China's energy insecurity and Iran's crisis

(Gold9472: Everyone should read this.)

By Kaveh L Afrasiabi

British Prime Minister Tony Blair has gone on record stating that the fear of soaring energy prices should not deter the international community from imposing comprehensive sanctions on Iran over its nuclear program.

That is easier said than done, especially when looking at the dire economic and non-economic consequences of the current Iranian crisis for China, Iran's energy partner.

In fact, the China-Iran connection transcends energy and covers a whole spectrum of economic activities - dam-building, steel mills,

ship-building, transport and dozens of other projects. At present, more than 100 Chinese firms are involved in Iran, also cooperating to develop ports, jetties, airports in six cities, mine-development projects and, of course, oil and gas. Trade between the two countries in 2005 hit a new record of US$9.5 billion, compared with $7.5 billion in 2004.

The world's media are nowadays awash with news of China's energy dependency on Iran weighing heavy on its policy considerations in light of the possible showdown at the United Nations Security Council next month over Iran's nuclear program and suspicions that it might want to develop a nuclear weapon - something Tehran vigorously denies.

China currently gets 13.6% of its oil imports from Iran. Beijing is also in the process of importing Iranian natural gas. China's plan is to become a comprehensive participant in exploration, drilling, petrochemicals, pipelines and other upstream and downstream services related to Iran's oil and gas industries (see China rocks the geopolitical boat, November 6, 2004).

As the Organization of Petroleum Exporting Countries' second-largest oil supplier, with a unique location straddling two main energy hubs, the Caspian Sea and the Persian Gulf, invoking the notion of an "energy Silk Road" to China, Iran is a natural partner for China and its booming economy's increasing appetite for foreign oil. China's total energy consumption in 2004 was about 2.3 times that in 1980.

China's plans with Iran are both short-term and long-term; the latter includes a plan to secure a 386-kilometer pipeline connecting Iranian oil with another pipeline from Kazakhstan to China.

China's demand for a stable Iranian - and Persian Gulf - supply of oil and gas is critical for its rapidly growing economy. As the world's second-largest oil consumer in the world after the United States, China has been a net oil importer since 2003; its dependence on foreign oil reached 40% in 2004. According to the Energy Information Agency, China alone accounted for one-third of global oil-demand growth during the period 2001-04. Still, its total oil imports accounted only for 6.6% of the total global oil trade in 2004.

According to experts, China's growing hunger for oil has been driven mainly by three factors: the increasing demand for personal mobility and good transport; a growing chemical industry that relies on petroleum products as feedstock; and using diesel-fired power generators as short-term solutions to provide needed electricity on-site when there is a national or regional electricity shortage.

In the United States, there is considerable concern over a future US-China collision over energy. Last December, Joseph Lieberman, a high-ranking Democratic senator, raised the specter of military conflict between the two countries by stating: "We are heading towards two-thirds [reliance of] each country on ... foreign oil. Let's recognize this problem before it becomes an intense competition which can actually lead to military conflict."

Last year, because of strong objections by the US Congress, China's $18 billion bid for a share of the US energy pie, that is, its quest to procure Unocal, the ninth-largest US oil company, was frustrated. That episode has brought into sharp focus the potential zero-sum energy game between the US and China.

What worries China in this game is its heavy reliance on foreign intermediaries to transport most of its oil from the Middle East (where China obtained 45% of its imported oil in 2004) and Africa (which contributed to 29% of China's oil imports) to its ports, and its lack of navy capacity to protect oil cargoes on the high sea and patrol the Malacca Strait, through which four-fifths of its oil imports pass.

To compensate for its sources of energy security, China has engaged in a spirited energy diversification, production-sharing and other creative oil contracts around the world, as well as beefing up its military power projections by, among other things, developing Gwadar Port in Pakistan's Balochistan province at the mouth of the Persian Gulf, some 400km from the Strait of Hormuz, at the estimated cost of $1.16 billion.

Moreover, recently China consented to Iran's accession to the Shanghai Cooperation Organization as an observer, thus adding to the geostrategic dimension of its energy-led cooperation with Iran. Simultaneously, China's cooperation with other Persian Gulf countries - Kuwait, Qatar, the United Arab Emirates and Saudi Arabia - has increased dramatically recently. According to one China watcher penning in a recent issue of the Washington Quarterly, increased China-Saudi cooperation could translate into a weakening of the oil kingdom's US dependency.

Conspicuously absent in the various commentaries on China and the Middle East is any serious consideration of what is actually loudly talked about in Tehran these days, that is, China's potential to contribute to regional security arrangements.

