creating an oil stock seems a sensible solution. But critics say Beijing's and New Delhi's timing is unfortunate, coming just as the global economy seemed to be recovering and the United States was questioning the value of its own reserve.

At 175 million barrels and 25 million barrels respectively, China's and India's estimated oil reserves are just a small fraction of the 700 million barrels held by the United States in its SPR.

China and India, which are both nuclear states, are also taking advantage of the United States' strained ties with Iran, Vietnam and Myanmar by extending these countries military and political support in exchange for energy supplies. And a Washington preoccupied with Iraq, the war on terror and nuclear crises in Iran and North Korea has been unable to checkmate either country as successfully as it did earlier.