The predominant story line in global oil markets over the last five years has been surging demand. According to one analysis, “This is the first ‘demand-led’ oil shock.” ¹ Most of this demand has come from a few countries in Asia (notably China) and from North America (notably the United States).

Source: http://www.wtrg.com/oil_graphs/oilprice1947.gif 

World oil consumption rose by more than one million barrels a day (bpd) in 2005 (but by 2008 had dropped by 1.8 million bpd). Consumption rose to record levels in 2010, and is expected to increase to 1.7 million barrels/day in 2011 and set new control records for 2012. The majority of the demand increase is attributable to developing countries that are not members of the Organization for Economic Cooperation and DevelopmentA group of the world’s most advanced and wealthiest economies that is both a forum for and an active participant in debates about international economic policies. It was established in 1961 and now has 34 members, including the United States, Canada, Mexico, Japan, South Korea, and most members of the European Union. (OECDA group of the world’s most advanced and wealthiest economies that is both a forum for and an active participant in debates about international economic policies. It was established in 1961 and now has 34 members, including the United States, Canada, Mexico, Japan, South Korea, and most members of the European Union.), notably China, Brazil, and Middle Eastern countries.² Most of this increase in consumption is driven by transportation and industrial needs.³ This section will discuss one important factor affecting global oil markets: growth in Chinese demand.

To read more about demand-related complications in the U.S. oil market, see Appendix B, “Demand Imperfections: Boutique GasolineA form of highly refined oil that is primarily used to fuel passenger automobiles, especially in the United States. Regulations.”

Growth in Chinese Demand

The single biggest factor underlying recent increases in global demand for oil has been China. China needs vast amounts of energy to fuel its rapid annual economic growth rates of 10-13 percent. ⁴ In the transportation sector alone, China is expected to double its demand for oil in the next 15 years as the number of cars in use in China grows fivefold. By 2020, China could be importing up to 63 percent of the oil it consumes, almost double the share it imports now. ⁵

Global Consumption, Measured by Carbon Dioxide Emissions

Source: http://www.epa.gov/climatechange/emissions/globalghg.html

These new supplies of oil must come from somewhere, and China has been aggressive in securing guaranteed long-term contracts for oil supplies around the world. ⁶ The tightness of current markets means that supplies from established oil exporters are already going to meet record levels of demand. Therefore, China has been forced to look to more troubled suppliers that other nations have avoided such as Sudan, Angola, and Gabon. China’s strategy has been to use its “soft powerPower that derives from persuasion and cooperation rather than confrontation and the exertion of force.” through loans and other diplomatic measures to develop economic alliances with these countries. ⁷ China has invested over $20 billion dollars in Sudan since the mid-1990s. ⁸

Some of China’s new partners, like Sudan, have been deliberately isolated by the international community to achieve strategic geopolitical objectives such as convincing the country’s government to take a more proactive role in curbing the activities of genocidal militias. Many find China’s willingness to “play by different rules” worrisome, arguing that it undermines the efforts of the international community to maintain moral as well as economic authority over rogue states. ⁹

For example, China’s relationship with Sudan has, in the eyes of critics, “crippled the United Nations Security Council’s ability to impose sanctions on the country because Beijing holds a permanent seat and therefore a veto.” ¹⁰ U.S. Secretary of State Condoleezza Rice warned that China’s energy strategy is “challenging…for [American] diplomacy.” ¹¹ The success of China in pursuing this strategy has emboldened other countries to show a similar disregard for international norms in their search for energy securityA complex concept meaning many things, energy security is most often used in a narrow sense to indicate the stability of a country’s supply of energy.: India, another energy-hungry Asian giant, has begun to develop closer ties with the regimes of Myanmar and Iran, both notorious for their poor records on human rights.

Not everyone agrees, however, in condemning China’s behavior. Some believe that Chinese “investment in the development of new energy supplies” should be encouraged because it strengthens global energy securityA complex concept meaning many things, energy security is most often used in a narrow sense to indicate the stability of a country’s supply of energy.. Such investment is “not a threat but something to be desired, because it means there will be more energy available for everyone in the years ahead as India and China’s demand grows.” ¹²

The case of Chinese demand is a clear illustration of the complexity of the calculus behind many energy issues. In striving to meet its own individual energy needs in ways that may be objectionable to the international community, China may nevertheless be performing the world an important service.

1 “Oil in Troubled Waters”

2 Energy Information Administration “Short-Term Energy Outlook.”

3 International Energy Outlook 2006 25-6

4 “China Lifts Annual Growth Figures”

5 Mufson

6 “Global or National”

7 Hoyos, “Continent All Set to Balance Power”

8 Sharife

9 Bader

10 Hoyos, “Continent All Set to Balance Power”

11 Mufson

12 Yergin

Next: Oil Supply I: Production