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Bloomberg December 20, 2004

China's Thirst for Oil Undercuts U.S. Effort to Rein in Iran

By Paul Basken and Demian McLean

Dec. 20 (Bloomberg) -- U.S. efforts to rein in Iran's nuclear weapons program through economic sanctions are being stymied by China's increasing reliance on the Islamic nation for oil.

The U.S. has tried for more than a year to get the United Nations Security Council to impose restrictions that might deter Iran from building an atomic bomb; China, which holds one of five vetoes on the council, is threatening to block those attempts. At the same time, a decades-long U.S. economic embargo of Iran is being undermined by a growing China-Iran trade partnership, highlighted by a $70 billion deal in October for oil and gas.

``The more they get involved with Iran, the more likely they are to cast a jaundiced eye on any kind of international sanctions against Iran,'' said Gary Sick, a Columbia University professor who served as a National Security Council adviser under U.S. Presidents Gerald Ford, Jimmy Carter and Ronald Reagan and wrote ``All Fall Down: America's Tragic Encounter With Iran'' in 1985.

President George W. Bush in 2002 labeled Iran part of an ``axis of evil,'' and preventing it from obtaining nuclear weapons is one of the administration's top foreign policy goals. ``It would be a bad idea for us to be confronting atomic ayatollahs,'' said John Pike, a military analyst with Globalsecurity.org, an Alexandria, Virginia-based research firm.

China has the world's fastest growing major economy, and needs oil to fuel it. The nation has more than doubled its oil use over the last decade, to 5.55 million barrels a day, becoming the world's second-largest consumer, the U.S. Energy Information Administration said. Once a net exporter, China now imports more than half of the oil it needs.

Scouring the Earth

``China is scouring the Earth's four corners for energy,'' said Peter Brookes of the Heritage Foundation, a conservative policy group in Washington that advocates free enterprise. The search for energy has become ``an increasingly dominant factor in Beijing's foreign policy choices.''

Iran's exports to China grew 16 percent last year, making it the latter's No. 2 oil supplier after Saudi Arabia, according to Chinese government figures. ``China and Iran see each other as mutually beneficial,'' said Mark Fung, a Washington-based economic consultant who has advised Goldman Sachs Group and Waddell & Reed Financial Inc. The two nations have essentially become ``global swing states,'' affecting U.S. foreign policy, he said.

China's economy expanded 9.3 percent last year and is growing at a 9 percent rate this year, according to President Hu Jintao. The country's oil needs could almost double again, to 11 million barrels a day, by 2010, according to a Nov. 23 report by Merrill Lynch & Co.

Energy Shortages

In July, August and September, Chinese officials restricted electrical power use for industries nationwide during the daytime to four days a week, forcing Xiamen Polo Metal Industrial Co.'s furniture factory in southern China to shift to nighttime hours.

``Even now, we still suspend production on Thursdays due to power shortages,'' Zhang Fan, the general manager, said.

Xiamen, which supplies Wal-Mart Stores Inc. and other U.S. retailers, hopes to boost production of such items as computer desks by 30 percent next year, Zhang said. ``We hope the local government can boost the power supply next year,'' he said.

The October agreement with Iran guarantees China 150,000 barrels of oil a day at market price for 25 years, and 250 million tons of liquid natural gas over 30 years, Fung said. The deal, the largest between the two nations, will boost Iranian oil exports to China by at least 80 percent on an annual basis from 2003, Bloomberg data show.

Fall of a Shah

The U.S. has had tense relations with Iran since the 1979 revolution that overthrew the U.S.-backed Pahlavi dynasty, installed clerics in positions of political power and led to the seizure of U.S. hostages. The U.S. has had an embargo against Iran since 1984. The Institute for International Economics in Washington estimates Iran is forgoing $750 million a year in U.S. trade and investment, with $400 million of that coming from a ban on U.S. companies handling indirect oil exports from Iran.

Hassan Rowhani, secretary of Iran's Supreme National Security Council, pledged last week to dispel suspicions that the nation's uranium-enrichment program is intended for bombs. Iran says it's for the production of energy.

``We will establish such confidence that there will be no concern left for anyone,'' Rowhani told reporters Dec. 13 after meeting with European foreign ministers in Brussels.

