Oil Market Emphasizes US-China Interdependence

The way China and the US are working together to free crude oil from their strategic oil reserves and take some of the heat out of the oil market might make you think that the world’s two largest energy consumers have identified one problem they can work with. On.

“Taking action to tackle global energy supply” — in hindsight clearly a reference to the reserve releases that followed — was one of the few solid points of agreement at last week’s virtual summit between Presidents Joe Biden and Xi Jinping.

Still, it’s an uneasy relationship. Take Khalifa, a port on the oil-rich coasts of the Persian Gulf where the Chinese state-owned company Cosco Shipping has built a $738 million container terminal with the government of Abu Dhabi. US intelligence agencies discovered that China was secretly setting up a military facility in the port and lobbying the UAE to halt construction, the Wall Street Journal reported last week, citing people it did not identify. That would be an extraordinary foray into a region where the US is the only major external military power. (Its allies the UK and France also have small bases in Bahrain and the UAE.)

It’s not hard to see why Beijing would want a safer foothold in the Gulf. The US has been one of the top three oil producers in the world since the 1800s and could be self-sufficient in no time. China, on the other hand, imports nearly three quarters of its oil, about 60% of the total, by sea.

The Beijing regime is existentially dependent on the long supply lines that carry crude oil from the Gulf to the eastern ports — and the security details for that trade are provided by the US Navy. If the two nations ever collide (for example, in a conflict over Taiwan), it would be relatively easy for Washington to block China’s energy supplies in the Strait of Hormuz, Malacca and Singapore. That could bring the entire country – and especially the power source for its war machine – to a halt.

Major power conflicts have long been driven by energy and transportation. The British naval blockade in World War I turned the war in its favor by cutting off Germany from imported nitrate fertilizers, leading to widespread starvation. The Japanese colonization of Manchuria and then Southeast Asia two decades later was intended to replace the previous reliance on American oil. Hitler invaded Russia in part to capture the oil fields of the Caucasus and restore the Wehrmacht’s outdated reliance on horsepower rather than motorized transport.

That best explains Washington’s continued obsessive involvement in the Middle East, a region in which it has few strategic interests relative to the huge sums invested in recent decades.

“The US’s ascendancy in the Gulf is a key element of its status as the dominant global power,” said David Brewster, a senior research fellow at the Australian National University’s National Security College, who focuses on the Indian Ocean. “If it weren’t for the US, the Chinese would be there, and that would destabilize the entire region.”

Understandably, Beijing doesn’t like America’s handshakes in this way — but it’s stuck with it, unless new carbon-free technologies can replace crude oil in both civilian and military uses.

Power imbalance

Key elements of China’s foreign and defense policy over the past decade make the most sense as an effort to redress power inequalities. The Belt and Road Initiative, with its ports in Tanzania, Pakistan, Sri Lanka and Myanmar, gives Beijing a footprint in the Indian Ocean that could one day be reused to make up for the critical shortage of military refueling and supply facilities. China’s only overseas military base, in Djibouti at the gates of the Red Sea, could serve a similar purpose.

Pipelines through Myanmar, a rail line through Malaysia and incentives for rail transport through Central Asia all reduce dependence on the bottlenecks around the Singapore Strait. China’s recent increased anti-piracy activity in the Indian Ocean and aircraft carrier construction all suggest aspirations to become a naval power, able to operate far from its own shores, securing distant sea links essential to its own survival.

It’s a dangerous game. China is unlikely to ever be a competing fleet in the Indian Ocean, Brewster said: “In the event of a major target shooting, it would be immediately cut off from home ports and would be very vulnerable.” Yet attempts by major powers to secure control of rivals’ seas have historically led to conflict as much as they averted them, such as with the Anglo-German arms race before World War I and Japan’s preemptive attack on Pearl. Port.

That is no less the case now. Any incremental shift from the US to China in control of Asia’s crude oil supply lines would alarm Washington’s other oil-dependent allies, Japan, South Korea and Taiwan, as much as it comforts Beijing. India, the world’s third largest importer of crude oil and the natural ruler of the Indian Ocean, may not be able to sit still either.

As much as this uneasy status quo annoys US foreign policy experts who would like to see the nation turn away from the Middle East, alerting their colleagues in China who fear their national security is under the thumb of the Pentagon, for the moment it’s the best we have. Cooperation between the great powers in releasing their strategic petroleum reserves might not change the oil market. However, the alternative to collaboration is much worse.

More stories like this are available at bloomberg.com/opinion

Bloomberg


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