Energy as China’s Achilles Heel?

Chas W. Freeman, Jr. (Ambassador, USFS, Ret.)

US Naval War College, Newport, RI December 7, 2006

This is a conference about the security of China’s energy supplies. I assume the point is that, in some circumstances, we’re against it, that is, against energy security for the Chinese. Presumably, in those same circumstances, the Chinese might be against such security for us. So one crucial question is, who would have the advantage in such a contest?

It would be fairly easy for the US Navy to interdict Chinese seaborne oil imports. These come mainly through the Straits of Malacca and Lombok, and Macassar in Indonesia, which we have the capacity to seal off to tankers bound for China. The People’s Liberation Army’s Navy has not developed any capability to defend these trade routes against lesser navies, still less ours. The US Navy could also fairly easily blockade Chinese ports. So there’s little question that we could cut China off from seaborne energy supplies.

China is worried about these vulnerabilities and is attempting to address them. More on that later. But, for now, let’s stick to the theme of possible confrontation over energy trade. Yesterday’s panels were, by and large, outstanding. Bear with me, please, if I go over the same ground, but with a different focus.

Americans are pretty much in denial about the fact that we now import about 12 million barrels of oil per day (bpd) or almost 70% of our oil consumption. China imports only 3.8 million bpd or somewhat less than half of its requirements, and brings in proportionately more than we do overland. To put this in perspective, China is only a bit more dependent on imported as opposed to home-produced oil than the United States was at the time of the 1973 Arab oil embargo. But oil plays a much less important role in the Chinese energy economy than it did in ours even back then. Today imported oil accounts for only about 1/3 as much of the overall Chinese energy diet as it does of ours. The Chinese may now be recapitulating our history by developing an addiction to imported oil and gas, but the fact remains that you have to go back to long-forgotten bygone days to find a period when the United States was as little dependent on imported oil as the Chinese now are for their overall energy supply.

My point is a simple one. Mirror-imaging is always a potential problem for analysis; it is a potentially fatal problem for analysis of energy dependence. In the US, “energy” means oil and gas, mainly imported oil and, increasingly, imported gas. In China, it does not. An interruption of oil imports would now be catastrophic for the American economy; it would be damaging but still far short of fatal for the Chinese.

So could the Chinese take retaliatory action to disrupt US energy imports if we sought to interfere with theirs? I don’t propose to do their targeting – conventional or unconventional – for them. Suffice it to remind everyone here that the last time the US Navy did serious convoying of oil tankers was when the United States was the world’s largest exporter of petroleum, not its biggest importer. Things are different now than in the glory days chronicled in “Victory at Sea,” and China isn’t Imperial Japan. US imports now account for almost 27% of the world’s oil trade. (Japan’s imports, on which it is totally dependent, are another 10%.) China accounts for less than 6%. The security stakes are very much higher for the United States than they are for China.

Our navy can destroy the oil trade of others. Can it protect our own? Is it in our interest to put ourselves in a position where we must attempt to do so? Are the ships we’re building suited to this task? Should we risk setting up a situation in which they have to be? Does it matter that RPG’s in zodiacs or dhows, junks, or outrigger canoes can now take down supertankers?

One can make one’s own judgment about the vulnerability of tankers transiting Hormuz, Malacca, Lombok-Macassar, the Panama and Suez canals, or the Cape of Good Hope. You can bet that Lloyd’s of London and the rest of the insurance industry will do so the minute there’s a whiff of a real problem. They can be counted upon to boost insurance and thus shipping costs through the roof, greatly increasing the cost of oil and gas to everyone, if anyone, no matter how righteous, starts blowing up LNG carriers or sinking oil tankers, wherever they’re bound.

Then again the US increasingly depends on imports of product, not just crude. Our domestic refining capacity is both limited and highly concentrated. If an unaimed blow from Hurricane Katrina could knock out 10 percent of it, what might a foreign enemy determined to engage in tit-for-tat through sabotage be able to do in time of war?

Fortunately, the only conceivable casus belli for a major Sino-American conflict is the unresolved issue of Taiwan’s relationship to the rest of China and the danger of a Taiwan conflict is rapidly receding. It is worth noting, however, that, with the possible exception of Japan, the United States would have no overt allies were one to break out. Even the Australians, who have been with us in every war for the past hundred years, would sit out a war over Taiwan. In such a war, our allies would be neutrals with no inclination or obligation to suspend their trade with China.

