Oil Will Be the Defining Issue for United States/China Relations

For several years before Deng Xiaoping initiated China’s economic reforms in 1982, one of the few opportunities to experience The Peoples Republic of China was to climb a ridge in Hong Kong’s New Territories. As I made my way up the rocky slope I could feel the steady crescendo of my heart anxiously pounding at my rib cage.  Peering through the trees into the valley below I could see border sentries of the Peoples Army wearing drab olive green uniforms and caps with big red stars. Flapping in the wind was the Communist Chinese flag.  In the distance peasants dressed in baggy black pants and large straw hats toiled in neatly embanked rice paddies as water buffalo pulling their ploughs slogged through thick clay- like mud. It was like standing at the edge of the earth.

In Shanghai at the time, the tallest building was a hotel constructed in 1929, twenty years prior to communist rule. Standing on the Bund and looking across the Huangpu River towards Pudong there was no illumination. What I remember most were the tens of thousands of bicycles, each rider with the same humdrum expression. It was as if no emotion was worth the effort to exercise the muscles in one’s face. Everyone wore the same blue Mao-suit. There were no colors anywhere.  The very few cars I encountered were the exclusive realm of communist party officials and their guests. It is hard to believe but this was only twenty-five short years ago.

The difference between China then and now is something out of a sci-fi movie. Standing today on the Bund and looking across the Huangpu River I am awed by the towering skyscrapers of Pudong.

It is as if Manhattan was built in a decade. The bicycles are gone; replaced by cars and black-smoke belching buses and trucks, trapped in massive gridlock.

My first journey between Hong Kong and Guangzhou in 1984 was ninety miles of picturesque rice paddies and small villages frozen in time. The peasants I saw then were living their lives much the same as they had for centuries before.

Today this corridor is one of the most highly congested and polluted industrial sprawls in the world with a never ending parade of tractor-trailer trucks pulling shipping containers; each doing their part in China’s export-centric economy.

For the past two decades China’s communist leadership has pursued an uncompromising policy of export dominance while systematically distorting and manipulating the world trading system for their benefit. As a result, millions of poverty stricken urban dwellers and rural peasants have been absorbed into the workforce. The creation of these jobs has meant relative social stability throughout China which is essential to continued communist rule.

However, this is getting more and more difficult to sustain. There is a broad coalition around the world demanding China’s currency, the Renminbi (RM, reflect its true value.  Many believe it is undervalued by as much as 30% thus creating an unfair advantage for Chinese exporters. Over the past three years the RMB has appreciated 16% due to intense pressure from China’s trading partners. It will continue to gradually appreciate eroding Chinese competitiveness.

The elimination of Chinese export tax rebates (which are against WTO rules) have accelerated. These rebates allow Chinese manufacturers to sell at or below cost and still show a profit through their unconventional accounting practices. At the same time, as the export tax rebates end, thousands of Chinese manufacturers are destined to close.

Labor costs, energy costs, and operating costs have dramatically risen especially in the coastal cities that have benefited most from the high economic growth rates of the past twenty years. Over the last six months I have seen several China-based manufacturers tack on large price increases citing rapid cost increases, the elimination of the export tax rebates and the appreciation of the RMB.  I am hearing a growing chorus of manufacturers saying it is time to look towards Vietnam and India instead of China, which is becoming too expensive.

China’s communist leadership, fearing its export competitiveness has begun slipping away, has quietly initiated a radical change of strategy that has huge implications for us all. To survive it must continue to absorb its never-ending, restive workforce. To do so their emphasis must shift from export dominance to creating domestic demand. Yet, increased domestic consumption does not mean more imports.

I must caution American exporters to contain their excitement.  China will continue to impede United States exports with insuperable barriers. At the top of this list are their baffling product approvals and investment laws.

The rapid emergence of a Chinese consumer class is the only way to save communism in China. How ironic. churning out these goods in Chinese factories, creating Chinese employment and keeping the appearance of economic prosperity is the new priority for big-brother in Beijing. Automobiles, appliances, electronics and anything else you can think of that have been out of reach for the vast majority of Chinese citizens must be made more accessible.

As a result, China’s demand for oil is going to explode. Everything the Chinese consumer will be buying for the first time is either made from oil, energized by oil, or both.  Yet, China has very limited oil reserves and must import most of its demand.

The United States and China compete on many levels; however our competition for oil will be the defining issue in our relation for years to come.

China’s need to obtain oil is essential for maintaining stability at home. China will coddle our sworn enemies including Hugo Chavez in Venezuela and Mahmoud Ahmadinejad in Iran. To get their oil China will offer arms and military support.

The Spratly Islands are a group of 100 coral reefs, islets, and islands in the middle of the South China Sea. They are claimed by China, Taiwan, The Philippines, Vietnam, Malaysia and Brunei. The Spratly’s are believed to have 17.7 billion tons of oil and natural gas reserves which surpass Kuwait’s 13 billion tons. This potentially makes the Spratly’s the fourth largest reserve bed in the world. China’s thirst for oil could very well lead to an attempt to enforce its claim on the Spratly Islands which the United States does not recognize. This could quickly escalate to a full scale confrontation. We do not have to go back far to understand the implications of oil in Asian-American diplomacy. In 1932 Japan colonized Manchuria in northern China and created the puppet state of Manchukuo. From here in 1937 Japan unleashed its all-out war on China beginning with its brutal Rape of Nanking. Japan for decades had sought to politically and military dominate China and control its vast human and raw material resources.

Japan like China has no oil reserves. Its oil prior to World War Two came from Alaska. President Roosevelt placed an oil embargo on Japan in July, 1941 to be lifted only after Japan agreed to get out of China. Without Alaskan oil Japan could no longer execute its war on China. They had a big decision to make. To kowtow to the American President, lose face and give up its dream of colonizing Asia under its Greater East Asia Co-Prosperity Sphere or make a mad dash for the Dutch East Indies oil fields in what is today Indonesia.

They chose the latter and the rest is history.

The increasing demand for imported oil in China over the next ten years is going to make today’s China seem like the surrealistic bicycles I encountered twenty-five years ago. China’s seemingly benevolence of the past must give way to the oil confrontations of the future.

We must demand from our government a comprehensive energy policy that has at its core American controlled solutions. The cost of a barrel of oil has no ceiling, so we are forced to compete with China for world oil reserves controlled by some of the most despotic regimes on the planet. Unless we act decisively there is no reason why gas will not hit $10 a gallon. After all today it is $15 a gallon in Denmark.

We must immediately start drilling on the continental shelf, the Arctic National Wildlife Refuge (ANWR) and and other federal lands. We must launch an affordable alternative fuel program with man-on-the-moon determination. This is truly the best way to give America the edge over China in controlling our dependence on oil, and setting our own oil prices without doing business with despotic governments.

There is no rational reason why we, with the third largest oil and gas reserves in the world according to the Interior Department, can’t produce enough oil and gas to prevent the Chinese from escalating world energy prices.

As Newt Gingrich says, “Drill Here. Drill Now. Pay Less.” If we do, we’ll be paying a lot less to the Chinese
as well..   The stakes could not be higher.

[youtube=http://www.youtube.com/watch?v=6Rb_rDkwGnU&feature=player_embedded]

Update: A reader sent in a link to an alternative fuel source video clip originally aired on FOX News well worth watching (has over 1,500 comments 7/08).  Let me know your thoughts by leaving a comment here.