Wednesday, April 15, 2009

China's Oil Strategy

I was intrigued by a couple of items I ran across in the morning papers concerning China's pursuit of new oil sources. The Chinese National Petroleum Corp. is apparently in talks with the Venezuelan state oil company, PdVSA, and Total for a heavy oil producing and upgrading concession in the Orinoco heavy oil zone, as well as discussing a partnership with Shell to bid on new oil projects in Iraq. China may still lag the US in oil imports, but it is catching up fast, and the efforts of state-controlled CNPC suggest that China has a strong sense of the importance of future oil supplies in supporting the country's economic growth. Perhaps we should take a page out of their book.

I'm not suggesting that the US consider setting up state-owned oil companies or pursuing the kind of government-to-government deals that would take large quantities of oil off the global market for years to come. Not only is that unnecessary for us but counterproductive, as well, considering the inflexibility it locks in. At the same time, it seems clear that China regards oil as a key strategic resource--a pillar industry--and that ensuring access to it remains essential for economic and national security, even in a world increasingly focused on renewable energy. Although our environmental priorities are quite different from those of China, our economic priorities have more in common. Oil represents energy diversification for China, while it is a mainstay of our own energy economy; however, both countries will consume many billions of barrels more oil before either of us reaches the point at which some combination of energy efficiency and alternative energy renders it passé.

The common thread here is access. In the case of China, it is to oil reserves around the world, as its oil industry outgrows its domestic roots. For the US, the task is more complicated. Falling oil prices have created a great opportunity to reverse the tide of resource nationalism that accompanied the rapid rise of oil prices from the $20s to nearly $150 per barrel. Countries that built their budgets on soaring oil revenues are straining, and some astute diplomacy by our government could help open some doors that had swung shut in recent years. But just as we are keen to set the right example on climate change policy, going into December's talks in Copenhagen, it is bootless to plead for access to other countries' oil fields when we restrict access to our own untapped resources so tightly.

A new report by the Department of the Interior indicates a mean estimate of "undiscovered technically recoverable resources" under the US Outer Continental Shelf of 86 billion barrels of oil and a similar quantity of natural gas, including significant quantities off the Pacific coast. To put that in perspective, the cumulative volume of the federal Renewable Fuel Standard between now and 2022--including large quantities of cellulosic ethanol that is still at least as speculative as the undiscovered oil resources highlighted by the Interior Dept.--sums to 308 billion gallons of ethanol, the energy equivalent of a little over 4 billion barrels of oil. In other words, there's potentially 40 times more energy in the oil and gas that remains to be found in our own waters than in all the ethanol and biodiesel we're required to burn over the next 14 years.

Once again, I should emphasize that this is not an either-or proposition. For all the faults and limitations of our present biofuel strategy--and they are numerous--the potential of non-food-based biofuels looks significant and too good to pass up. However, the same is also true for the opportunity represented by our own undiscovered potential oil and gas resources, which at least one study suggests could contribute over a trillion dollars in new royalties and taxes to the Treasury, if developed. Whether or not China would be as reticent as we have been about such a resource off their shores, we must recognize that the global oil game is changing in response to new players, and that it is a game we cannot yet afford to opt out of, because renewable energy is not yet ready to fill the gap that would be left, nor will it be for at least another decade or two.

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