The Dragon Chases Oil

China reminds me of that time-honored axiom, "Be careful what you wish for."

It was 33 years ago this month that President Nixon made his historic trip to China. He found a self-absorbed, static, isolationist, communist nation striving for self-sufficiency in all things. Today, the world's largest nation has abandoned communism and enthusiastically and successfully embraced capitalism and international trade.

We won. So why aren't we savoring our victory? Perhaps because we are discovering that China has become a far more formidable economic competitor than it ever was as an ideological opponent.

Since 1980, China's economy has grown faster for longer than any country in history, doubling every six to seven years. In the 1980s and '90s, that exponential growth went largely unnoticed because it applied to a tiny economic base. But as that base expanded, each doubling added ever-increasing amounts of capacity and strength.

By 2000, China needed only one more doubling to burst upon the global economic stage as a leading actor. Recognizing that dynamic, the world's manufacturing firms quickly moved into China to take advantage of its rapidly growing domestic market and its vast quantities of low-paid, highly educated and well-disciplined labor force.

In 2004, the curtain went up on China's performance. And what a performance it was.

That year China's import and export volume reached $1.1 trillion, double its 2001 volume. China became the world's third largest trading nation, next to the United States and Germany. It replaced Japan and Mexico as the largest single source of U.S. imports of consumer electronic products and information technology hardware such as computers. China accounted for one third of the growth in global oil consumption and 90 percent of the increase in global steel demand.

At one point in 2004, China's voracious appetite for materials for its white hot construction and manufacturing markets tied up 20 percent of the world's bulk shipping capacity. Freight rates on transoceanic shipments soared by some 300 percent. U.S. builders experienced a shortage of cement.

China now accounts for 13 percent of the world's gross domestic product (based on purchasing power parity exchange rates). Imagine the impact of the next doubling.

In 2001, the Chinese purchased 2.2 million cars. By 2004, its internal automobile market exceeded 5 million. In the next 15 years, China's car market is expected to surpass 20 million, exceeding that of the United States.

What is the implication of these startling statistics? Let's focus on China's oil consumption, since oil is such a pivotal factor in world affairs.

In 2004, China's oil consumption increased by 40 percent, to 6.5 million barrels a day. U.S. domestic demand is 20 million barrels a day. U.S. demand is increasing by about 500,000 barrels per day per year. China's is increasing by about 1.5 million barrels per day per year.

World oil production is straining now to satisfy growing world oil consumption. Both the U.S. and China are increasingly dependent on imported oil. Both are aggressively pursuing strategies to maintain their access to oil. To me it looks like China's strategy is more farsighted and coherent. While we've spent $300 billion to invade Iraq, have tried to overthrow the Chavez government in Venezuela, and now threaten Iran, China has quietly entered into long-term contracts with many of these countries. It has invested about $15 billion in foreign oil fields and expects to invest 10 times more over the next decade.

China has begun to negotiate directly with our largest long-time oil suppliers to lock up future supplies. Canada is currently our largest supplier. Virtually all Canadian oil pipelines go south to satisfy the energy needs of a thirsty U.S. Midwest. That will soon change. Chinese and Canadian companies are negotiating to build a pipeline from northern Alberta west to British Columbia. Murray Smith, Alberta's former energy minister candidly observes, "The China outlet would change our dynamic."

In December, China signed a deal with Venezuela and neighboring Colombia to construct a pipeline linking Venezuelan oil fields to ports along Colombia's Pacific coast. This will allow China to bypass the U.S.-dominated Panama Canal. Venezuela is our fourth biggest supplier of oil. Congress has asked the Government Accountability Office to investigate the potential impact the Chinese pact might have on our oil imports.

China is protecting its energy interests with a string of military bases and diplomatic ties from the Middle East to southern China. Recently, it signed a 25-year oil and gas deal with Iran. Currently, about 80 percent of China's oil imports pass through the Straits of Malacca. China views that sea corridor as under U.S. Navy control. It is investigating the construction of a canal across the Isthmus of Kra in southern Thailand that would allow it to bypass the Straits.

Of course, Richard Nixon and Henry Kissinger alone cannot take credit for China's new economic direction. But on this anniversary of their historic visit, we may once again muse about the law of unintended consequences.

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