When The Oil Wars Blow  

Will Hutton had a good piece in the weekend's Observer about the great game being played between China and the US over oil - one more person in the "smells like 1914" camp.

In related news China and Kazakhstan have apparently decided to strengthen ties, while the Chinese-Russian relationship seems to be getting closer - but the Russians seem to have some reservations about guaranteeing oil supplies to China. On the other edge of Russia, there are already rumblings about supposedly newly democratic Ukraine facing a change of government before the end of the year.

This is a new great geopolitical game and neither the Chinese nor American military are impressed by arguments that the market must rule and that great powers in today's globalised world no longer need strategic oil reserves. The US keeps six nuclear battle fleets permanently at sea supported by an unparalleled network of global bases not because of irrational chauvinism or the needs of the military-industrial complex, but because of the pressure they place on upstart countries like China.

Japan's decision this year to abandon its effort to build its own oil company and attempted strategic reserve was an overt acceptance of its dependent position. China is not ready to make the same admission of defeat.

No country has offered such a comparable challenge to the world order since Germany's rise at the end of the 19th century. Like China today, it wanted markets and raw materials; like China today, it confronted a world ordered around the needs of the existing powers; like China today, its gigantic size and explosive growth could not be ignored. Germany built fleets and scrambled for colonies in Africa. Today, China builds fleets and scrambles for oil reserves. The open question is whether it will end in another 1914.

The optimistic reply is that China is being much cleverer than the Kaiser's Germany. It has expanded by opening up to the world, so giving its great power rivals a stake in its growth; 400 of the US's top 500 companies manufacture in China. Wal-Mart, the US's largest retailer, is founded on cheap Chinese imports. China may have built up immense foreign currency reserves, but it judiciously lends them to the US, so financing the US's trade deficit.

Although oil prices are troublingly high, some experts like Erasmus University's Professor Peter Odell believe that, far from oil reserves running out, the earliest world production might peak is well after 2050, and that takes no account of more efficient energy use. Today's upward oil price spike won't last long. There is more than enough oil for China.

The pessimistic reply is that's not how it feels or how the game is currently being played. Even if there is enough oil, it is in parts of the world that are endemically volatile. As Paul Roberts points out in The End of Oil, the geological formations that create oil have already been identified and the easily exploitable reserves are rapidly depleting.