It is not irrelevant in this connection that China is developing a wide array of foreign energy supply arrangements. A very few of these are with countries, like Iran and Sudan, from which we have chosen not to import oil and gas, but most are with countries like Angola, Nigeria, Saudi Arabia, and Venezuela – oil exporters on which we ourselves are heavily dependent. It is entirely possible that these countries might take efforts by us to disrupt their trade with China amiss – and react by cutting off their sales to us. Finally, in arrangements that are likely in time to be replicated with others, China has reportedly agreed with Saudi Arabia to allow the Kingdom to own and operate part of China’s strategic petroleum reserve. An attack on such foreign owned and operated facilities would be an act of war against their owners as well as China. Such an attack could impose much more consequential collateral damage on the attacker than on China.

Well, you get my point. Here we are in Rhode Island, my native state – an international byword for patriotic parades and organized crime, to which I come home when I wish to feel slender and listen to English as it should be spoken. Any Rhode Islander will tell you that people who can’t get along without storing a lot of gasoline in the garage should think twice about taking up arson as a hobby – especially in Mafia neighborhoods – or, for that matter, where there are unfriendly guys from Shanghai.

It appears the Chinese agree. Rather than treating energy security as a primarily military problem, they seem to be approaching it as a complex set of issues in which the military dimension is only one component and perhaps, at that, the least salient.

Chinese concern about energy policy disarray and dissatisfaction with the level of coordination between policies affecting domestic and foreign sources of energy have finally combined to produce a consensus on the need to create a ministry of energy for China. A less solid consensus supports the creation of a national security council to coordinate various aspects of Chinese foreign relations. Both are likely to come into being when a new government is formed next spring.

Meanwhile, despite occasional lofty talk about energy independence and the undeniable existence of a US Department of Energy, America still has no coherent programs to promote energy company research into synthetic and renewable energy resources, to funnel investment into new energy capacity and infrastructure, or to curb the growth in our dependency on imports of oil and gas. Even without an energy ministry, China has made solid progress at doing all three.

The Chinese emphasis on coal, coal conversion, hydro, solar, wind, biomass, nuclear power, and natural gas from Central Asia and Siberia is directed in part at holding down seaborne oil and gas imports. Chinese emphasis on oil sand development in Canada, which is second only to Saudi Arabia in reserves of this so-far unexploited energy source, represents yet another significant effort at diversification. China has and plans to have a much more diversified energy menu than the United States, with much heavier reliance both on coal and on renewable sources of energy as well, crucially, as restriction of oil and other liquid fuels to the transportation sector.

Oil and gas are in some senses indistinguishable for purposes of energy security. Both move to market by ship or pipeline. Natural gas is now increasingly transported by sea in liquified form. Chinese imports of LNG have just begun, but both the US and China are rapidly increasing or planning to increase seaborne imports of LNG from producers like Qatar, Australia, Indonesia, and -- in the case of China -- Iran. China is building an expensive pipeline to Turkmenistan to supplement pipelines to gas fields in Russian Siberia, in part as a hedge against sole dependence on maritime trade in gas. China is also increasing its strategic storage capacity. It now has only about 30 days of oil reserves in storage, but, given the recent drop in oil prices, it has begun to fill oil storage facilities that it had kept empty when prices were high.

Even more than the United States, China also has the potential to save a lot of energy. Doing so is a key part of its strategy for achieving energy security. Despite China’s very low rates of per capita energy consumption (which are only about 14% of US per capita consumption), China consumes between 7 and 11 ½ times more energy than Japan to produce one dollar of GDP and it’s about 4 ½ times less efficient than we are. If China has farther to go in energy efficiency, this also makes it much easier for it to conserve and thereby curb growth in demand for imported oil and gas – all the more so because Chinese consumers have not yet become accustomed to the high levels of energy consumption we take for granted.

The current Chinese government seems belatedly to have found both the vision and the will to do serious demand management, something our politics will not allow us to do. China’s mainly market-driven efforts to boost the efficiency of its currently energy-wasteful economy are now producing rapid increases in energy efficiency. The Chinese aim to cut energy consumption per unit of GDP by about 4 percent annually in coming years, with special attention to oil and gas consumption. Still, even if China’s imports of both grow much more slowly than its economy, they will inevitably go up pretty fast, given the speed of the country’s economic growth.

So, even if the mainstays of Chinese energy policy are diversification, innovation, conservation, and constraints on the role of oil and gas in the Chinese economy, China has to be concerned about the vulnerability of oil and gas imports to disruption whether by natural or manmade events. So far, China appears to be continuing to rely primarily on political and economic measures rather than focusing on the Chinese navy to address this issue. China’s cultivation of cordial ties with Africa, where it is now the largest foreign investor, is a case in point, well illustrated by the recent Sino-African summit in Beijing. China’s willingness to subordinate other priorities to the consolidation of energy-purchase relationships with sometimes difficult partners abroad also testifies to this. So too does China’s stress on drawing foreign suppliers into the ownership and operation of refineries on its territory so as to consolidate their dependence on the China market and give them an incentive to continue to supply it even in times of adversity.

