China and Oil

Interfax (the Russian news agency) offers up an interesting analysis by David Stanway here :

It is well-known that China's thirst for oil is increasing rapidly. What is often overlooked is that China is itself quite a significant oil producing nation, and for a long period domestic output was enough, with the Daqing oilfield pumping 50 mln tons out per year. By 1993, however, economic growth had stretched domestic capacity to its limits, and China became a net importer for the first time in its history.

Since then, economic growth has continued at a rapid rate, and the volume of imports has increased relentlessly. Efforts to boost production, particularly in the relatively new oil fields of Xinjiang in China's far west, have not kept up with the rise in demand.

Output was up to 175 mln tons in 2004, a meager rise of 2.9%. Consumption, however, was up 16.8% to 288 mln tons. The import volume of 115 mln tons was another new record, and placed China behind only the United States in the list of top crude importers, overtaking Japan...

...China is still heavily reliant on the Middle East, with three fifths of its imports coming from the region - and through the Malacca Strait. Saudi Arabia and Oman are the biggest sources.

There is, furthermore, a so-called "Asian premium" of up to USD 2 per barrel for oil shipped from the Middle East to the Far East, which is a significant increase in costs. This is something that Japan has put a lot of thought into as well. Japan has been suggesting joint regional efforts to try to remove the tariff.

China wants to boost the proportion of oil imported from Russia, and the volume is set to increase even though the plan to construct a pipeline from Siberia to Daqing has suffered a setback. A number of deals have been signed to boost the amount of oil coming in by rail and by truck across the border. Kazakhstan is also expected to lift its imports to China by a significant proportion in a few years.

Transportation problems are significant. All China's oil shipments from the Middle East must pass through the narrow Malacca Strait, a hotbed of pirates and - some fear - a potential target of terrorist attacks...

China's foreign policy is almost completely dominated by these energy concerns. Liu Jianchao, the Foreign Affairs Ministry spokesman, last year said that energy was the single most important issue for China on the world stage.

It's a complicated problem for China and for its competitors for oil supplies.

Update: Simon has a number of links to several interesting China energy posts like this and this. And a link to this post taking on the Bill Gertz heavy breathing on China's "up arming." All food for thought and all provide some different perspectives on things.