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Page added on March 31, 2005

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China’s demand for oil causes worries worldwide

Sun Herald News

BEIJING – (KRT) – What is China’s greatest economic challenge?

“Energy supply. Especially oil supply,” said Huang Fanzhang, vice chairman of the China Reform Forum.

Huang is a respected Chinese economist who writes reform proposals for the People’s Congress. We’d talked of many problems, but he chose oil as the most critical.

Today there are 10 million cars on China’s streets and freeways. In 15 years, there will be 120 million.

China’s oil consumption hit 5.8 million barrels a day last year. China moved up to second rank among oil consumers behind only the oil-thirsty United States, at 20 million barrels a day.

China imports 2.75 million barrels a day (modest by U.S. appetites). But with 120 million cars in its future, China’s oil companies are scouring the world to find oil and natural gas deals that aren’t locked up.

One approach would be to buy the reserves of other companies. Chinese takeover rumors have swirled around Unocal Co. and Canada’s Husky Energy Inc.

At the moment, it is the competition for reserves in other nations that has many people worried. Including Huang.

Worriers in America look at China’s oil deals in Iran and think China will offer it diplomatic protection at the U.N. Security Council if Iran’s nuclear program draws a threat of worldwide economic sanctions. China’s Foreign Ministry spokesman Liu Jianchao has called this “insulting.”

Venezuela’s President Hugo Chavez is loudly declaring his intention to shift away from his main oil customer, the United States, and has met repeatedly with top Chinese officials.

China’s refineries aren’t yet able to handle Venezuela’s thicker oil. They need the lighter types of crude oil produced in the Middle East, West Africa and Russia.

China’s top foreign oil suppliers now are Angola, Saudi Arabia, Oman, Iran, Russia and Sudan. About 60 percent of its imports come from the Middle East by tanker. The vessels have to sail through the waters of Southeast Asia on their way to China, which makes Chinese planners nervous.

“They’re pretty uncomfortable with oil on boats moving through the Straits of Malacca, under the gaze of the U.S. Navy,” said a Western diplomat who spoke on condition of anonymity.

Worriers in Asia fear China’s territorial claims to islands and undersea petroleum resources also claimed by Japan, Taiwan and other countries.

Worriers in Beijing look at a bidding war they recently lost with Japan for Russian oil. Japan has offered billions of dollars in financing to build a pipeline across eastern Siberia that would terminate near the Pacific port of Vladivostok. China wanted the pipeline to cross its oil-producing northeast, where it could feed a chain of refineries, before reaching the sea at a Chinese port.

In December, when the Chinese provided more than $6 billion used by the Russians to finance the auction seizure of the major piece of Yukos Oil Company, it looked like the pipeline terminal might be in play again. The Chinese government said the money was for future oil deliveries, but it helped the Russian government steer the auction away from U.S. bankruptcy court threats aimed at any European financiers that supported the sale a favor the Russians are likely to remember.

The Chinese government has set a priority on energy efficiency in its future economic growth plans. China uses far more energy for each dollar of economic output than other countries – 2.4 times as much as the world average, and 8.7 times as much as Japan.

But China will need more oil in a world where there are limited supplies.

“We have to expand our production through more and more exploration, and we have to buy more oil from abroad,” said Huang. “A better way for China to buy this oil is through cooperation with other consuming countries instead of competition.”

Huang hopes Japan and China could jointly finance the Russian pipeline, and that other deals in the Far East tie countries together instead of leaving them snarling in a bidding war.

Russian gas from Sakhalin Island, for example, could supply China, Japan and South Korea. In the future, even North Korea could be added.

“These deals may be good, not just for China, but also for Asia and even world peace,” Huang said.

© 2005, The Dallas Morning News.

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Distributed by Knight Ridder/Tribune Information Services.

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