The U.S., remaining skeptical, wants the United Nations to adopt a tougher stance. Ray Takeyh, a Council on Foreign Relations analyst and a former professor at the U.S. National Defense University in Washington, said the only meaningful UN sanctions would be an Iranian oil embargo, and ``there is no chance the Security Council is going to invoke that at the time when China is becoming ever more dependent on Middle East energy.''

`Currying Favor'

In protecting Iran against sanctions, China may be enticed by ``the short-term attractions of currying favor with a potential ally, one increasingly important in terms of China's growing need for oil,'' U.S. House International Relations Committee Chairman Henry Hyde, an Illinois Republican, said Dec. 2 in Hong Kong.

``This criticism is invalid,'' said Liu Jianchao, a spokesman for China's Foreign Ministry in Beijing. ``We object to this characterization and find it insulting.'' He added that China is adamantly against the proliferation of weapons of mass destruction.

China wants the issue over Iran's nuclear programs to be resolved ``within the auspices of the International Atomic Energy Agency,'' Liu said.

White House spokesman Sean McCormack said he couldn't assess the degree to which China's foreign policy is being influenced by its need to find expanded supplies of oil.

Unknowable

``Part of the answer is, I think, unknowable to us,'' McCormack said. ``It gets to the thinking of the Chinese government, and what values they place on different things.''

Philip Verleger of the Institute for International Economics, a policy study group in Washington, said the U.S.'s own dependence on foreign oil is complicating the situation, hampering its ability to influence other countries.

China regards the U.S. as ready to blame other countries for the problems it faces in places such as Iran before examining its own responsibilities, said Verleger, a former Treasury Department energy policy adviser. ``If the U.S. really wanted to influence things, to help the Chinese, what it would do is'' set an example by reducing oil consumption, he said. The U.S. currently uses about 20 million barrels of oil a day.

More Aggressive

The U.S. must be more aggressive in discussing with China its oil needs and establish less harmful ways of meeting that demand, said William Clark Jr., who was assistant secretary of state for East Asia and the Pacific under President Bill Clinton.

``We should be sitting down now with the Chinese, recognizing what's going on, making sure that they do not feel threatened, and yet ensuring that the oil that is available is shared equitably,'' said Clark, who is now managing director at Hills and Co., a trade and investment consultant in Washington.

While China's Iranian dealings raise the most immediate concern for U.S. policy makers, it isn't the only one. In September, China blocked a U.S. proposal for UN Security Council action against Sudan, where two decades of civil war have claimed more than 2 million lives. Sudan supplies 7 percent of Chinese oil imports, and China is the chief investor in the country's biggest pipeline, which carries 75 percent of its 345,000 barrels daily, according to the U.S. Energy Department.

China's Needs

``China needs a lot of oil over the next few years,'' Verleger said. ``They're going to go do business with whomever they can to get that oil.''

China is also buying oil from Angola, Vietnam, Indonesia and Russia, and is making deals with Venezuela, Brazil, Uzbekistan and Kazakhstan, the Heritage Foundation's Brookes said. China Petroleum & Chemical Corp., the state-run oil company known as Sinopec, is considering buying oil and gas fields in the Middle East, Central Asia, South America and Southeast Asia, Vice Chairman Wang Jiming said in a Dec. 8 interview in Beijing.

Venezuela, which sends more than 60 percent of its oil to the U.S., began negotiations with Colombia last month on building an oil pipeline to the Pacific Ocean. That would enable greater exports to China by bypassing the Panama Canal. China also has been working on a pipeline with Kazakhstan.

Long-Term Hopes

Eventually, the need to find allies may make China more cooperative with the U.S. rather than less, said U.S. Senate Foreign Relations Committee Chairman Richard Lugar, a Republican from Indiana. One example, he said, may be China's willingness to lead a U.S. initiative for multination talks with North Korea over its suspected nuclear weapons program,

``To the extent that the Chinese see as a priority their national economic growth and the need to keep alive all these channels that are friendly, this could very well lead to a constructive foreign policy,'' Lugar said in an interview. ``I think that has been characteristic, really, of why they have dealt with us fairly adeptly in the North Korean negotiations.''

Ruan Zongze, vice president of the state-run China Institute of International Studies in Beijing, said he doesn't see a ``strong linkage'' between China's quest for oil and policies toward Iran.

``If there is any linkage between them, I would say China would pursue a more cooperative foreign policy, and more accommodative to the rest of the world,'' Ruan said.

``We will certainly diversify the energy supplies -- that strategy is clear,'' he said. ``But all


Copyright 2004 Bloomberg L.P.