New rules in global rivalry for oil

The growing Asian demand for energy could alter US strategy.

Although a Chinese oil company withdrew its bid for a major US-based energy producer this week, the effort put America on notice: China and other nations have launched a concerted push to secure access to oil and natural gas, and the United States must consider how to respond.

It's probably too strong to call it a pipeline-and-tanker version of a global arms race - in fact, that's precisely what many world leaders hope to avoid.

But in an era of rising oil prices and burgeoning demand for fuel, the issues of energy and national security appear increasingly linked.

The $18.5 billion bid to buy Unocal Corp. stirred concerns in the US Congress, which approved energy legislation last week that included a provision that would have delayed a takeover by the Chinese National Offshore Oil Corp. (CNOOC Ltd.). In withdrawing its offer Tuesday, the government-controlled company cited political opposition in the US.

Many observers say American fears were overblown, but the Capitol Hill angst highlighted a key question: Will energy markets be marked by international competition or cooperation? The contest between China and the US is as much about strategy as resources.

Up to now, the US has relied largely on oil markets to divvy up resources. Its focus is on promoting an expanding and smooth-running global energy market. China is deploying government wealth - fed by its large trade surplus - to back the expansion of firms like CNOOC.

"To support their economic growth countries like China and India are aggressively moving to secure new energy streams," says David Phillips, an energy expert at the Council on Foreign Relations in New York. "The US needs to have a comprehensive energy strategy, which is part of our overall national-security strategy."

That assessment is widely shared.

Oil remains the key fuel for transportation, and demand for natural gas - a Unocal emphasis - has been soaring. India and China, the world's most populous nations, are scrambling to ensure the foundation of their expanding middle class. That economic growth suggests that in the near future demand could outstrip supply.

Some argue that, with competition for resources growing, Washington should review - and sometimes restrict - energy deals involving US companies.

Japan's thirst for oil was a catalyst for its war with America 65 years ago, Frank Gaffney, president of the Center for Security Policy, warned in testimony to Congress last month. Although China has not taken a military approach in its quest for oil, "We ignore at our peril ... the fact the Beijing is engaged in an even more ambitious effort to acquire legal title to energy resources," Mr. Gaffney said in opposing CNOOC's bid for Unocal.

He argues that Congress should adopt a much more rigorous approach to reviewing such business deals - with national-security interests at the forefront.

National-security concerns in this new era could go well beyond China - and beyond the realm of corporate mergers. India, in its own rush for fossil fuels, has proposed the development of a natural-gas pipeline from Iran. This is controversial in Washington, which would like to isolate Iran amid concerns about nuclear proliferation there.

The Middle East, of course, remains the geopolitical center of the oil question. Some two-thirds of the world's proven oil reserves are there or in North Africa.

While few see the US-led war in Iraq as fundamentally about oil, neither that effort nor the 1991 Gulf war was undertaken without careful consideration of oil-market implications.

"One of the assumptions, and they were obviously wrong, was that a liberated or democratic Iraq ... could break the back of OPEC," and supply additional oil on world markets, says Frank Verrastro, who specializes in energy at the Center for Strategic and International Studies in Washington.

Indeed, given the world's current dependence on Saudi Arabia and other OPEC nations, many experts say large buyers of oil such as the US and China have more to gain from cooperation than rivalry.

"They are countries that have the same common interests we do - diverse energy supplies" to support economic growth, says Amy Myers Jaffe, an energy expert at the James A. Baker III Institute in Houston.

Such cooperation could range from technology development to agreements to take turns when buying oil to fill strategic reserves.

Most important, experts say, it means promoting a free and open world energy market. "When we isolate other countries, it becomes harder to secure their constructive participation in addressing America's needs," says Mr. Phillips of the Council on Foreign Relations.

Among the dangers: nations negotiating bilaterally for pledges of oil, rather than selling and buying it on the open market. State-run firms now control about three-fourths of the world's oil resources.

Energy rivalries could accelerate, if those supplies become the stuff of diplomacy rather than of dollars in the marketplace.

In the long run, experts from Mr. Gaffney to Mr. Verrastro agree it's vital to reduce reliance on oil through steps such as conservation and the development of alternative energy sources.

In the meantime, much of the global economy will still run on oil. In the US, Chevron is now free to pursue its own bid for Unocal. And China will push forward on new energy deals, as it has been for a decade now.

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