China's Congress Calls for National Oil Reserve

At the National People's Congress meeting this week in Beijing, Chinese
legislators discussed the need to build up a strategic oil reserve. The head
of one of China's state-run oil firms presented the proposal, citing crude
oil reserves as a necessary economic safeguard against fluctuations in world
oil prices, reported Xinhua.

The Chinese government has been a net oil importer since 1995 and is
anticipating an increased dependence on foreign oil. But the threat of an
erratic market is not the only reason for establishing strategic oil
reserves. The Chinese have another driving concern: the potential for
enemies to obstruct the flow of oil to the country. The urgency with which
China is seeking to resolve its energy crunch suggests that Beijing may be
anticipating a day when its agenda ­ for example, reunification with Taiwan
­ clashes with those of other international players.

China understands that it cannot remain completely self-reliant. Although
coal satisfies approximately 75 percent of its energy needs, oil demands
have outpaced domestic supply and will continue to grow approximately 4
percent to 5 percent per year through 2015, according to the U.S. Department
of Energy. Meanwhile, the country's largest domestic oil source, the Daqing
field, is mature and expected to decline in production. While offshore oil
sources remain promising, the grand expectations of Xinjiang production have
failed to pan out.

China's lack of strategic crude oil reserves could threaten its national
interests. Having reunited with Hong Kong and Macao, China now appears ready
to focus its attention on Taiwan. Taiwan elections are approaching, and
China is once again beating the war drums to reunify with Taiwan. But this
year, the Chinese People's Liberation Army took its rhetoric a step further
by setting an ambitious seven-year timetable for reunification. Until
Beijing has a secured reserve, countries that want to prevent an invasion
could deny China its access to oil.

Given China's ambitious, energy-intensive plans for military and naval
expansion, the country must expand its resources extensively. Although many
industries run on coal and hydropower, the machines of war ­ tanks, planes,
trucks and ships ­ cannot. Creating the reserve will be no small task. At
today's oil prices, a 90-day reserve to satisfy China's current demand of 4
million barrels per day would cost more than $10 billion ­ about the same
amount as its official defense expenditure for 2000.

But building up an oil stockpile scratches only the surface of the country's
strategy. Beijing must also develop reliable sources of foreign oil. Some of
the momentum behind the emerging strategic alliance with Russia derives from
China's oil needs. By carving out a solid diplomatic relationship with a
country that can supply oil over land, China helps ensure that its resources
won't be jeopardized by conflicting interest.

Currently, plans exist for several oil and natural gas pipelines. Two oil
pipelines are under consideration, one originating in Russia and the other
in Kazakstan. They would begin construction within the next five years and
would each supply about half a million barrels per day ­ not enough to keep
up with the projected demand.

Beijing will probably have to resort to importing oil by sea, where the
potential for interference makes the supply far more vulnerable. Already,
there are plans to import natural gas from a port in Shenzhen, on China's
southeastern coast. China's green-water naval development will become
increasingly crucial as the country shifts toward reliance on the sealanes
to supply its energy needs.

Without a stable oil supply, China cannot sufficiently expand its forces to
achieve its strategic goals. Yet, expanding its forces ­ in particular, its
navy ­ is critical to creating that stable supply. Until China can better
control the seas, it will concentrate on land sources of oil; partnerships
with oil-producing nations like Russia will become essential. As China's oil
needs increase, it must take on a far more assertive regional role ­ or at
least, as assertive a role as it can afford.

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