According to China's Foreign Ministry, there is nothing off the table for Premier Wen Jiabao on his three-day visit to India, which began on Wednesday, Dec. 15. Premier Wen's dialogue with Prime Minister Manmohan Singh will address obstacles blocking a future China-India free-trade agreement in addition to the simmering dispute over the 90,000-square-kilometer territory of Arunachal Pradesh, which is currently under Indian control and claimed by China. These are important issues hindering better relations between the world's two most populous countries.
Conspicuously left out of the dialogue is frank discussion about managing future energy security. This is a significant omission since energy competition will be the most likely cause of serious tension and possibly even war between the two emerging Asian giants.
To be sure, nations have long competed for finite energy and other resources. But Asia has not seen a powerful China and India since the 1600s. Their rapid modernization over the past three decades means energy competition is occurring on an unprecedented scale.
The numbers behind China and India's seemingly insatiable thirst for energy are mind-boggling. For example, Chinese demand for petroleum reached 8.6 million barrels per day in 2010, and is projected to jump to around 14.2 billion barrels in 2030. Although China has massively increased its refining capacity to meet most of its current and projected needs, the estimate is that China will still need to import 11.7 million barrels of crude oil in 2030, up from 4.8 million barrels currently. This means 70 percent to 80 percent of China's crude oil needs will be from imports.
The numbers for India are smaller but still overwhelming. India consumes 3 million barrels per day, two-thirds of them imported. According to the International Energy Agency analysis of projected trends, India will eventually be importing around 7.4 million barrels per day, roughly 90 percent of its future petroleum needs. Indeed, even accounting for increased reliance on other energy sources such as coal and natural gas, China and India will collectively account for 50 percent to 65 percent of the growth in demand for petroleum over the next two decades.
These huge rises in demand for petroleum and other resources do not in themselves presage rising tensions between China and India. It is arguable that it is in the interests of both countries to enhance their collective leverage over energy suppliers such as Russia, Saudi Arabia, and Australia in an attempt to be a price-maker rather than taker. Yet, the evidence is that competition rather than harmony is increasingly driving the energy security policies of both countries, and that an energy-driven rivalry between China and India will intensify rather than abate. There are two major reasons this is the case.
First, the legitimacy of the Chinese Communist Party depends on the continuation of rapid economic growth. China's state-led development model relies heavily on fixed investment to produce growth—an approach that is extremely energy-dependent. Since the regime sees securing necessary energy resources as a matter of survival, China's energy strategy is increasingly based on owning and controlling foreign petroleum resources in places such as the Middle East and Africa.
Based on the prevailing view that global energy markets and open access can be manipulated and restricted by American-led efforts, China views its "me-first" mindset toward secure energy resources as prudent. Rather than rely on strengthening an international system of open access based on market prices to secure its energy, Beijing gives its state-owned national oil companies (NOCs) what it needs (in the form of cheap loans and other support) to directly source resources for China's exclusive use. Chinese NOCs have 200 energy projects in more than 50 countries worth some $50 billion.
This perceived mercantilist approach to energy is in turn leading New Delhi to use its own state-owned NOCs to secure India exclusive access to foreign energy supplies. For example, Indian NOCs such as ONGC Videsh (ONGC:IN) have been making large investments in countries such as Sudan, Angola, and Russia. Although India does not exhibit the same paranoia about the dangers of relying on the international commodities market like China, New Delhi is nevertheless increasingly copying the Chinese me-first approach for fear that China will undermine India's future access.
The trend toward using state-owned NOCs to secure exclusive access creates a further problem. Given the intimacy between NOCs and their respective governments, commercial competition and disputes between Chinese and Indian NOCs have the potential to take on a serious political flavor. In 2005, ONGC Videsh bid against the state-owned China National Petroleum Corp. (PTR) to acquire major assets of a London-based company, PetroKazakhstan. In 2006, ONGC lost out again to another Chinese state-owned company, Sinopec (SNP), for a Nigerian oil field. The competition translated into political tension at the highest levels before a diplomatic agreement between New Delhi and Beijing on bidding protocols was reached. The point is that the trend toward a nationalistic approach to energy security is likely to significantly harm political relations between the two countries.
Second, 70 percent to 80 percent of oil imports into China and India will probably originate from the Persian Gulf by 2030. For China, this means oil tankers will have to leave the Gulf, then pass through the Indian Ocean and up through the Malacca Straits toward ports such as Qianwan in Shandong province. Given the long-standing vulnerability to potential American-led efforts at what some Chinese see as a policy of "energy strangulation," China has grown increasingly intolerant and critical of India's ongoing plans to extend its presence in key shipping routes along the Indian Ocean. Beijing has already termed the Indian Ocean as "critical" to its core interests.
Although Beijing does not yet have the capability to deploy significant naval forces in the Indian Ocean, the already serious naval rivalry between Beijing and New Delhi is driven by energy security concerns.
Worryingly, resolving energy insecurities between these two Asian giants is a long way away. China needs to trust an open international market for energy resources and the region needs to trust China. Neither of these things will happen soon—even more reason the issue should be on the table in New Delhi this week.