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Energy Bedfellows: Countering OPEC through China-U.S. Cooperation

Author: Sebastian Mallaby, Paul A. Volcker Senior Fellow for International Economics
September 17, 2007
Washington Post

President Bush has denounced our addiction to oil. His foreign policy has been guided by advisers — Dick Cheney, Donald Rumsfeld, Paul Wolfowitz — whose worldviews were formed during the 1970s, when the OPEC oil cartel emerged as a threat to U.S. interests. But OPEC now appears more menacing than it has in a long time. For an administration that made energy security a priority right from its first months, this is a humiliation.

At its meeting a year ago, OPEC resolved to restrain output and force higher prices on consumers. That muscle-flexing worked: It reinforced the market dynamics that have brought prices to $80 a barrel. Then last week, after much American pleading, OPEC magnanimously promised to boost output by a token amount. “Our message to consumers is that we care,” OPEC’s leader told the media. The unspoken subtext was, “You are at our mercy.”

OPEC apologists say we shouldn’t fret. Oil producers and oil consumers are interdependent, the argument goes: They need our markets just as we need their energy. Unfortunately, this line is less convincing than it used to be.

Thanks to the high prices of recent years, oil exporters are sitting atop mountains of money. The United Arab Emirates, for example, has a government trust fund worth perhaps $1 trillion; with each passing month, the piggy bank grows bigger. Most OPEC members are in a better position to sustain a loss of access to our markets than they used to be, whereas our ability to survive an interruption in supply has not grown commensurately. In his State of the Union address in January, President Bush proposed doubling the size of the Strategic Petroleum Reserve. Then he forgot about it.

Next there is the fact that, as the oil expert Daniel Yergin points out, Asia has supplanted North America as the largest oil consumer. This changes OPEC’s calculations fundamentally. The oil states used to worry that if they pushed prices too high they would force Western economies into recession, which would diminish demand for oil and ultimately drive prices lower. This mechanism restrained OPEC’s greed, particularly at moments when the U.S. economy looked vulnerable. But today China’s annual growth rate is 12 percent and India’s is 9 percent, so OPEC need not lose any sleep about the U.S. slowdown. Americans can experience economic pain, but oil states no longer have to feel it.

Then there is the change in Arab trade patterns. Europe has become the main supplier for Arab OPEC members: Saudi Arabia gets almost a third of its imports from the euro zone plus Britain, whereas only about a tenth of its imports come from the United States. The result is that the Arabs increasingly think of oil prices in terms of euros or pounds, since those are the currencies they need to pay for their imports. At times when the dollar is falling — as it is now — this means Arabs will force Americans to pay more to finance Arab purchases from Europe.

Not all of this is Bush’s fault. But the president has missed an opportunity that some of his Democratic rivals see clearly. As Samuel Berger, one-time national security adviser to Bill Clinton, argued at a recent Aspen Strategy Group meeting, the United States ought to be boosting cooperation with fellow oil-consuming nations, particularly China.

China’s oil strategy currently leads it into conflict with the United States. China has often been the chief disruptor of American efforts to squeeze Iran over its nuclear program, because China thirsts for Iran’s energy. China spent three years resisting U.S. efforts to stabilize the Sudanese territory of Darfur, because it has a stake in Sudan’s oilfields. The nightmare scenario is that, in its search for oil security, China might develop a blue-water navy and assert a right to oil in the South China Sea. In which case China’s claims to be pursuing a “peaceful rise” would be swept off the table.

But it doesn’t have to be this way. Chinese and U.S. oil interests are actually similar. Both countries want reasonable prices, reliable supply and freedom from OPEC blackmail. China may think it is enhancing its energy security by cozying up to Sudan or Iran, but the truth is that Sudanese and Iranian production will drive down the market price China pays for oil whether or not Beijing sides with rogue states at the United Nations. So intelligent diplomacy could convince the Chinese that their best oil policy isn’t a navy. It’s an effort to boost non-OPEC energy options, from switch-grass ethanol to electric vehicles.

Berger proposes a multilateral green energy fund, in which China might invest some of the huge wealth created by its trade surpluses. The more OPEC flexes its muscles, the more his idea appeals to me.

This article appears in full on CFR.org by permission of its original publisher. It was originally available here.

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