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Over a barrel
Energy-starved China is doing what you would expect: becoming a global oil power.
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Some of the hottest questions in world oil today are not about the Middle East but about China. How big will its impact be on the market? Does its drive for energy supplies portend something more than intensified commercial rivalry—a geopolitical clash that would pit the U.S. against the country that not only stocks the shelves of Wal-Mart but also happens to be the second-largest holder of U.S. government debt?

The global oil industry was not prepared for last year's supercharged increase in demand. Global economic growth of 5% propelled a surge in world oil usage of 2.5 million barrels a day, more than double the average annual growth between 1994 and 2003. Part of that growth—about 500,000 barrels a day—was in the U.S., most at the gasoline pump. But 930,000 barrels, nearly 40% of the rise in global oil demand, came from China. And it's not just cars. Oil is China's quick fix for generating electric power in the face of coal shortages and blackouts.

China is in shock from becoming so dependent on the world oil market so fast. A dozen years ago it was self-sufficient in oil; now it is the world's third-largest oil importer. This year China may import half its oil. That's why the country's leadership, worried that energy shortages could threaten economic growth, adopted its "go-out strategy." Its three major oil companies have been working overtime to make themselves players in world oil, willing to pay top dollar to get into the game—from Angola to Australia.

Better that China seek to solve its problem through the same global trading system that is making it an economic power than by flexing its military might. But there are some in the West who worry that the reach of its oil companies will help China carve out political spheres of influence. And there are some strategists in China who, for their part, speculate that the day will come when some conflict leads the U.S. Navy to interdict oil shipments to China.

For the most part China is behaving the way any country starved for oil would, especially one with a well-established domestic oil industry. China is participating in partnerships, acquiring reserves, contracting for future supplies of liquefied natural gas, selling oilfield services, developing projects around the world, and buying lots of oil. It's a good bet that when a Chinese oil company enters Iraq, it will be in partnership with one or more Western companies.

But interests can collide when oil gets caught up in foreign-policy issues. China's quest for oil has taken it to some countries where American oil companies can't go: Sudan, for instance, where China is the largest oil producer. Or Iran, where China has agreed on a $70 billion gas deal. Companies from other countries also have Iranian deals. But China has a veto in the UN Security Council, where the issue of Iran's nuclear program could well end up over the next year.

Geopolitics looms large in China's own neighborhood. Kazakhstan has welcomed Chinese investment as a way to offset Russian influence. The wrangle over a proposed pipeline for Siberian oil to Asia is not just a commercial matter—it reflects all the rivalries and suspicions among China, Russia, and Japan. Even more explicit is the collision between China and Japan over Chinese drilling for natural gas in disputed waters of the East China Sea.

But the greater part of China's oil, by far, will come under commercial frameworks. One of the things that will help the process is the nature of the Chinese oil companies themselves. Two of them—CNPC/PetroChina, and Sinopec—were carved out of the oil ministry. The third, CNOOC, was created to be a partner of Western companies in offshore oil development. These companies are partly state-owned and certainly responsive to the interests of the Chinese government about energy security. But they have all done IPOs over the past few years and are also responsive to the requirements of institutional investors looking for profitability. Walk into their headquarters and you won't see exhorting slogans but signs flashing the latest share price on the New York Stock Exchange.

These companies are trying to move fast in the world market, but they're still new at the game, still trying to figure out how to be competitive. So far, one set of beneficiaries from their progress has been Western investors, who have found them a good way to play both energy and the Chinese economy.

It's certainly in the interests of China and the U.S. to ensure that commercial competition doesn't get ensnared in larger rivalries or conflicts. The two countries have too many common interests in energy technology, energy efficiency, and the environment—and in the overall stability of their increasingly interdependent relationship.

Daniel Yergin, chairman of Cambridge Energy Research Associates, received a Pulitzer for The Prize: The Epic Quest for Oil, Money, and Power. He is writing a new book on geopolitics and oil.

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