Oil prices have been soaring, yet the U.S. media has overlooked one of the chief reasons why.  The 2005 Department of Defense report on “The Military Power of the People’s Republic of China” cites Beijing’s growing need for foreign sources of metals and fossil fuels as a “driver of strategy,” noting that these account for 60 percent of China’s imports.  It is pushing China into closer ties with a variety of unsavory but resource-rich regimes, such as Iran, Sudan, and Venezuela.  It is also bringing U.S. and Chinese interests into conflict.

Americans feel this rivalry every time they stop at a gas station.  The price of a barrel of West Texas Intermediate oil had risen from $18 in November 2001 to a record $68 by the end of August.  This is similar in real terms to the price jumps of the 1970’s.  But while those spikes were the result of politically induced “supply shocks” of limited duration, the current rise is from increased global demand, which will continue indefinitely.

China is driving the system in her role as “workshop of the world.”  She is moving beyond textiles, toys, and consumer electronics into the heavier manufacturing of automobiles, steel, shipbuilding, petrochemicals, and high-tech industries.  Her own demand for goods is expanding, but so is production for export and for import-substitution.  China’s global trade surplus will top $125 billion this year.  Her trade surplus with the United States will be around $220 billion, out of an overall projected U.S. trade deficit of $700 billion.  Whereas China exports manufactured goods to pay for her imports of oil and raw materials in classic mercantilist fashion, the United States does not export enough to pay her import bills, for either manufactures or energy.  America relies on debt and the sale of productive assets to finance her consumption—the historical pattern of decline.

Yet, the United States is much more energy efficient than China.  America has cut by half her oil per real dollar of Gross Domestic Product (GDP) since the crises of the 1970’s, because of improved fuel efficiency, increased use of non-oil sources of energy, and the decline in manufacturing under the pressure of imports.

According to William B. Gamble, president of Emerging Market Strategies, “China consumes twice as much energy as India per dollar output, and between three and five times the energy per dollar output than the world average.  They consume a staggering fifteen times more than the Japanese, who have been investing in energy efficient technology since the first oil shock in the 70’s.”  Thus, the shift of industry from the United States, Europe, and Japan to China in pursuit of “cheap labor” has helped create a world of “expensive energy.”

If these higher energy costs were fully passed on to those who operate in China, that country’s competitive advantage would suffer.  Beijing subsidizes energy to consumers, however, to keep the system humming.  It is also looking for ways to shield the economy from world prices by buying oil and natural-gas fields in Kazakhstan, Russia, Venezuela, Sudan, Iran, Saudi Arabia, and Canada.  It tried to acquire the American firm Unocal, whose primary fields are in Indonesia.  “Free traders” were appalled when Congress objected to the Chinese bid on geopolitical and national-security grounds, but Beijing’s strategy is about avoiding markets, not entrusting China’s fate to some “invisible hand.”  In the most strategic sectors of the economy, China is still a state-run enterprise.  By vertically integrating energy with industry, the country can internalize price at the cost of production and avoid the premium price set by supply-and-demand in the global arena.

Indian strategists understand Chinese ambitions better than do American economists.  India’s oil minister, Mani Shankar Aiyar, wanted to up his country’s bid for PetroKazakhstan against China’s attempt to buy the largest private integrated oil company in that Central Asian land.  Beijing interests have already gained control of most of Kazakhstan’s other oil reserves.  A crucial battle is being waged among pipeline projects to determine whether the rich oil and natural-gas fields of Central Asia will pump to markets in Europe, or the Persian Gulf-Indian Ocean ports, or directly to China.  A similar competition is in full swing between Japan and China over which direction Siberian oil will move.

During the 1990’s, questions of ownership and control of resources were neglected, as was exploration and development, because competition was driving down world prices.  That situation has now changed, and so must U.S. policy.  With markets driving prices upward, the power to direct the flow of scarce resources becomes paramount.  Expanding U.S. ownership of global resources while investing in domestic development and efficiency is only part of the campaign to foster energy independence.  Diplomacy must also shape foreign decisions to maintain U.S. access to resources and prevent needed supplies from being hoarded by rivals.  It’s an old game that our statesmen need to relearn quickly.