Implications of the nuclear crisis for China
Given China's veto power in the Security Council, it has a major determining role in influencing the shape and outcome of the international "proto-crisis" over Iran's nuclear program.

China's decision to vote against Iran at the UN's International Atomic Energy Agency (IAEA) meeting this month - resulting in Iran's referral to the Security Council - did not come as a big surprise to Tehran, since for more than two years top Chinese officials have been visiting Iran and in no unmistakable tone conveying the message that China would not sacrifice its huge trade interests with the West, the US in particular, over Iran.

Branding itself as a "force for peace", China has been working overtime to prevent the situation from deteriorating to the point of UN sanctions threatening the wellspring of its imported energy.

In the light of Iran's rejection of the IAEA move and threats of punitive UN measures against it, China must calculate the various unhappy scenarios involving serious disruption in the Iranian oil supply, not to mention the lesser threat of a more comprehensive disruption in oil flows from the Persian Gulf as a whole in a military scenario. It must factor those risks into its present options of how to behave at the Security Council when the matter arises next month, after the IAEA has presented its latest report on Iran to the UN.

Even a medium-intensity crisis recycling the present danger of escalation is harmful to China's economic interests and investments in Iran and the Persian Gulf, as it translates into higher energy prices and costlier premiums on insurance for oil and gas shipments to China. Fearing diplomatic isolation and a backlash should it exercise its veto in the face of a seemingly global consensus on the threats of Iranian nuclear proliferation, China might be willing to abstain at the Security Council, but likely as a result of a substantive quid pro quo with the US and Europe.

In turn, this raises the important question of what the US and Europe can put on the table that would possibly appease China. Certainly not much on the energy front, at least not directly. Indirectly, however, the US could push for Chinese participation in Iraqi oil or, similarly, a more meaningful China-Saudi cooperation. Yet it is doubtful that China would be content with such initiatives in the light of continuing instability in Iraq impeding its oil industry and the United States' own weariness of undue Chinese closeness to Saudi Arabia.

Hence the US might turn to alternative trade incentives, perhaps even an India-style promise of civil nuclear cooperation, since China is keen on a major push with several new nuclear reactors. But the nub of the problem is that with every move or initiative there are certain flip-sides that may, in fact, trump the original purpose - for example, how the India-US nuclear agreement has been sold in the US Congress as a sop toward deterring China. A similar deal with China for the sake of garnering its vote against Iran only complicates the United States' Asian and subcontinent strategy.

Nor should we be oblivious to the negative ramification on US-Russia relations, given that the old power competition between Moscow and Beijing has not altogether disappeared, irrespective of their recent joint military exercises and other contacts.

Clearly, the US can sweeten the pot with several related concessions, such as selling state-of-the-art coal-gasification material to China, leaning on Europe to ease some of its restrictions on China trade. But again, the million-dollar question is whether or not the sum of such incentives suffices to bring China on board for sanctions on Iran.

Perhaps not, which is why US policy has quickly veered in the military direction, as a timely prop in its current bargaining with China and Russia over Iran, the assumption being that these two Iran allies will go for sanctions as a lesser evil compared to outright military confrontation.

To their credit, both Moscow and Beijing have recognized the perils to their interests by the United States' scripted strategy against Iran, simultaneously warning the US not to threaten Iran. After all, Iran is not the poor, and strategically unimportant, former Yugoslavia, and the stakes are too high to let the US impose its will unilaterally.

Nonetheless, the United States' drive to deprive Iran of nuclear-weapons potential is not easily reversible and, henceforth, China's policymakers must include in their calculations the worst-case scenario imperiling their energy ties to Iran (at least for a while).

Since China has scanty strategic oil reserves of about 30 days, the "nightmare scenario" itself is a powerful motivating force for China to play crisis-prevention, and yet, since it has limited influence on Iran and the other players in this dangerous crisis, it must also consider the option of sacrificing some of its shared interests with the US for the sake of safeguarding its cherished energy stakes in the Middle East.

The latter form important facets of China's long-term ambitions as a global superpower. The real danger of deflating those ambitions by a deft US policy that would deny China one of its most important regional allies is unmistakable.

Kaveh L Afrasiabi, PhD, is the author of After Khomeini: New Directions in Iran's Foreign Policy (Westview Press) and co-author of "Negotiating Iran's Nuclear Populism", The Brown Journal of World Affairs, Volume XII, Issue 2, Summer 2005, with Mustafa Kibaroglu.