On the military side, for now, at least, China – like everyone else – seems prepared, if not content, to allow the US Navy and its sister armed services to continue unselfishly to bear the burden of protecting the world’s energy supplies and ensuring freedom of navigation for the benefit of energy producers and consumers around the world. One of our most lovable characteristics as Americans has been our apparent willingness to bear any burden and pay any price to preserve our freedom to gas-guzzle and to guarantee foreigners the right to join us in this most sacred of all liberties. In the long term, however, it is difficult to believe either that the United States will be willing to continue to provide such a free ride to allies, friends, and competitors alike, or that China will not wish to develop an independent capacity to secure its overseas energy sources and trade routes. Energy security is a subject we should be discussing with the Chinese.

The fact is that China does not trust US maritime policy. US innovations like the Proliferation Security Initiative (PSI) appear to project a disdain for both sovereignty and traditional principles of international law that the Chinese are not alone in seeing as both ominous and potentially destabilizing. If international law is no protection, countries like China will have to pack a pistol when they venture abroad. In the absence of mutual trust, proposed anti-piracy patrols in the Straits of Malacca, desirable as they may be, also excite Chinese concerns. They, like the littoral states, wonder whether these patrols are really intended to defend the global commons or to gain de facto control over their energy jugular.

The nearly two decade-long absence of friendly interaction between the US and Chinese navies, except intermittently at relatively high levels, often in connection with ship visits, has fed mutual suspicion. If this gap in our international relations is not corrected, it will nurture Chinese concern over the implications of continuing to rely on the US Navy for the defense of China’s energy trade and the security of its choke points. It will add to Chinese reluctance to contemplate cooperation and burden-sharing with the US in support of freedom of navigation and the security of the world’s energy trade. This, in turn, will increase the incentives for China to acquire independent naval power projection capabilities with which to defend its supply lines on its own. Thus, despite clear common interests, the lack of present cooperation between the US Navy and its Chinese counterpart undermines the prospects for future cooperation and the absence of interaction increases the possibility of future contention.

Such contention could be very damaging to both countries but, mainly, as I have argued, to the United States. For the foreseeable future, it will be our market that is most dependent on imports, not China’s, though China’s dependency will grow. Despite popular perceptions, it is also still our market, not China’s, that more than any other drives energy prices, though China’s impact on prices will be ever greater in future. Meanwhile, price rises or supply disruptions affect us more than China and will continue to do so for the foreseeable future.

As the two largest consumers of energy, the United States and China have many problems in common. We could gain a lot by working together rather than at cross purposes.

A strategy aimed at working with China to boost mutual as well as global energy security would have several elements. It would integrate China as rapidly as possible into the G-7 global economic management system. It would bring China into the International Energy Agency (IEA) -coordinated strategic petroleum reserve system and demand Chinese contributions to the mitigation of energy emergencies rather than, as at present, allowing China to have a free ride on other nations’ oil stockpiles, including our own. It would encourage, not seek to exclude, Chinese access to Central Asian and Russian oil and gas fields for which China is the most economic market, thereby reducing pressure on China to compete with the US for supplies that are more advantageously located in relation to our market. It would work with China on ways of increasing the use of domestic energy sources, e.g., using coal in environmentally friendly ways or develop renewable energy resources that could obviate the need for China to import ever more oil and gas. And, most relevantly to the US Navy, it would seek patiently to enlist China along with other energy consumers in support of freedom of navigation, anti-piracy patrols, and protection of strategic lines of communication.

Would the Chinese be willing to work with the United States in this way? Would the Chinese People’s Liberation Army Navy be willing to cooperate with the United States Navy or work out a division of labor with us in support of our navy’s mission of safeguarding the global energy commons? I think the answers to these questions are almost certainly “yes,” though we will never know unless we ask. Will we ask? China is such a useful cure for our post-Cold War case of enemy deprivation syndrome and it provides such a convenient rationale for building more nuclear submarines that, no doubt, some in our country will not want to ask. But I think that, in our own interest, we should.

To conclude: China is worried about its rising dependence on energy imports, but it has a lot less reason to be worried than we do. Signaling an intention to threaten Chinese energy security could have lots of adverse consequences for us, and it’s hard to find many benefits. We would almost certainly be better off recognizing that, as the world’s two largest consumers of energy, the United States and China have common interests that should draw us together rather than pull us apart. And if we can find a way of working with the Chinese in the energy arena, rather than against them, we’ll almost certainly both be better off.