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Chinese Demand for Oil

World oil reserves

The world's oil reserves are running out, and the rising demand shows no signs of abating. According to the Energy Information Agency of the U.S. Government the world demand for oil is expected to increase by 54 percent until 2025. Another additional 44 million barrels of oil have to be produced every day to meet this demand. This growth in demand comes particularly from China, with its rapidly growing economy.  China, which is the biggest consumer of oil after the U.S, is creating an oil reserve for the coming decade.

The behavior of oil is, just like other commodities, determined by demand and supply. With prices a barrel of over $75 last July and $51 now. The main reasons for the rise in the world oil prices were the rapid growth of the world economy, the rising demand for oil in China, the financial speculation and the depreciation of the U.S Dollar. According to experts those reasons are more important than market fundamentals. This report will examine the role China plays in the demand for oil and political consequences.

The Chinese strategy

China has the world’s biggest coal reserve, but because of pollution that is caused by burning coal for power, China is forced to seek supplies of petroleum from overseas. The Chinese government doesn’t want to buy oil on the open market because this way they are imposed to price changes, therefore China is getting its oil from countries that have oil fields but lack the capital or technology to exploit them.
The Chinese demand for oil increase every year by 7,5%, with its daily oil consumption of 7,6 million barrels. According to government figures China’s oil imports in 2006 rose by 14.5 percent.  
To not be completely dependent on Saudi-Arabia, the world’s number one oil supplier, China has recently been exploring areas as Sudan, Iran and Russia. While the world oil reserves are decreasing this issue has provoked some political critics.

An important strategy China uses to ease the negotiations is the aid-for-oil strategy. China will help to develop infrastructure in oil producing countries by building, among others: roads, bridges, hospitals and sport centers. They also extend foreign aid and forgive national debt.
The major countries where china is getting its oil from are: Saudi-Arabia, Sudan, Iran and Russia. The importance China plays in these countries will be explained below.

Oil from Sudan

Since 1997, China is investing heavily in Sudan’s oil fields. China’s largest oil company is pumping the oil up and sending it through Chinese made oil pipes to the Red Sea. Big oil tankers ship it from there to China’s biggest cities.
The rebel army that controls much of southern Sudan has been attacking the oil installations which ended in a civil war killing thousands of people.
According to a former government minister from Sudan; Sudan is China's largest overseas oil project and China is Sudan's largest supplier of arms.
This new strategy has raised a growing concern in Western governments. The first reason for this is commercial competition.  The second reason for the growing concern is that China is weakening the ability of the West to put economic pressure on racial and corrupt states in Africa.
China doesn’t mind doing business with corrupt governments which creates some tension between China and the West, but ironically Western multinationals are doing exactly the same thing as China. So there is no moral high ground to complain about China’s strategy.
In 2005 alone Chinese companies invested over $175 million in African countries. The investments were mainly in oil exploration projects and infrastructure.

Other Countries

Iran has the third largest proven oil reserve in the world. About 10 percent of China’s oil imports in 2005 are from Iran. In the mean time China has done some goodwill projects in Iran, like the Teheran subway.  

China is a major oil costumer for Russia. Now the oil is transported by rail from Russia to China. According to China Petrochemical News the Russian railways, RZD, is planning to increase its crude oil deliveries to China by 46% in 2007.  In 2006 the Russian railways transported 10.26 million tons of crude to China. The company's media department said “the railway company will invest RUB2.5 billion this year”. Since May 2006 oil has already been piped to China from Kazakhstan through the 960 km pipeline.
A new pipeline will be made connecting Siberia with Daqing. The works for the new pipeline will begin this April and are expected to be finished within 11 months. The entire project is excepted to cost $11,5 billion. 

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