Shanghai, the largest city in the world's biggest energy consumer
Shanghai, the largest city in the world's biggest energy consumer
Yu Huapeng

BEIJING - A new study published by the National Academy of Economic Strategy (NAES) finds a global energy market that is in the midst of major changes. China, in this context, is facing both opportunities and challenges; in particular, there are concerns about China’s energy security brought on by shifts in the sector in North America.

The global energy market is undergoing three major changes. First, the diversification of the oil supply. With huge oil reserves and production growth in North Africa and Latin America and the development of unconventional oil and gas resources in North America, the three global oil-exporting centers will be the Middle East, North America, and Africa. Second, with increasing oil consumption in Asian countries, competition among oil producers from African and Latin American emerging countries will be rife. Third, the development of new energy sources from shale oil, gas and tar sands alters the balance of power between energy-producing countries, so energy trade disputes will intensify.

As the report pointed out, the relationship between North American countries and global energy trade regions has undergone major changes in recent years – in particular in the United States, where dependence on foreign oil and gas has decreased. This has created new issues for China’s energy security. If China and America’s interdependence in strategic trade sectors such as coal, petrol and gas can be increased, it will help the two big powers avoid a comprehensive strategic competition.

“There are mainly two types of friction in the China-U.S. energy relationship. One of them is that when Chinese oil and gas companies try to acquire American companies, they face political obstruction. Another is that America has repeatedly launched anti-dumping and countervailing duty investigations over the wind power and solar photovoltaic power generation equipment exported by China. Since China hasn’t yet acquired market economy status in the World Trade Organization, China is in a disadvantageous position during the trade dispute resolution process,” writes Professor Zha Daojiong of Peking University, one of the authors of the study.

As the world’s biggest energy consumer, China is one of the most interested parties in the global energy market, as Shi Dan, vice-director of the NAES points out. In recent years, China’s dependence on foreign oil has reached nearly 60%, while for natural gas, it’s close to 30%. It has also become the world’s largest net coal importer.

The geopolitics of oil

As China bypasses the United States as the largest energy consumer, it needs to establish good relations with countries in the international energy business while safeguarding its national interests at the same time. As China rapidly expands its foreign energy investments, it must also carefully manage its relationships with the energy producing countries. In addition, China is faced with an unprecedentedly complex international context. Though its international standing has gone up in the global energy market, it is also subject to more challenges and pressures.

The study also noted that Central Asia and Russia, as well as Africa and the Middle East are China’s strategic regions for energy imports. China must have different strategic approaches for each of these regions. In Central Asia and Russia where China’s relations are politically cold and economically hot, things have to change. China must also work to strengthen economic and trade relations with Africa so as to raise the competitiveness of its investments in Africa. And because of the political instability in the Middle East, it has to handle the situation with political and diplomatic wisdom, while dealing as with the multi-lateral relationships between China, the Middle East and the United States.

Meanwhile, changes in the Asia-Pacific region are bringing more uncertainty to China's energy security. With an optimistic economic development perspective in Asia, the region’s energy consumption will continue to grow, especially in the large energy-consuming countries like China and India, as well as Japan and South Korea. Energy import demand may exacerbate regional competition for the energy market.

However, tense relations in the Asia-Pacific region are not conducive to energy cooperation. Territorial disputes, combined with outside influences, deepen the distrust within the region and could be disrupt the for the energy supply, which is sensitive to the political context.

The U.S. sanctions against Iran have also aggravated the problem of energy supply – China and India are Iran's top two oil customers. As China’s third largest source of crude oil, Iran is of strategic importance. Meanwhile, as a consequence of the changes brought on by energy sector reforms after the Fukushima nuclear disaster, China must work to strengthen its energy relationship with Latin America, in order to raise its bargaining ability in the global resource game.

Though Latin America cannot guarantee the security of China's overall energy supply, nevertheless, Chinese oil companies’ participation in the region’s energy market has multiple strategic significances. In addition to the diversification of China’s crude oil imports, it can also enhance economic and trade relations with Latin America as well as affecting the global energy market and thus indirectly increasing China’s chips on the table.

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