The Struggle over Oil

China and India are currently the engines of world economic growth. But India is still a minor part in the worldwide competition for scarce resources. China has become the world's second-largest importer of oil after the United States. It is building new cities and a network of superhighways, both of which are only deepening its appetite for oil, steel and other industrial materials. The rise in price for oil, which recently crossed $60 per barrel, has profound implications for Indian industry, since it continues to operate in conditions of chronic energy shortage.

In its ongoing strategic rivalry with the United States, China holds a trump card -- its nearly 800 billion dollars in foreign exchange reserves. Until now Beijing has been content to buy low-paying US government bonds, indirectly financing America's huge trade and budget deficits.

According to one view, there is a domestic imperative behind this policy. The Communist Party hopes to gain legitimacy in the eyes of its citizens that it lost after the Tiananmen massacre 16 years ago by appealing to nationalism by reclaiming Taiwan. By integrating its economy to that of the West, it makes itself immune to Western sanctions should it take over Taiwan by force.

In reality, China and America are already dependent on each other. Much of American manufacturing has relocated to China to take advantage of low wages. China cannot let its currency appreciate against the dollar, because then its products will be too expensive for Americans to buy, which would result in the closing of its factories, and social unrest and unemployment.

A new phase

The contest between China and the US has now entered a new phase. Beijing has moved beyond holding US government bonds to the purchase of American companies. Last year Chinese computer maker Lenovo bought IBM's PC operations for $1.7 billion.

More recently, fridge and washing machine maker Haier bid $1.28 billion for US domestic appliance group Maytag, and the China National Offshore Oil Corporation (CNOOC), which is 70 percent owned by the Chinese government, offered $18.5 billion in cash for the American oil company Unocal.

The bid by CNOOC is raising objections in the US on national security grounds. Unocal has global reach and its control would make China a formidable player in the new energy 'great game.' Beijing is pursuing several other initiatives to secure oil and gas that will bypass American or European companies before reaching China. This includes negotiating with Russia for a pipeline to bring Siberian crude to Daqing, China's northeastern oil hub.

As its economic power increases, China's foreign relations are being transformed by its energy imperative. Beijing is entering into deals with countries around the world to diversify its economic and trade relations. It has already become the second largest world economy as seen from the figures for GDP from the 2004 CIA World Factbook:

Chinese GDP is two-thirds of that of the US and the gap is shrinking rapidly because of its much higher growth rate. Chinese analysts are arguing that the US should approve the Unocal deal so that China becomes America's partner in the management of global energy resources. Some analysts have warned that if this approval doesn't come through, China will be forced to expand its business with 'rogue states' such as Iran, Sudan, and Myanmar.

China's recent tensions with Japan, South Korea, and other neighbours are energy related, regarding control of disputed islands in the Pacific with potential oil deposits. These tensions would worsen as oil prices go up.

The great game in Southern Asia

India's own attempt to ensure energy supplies with a gas pipeline from Iran has met with opposition from the United States on the grounds that it would strengthen Iran's economy. The victory of the anti-American nuclear-hardliner Mahmud Ahmadinejad as the country's next president is only going to make that opposition stronger.

Ahmadinejad has won massive backing from Iran's rural poor, who want a continuation of handouts based on oil and natural gas revenue, which run to about a fifth of the per-capita GDP. As Iran's economy continues to flounder, it will come under increasing pressure from the West to renounce its quest for nuclear weapons in exchange for technology. It is not clear that the radical mullahs who run Iran will listen.

Afghanistan is partially pacified; it remains to be seen whether the old plans of Unocal to build a pipeline from Central Asia to the Arabian see through Afghanistan and Pakistan will be revived. Unocal promoted the pipeline in the 1990s through its intermediary Zalmay Khalilzad, who has since served as American ambassador to Afghanistan and now to Iraq. If the Iranian pipeline to India is not built, then this may be substituted by a Central Asian pipeline through Afghanistan.

If China's bid for Unocal is approved by the United States, the 'great game' for energy will become more tangled. Already China has signed a $70 billion deal to buy Iranian oil and natural gas. It has also blocked American efforts to raise the issue of Iran's nuclear weapons program before the United Nations Security Council.

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