The prospect of China buying up international petroleum supplies to quench its growing thirst for energy is the newest geopolitical nightmare. Like most bogeymen, though, the fear disappears when exposed to harsh light. China is eager to secure resources to feed its developing economy, but those efforts pose no threat to other countries. Oil is fungible. Markets will ensure that every drop that can be produced and distributed will be.

The world has watched with awe at the speed with which China has emerged as one of the engines of global economic growth. One of the consequences of that explosive expansion is a voracious appetite for energy supplies. A little over a decade ago, China was a net energy exporter; today, it is the second-largest energy consumer in the world.

China imports more than 40 percent of its oil. Consumption grew 15 percent last year and is expected to increase another 9 percent in 2005. According to authoritative estimates, Chinese demand for oil will double by 2025. Its dependence on foreign oil will reach 60 percent in five years.

The need to secure energy supplies has galvanized China’s leadership and become a pillar of the country’s foreign policy. That search has had some unsavory consequences, pushing Beijing ever closer to regimes in Sudan, Uzbekistan, Iran and Venezuela, all of which have questionable human rights records. Beijing and Tokyo have battled for several years now over the rights to Russian oil, a contest that sees Moscow milking every possible strategic advantage. The possibility of energy reserves in the South and East China Sea is one reason why Beijing takes such a hard line over those disputed territories.

Last week, China prevailed in a bidding war for PetroKazakhstan, a Canadian-owned company with oil fields in Central Asia. The China National Petroleum Corp. (CNPC) offered $4.2 billion for the company, besting a $3.6 billion offer from India’s state-owned Oil & Natural Gas Corp. The CNPC bid put a 21.1 percent premium on the price of PetroKazakhstan’s shares, and valued the company’s proven reserves at $10.26 per barrel — 20 percent more than the market valuation of CNPC reserves.

The CNPC success comes on the heels of the contentious — but failed — bid by China National Offshore Oil Co. (CNOOC), the country’s third-largest oil company, to take over the U.S. oil and gas giant Unocal. Chevron prevailed in that bidding war, but the U.S. company was aided by U.S. politicians’ concern that a Chinese company was set to take control of U.S. energy assets. Their opposition was probably emotionally gratifying, but economically it made little sense.

Oil is a fungible resource: Its use in one place frees up other reserves to be used elsewhere; each barrel “diverted” for China’s exclusive use is a barrel it will not have to import. Moreover, there are different types and grades of oil, some of which are better suited to particular markets. The petroleum best suited for China is not the same as that which is in biggest demand in Japan. The international oil market works: Oil flows to meet demand.

Although China is a net oil importer, it still exports about 20,000 barrels of oil daily to the United States, more than twice the amount exported last year. China had exported oil to Japan for more than 30 years until talks broke down last year over the terms of a contract extension.

Simply put, no country can monopolize supplies. Inasmuch as China is poor and that there is only one international market, bidding up prices to “capture reserves” will only increase the price China must pay as a consumer.

China’s willingness to pay top dollar for reserves has two additional benefits. First, in the Unocal case, it would have kept U.S. workers employed (especially since CNOOC was prepared to make assurances in this regard). Second, the readiness to put more money into securing energy supplies means that there will be more money for exploration and development, which could ease price restraints in the long run. Japan’s own experience with attempting to “capture” national oil rights should serve as a cautionary lesson for China.

In fact, global reserves are not the primary problem right now. Rather, the chief bottleneck is the shortage of refining capacity. The failure to ease that constraint will ensure that prices remain at historic levels.

The supply side of the equation must be fixed because demand for oil will remain high. As China’s growth continues, India’s emergence as a global player — it was the other main bidder for PetroKazakhstan — will add to the pressure. India’s oil imports are expected to rise from 1.4 million barrels a day to about 5 million barrels a day by 2020. Slaking that thirst will roil oil markets, no matter who controls the wellhead.

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