An IDC Analysis


New Delhi, 30 May 2006


The economic boom came and went and the bullishness was corrected by foreign investors pulling out and the dip in commodities. Just wait for the corrections due to the Iraq war and energy crisis coming in the next one year. USA too is in boom, the huge deficit notwithstanding. Russia does not know what to do with its earnings and reserves and are back to military spending to take on USA. The so called Cornelli Barnett's theory that spending on Defence fuels the economy is on the move in Russia.

The nation's economic indicators are strong as NRI money from abroad in participatory notes and FDI continues to flow like water. Returning Indians are coming back with flush pockets and the property market is sizzling. But we predict tough days ahead for India on the energy front in the coming years, which will have an effect on the economy, and the country is doing little about it.

The electricity crisis in New Delhi is hitting businesses, not the VIPs, and both Tatas and BSES are trying to cope but UP, Gurgaon and many parts of India are in a terrible shortage and transmission losses are colossal. The cost of energy is rising world wide, and the supply is just keeping up with demand and Russia is pumping away and depleting its reserves. China is building up huge strategic reserves and its demand is rising. Indonesia is set to become a net importer as its economy has picked up.

The Indian Government is unable to raise prices, an education reservation policy muddle is keeping the Government busy and the Left has won in Bengal and unless they relent, prices of gas and fuels will rise only marginally. Even in USA prices have risen dramatically. The Iran factor, problems in Bolivia, Venuzuela or Nigeria can set off crises of their own. Gas prices are high and linked to oil as the world goes into gas mode all over and the Kyoto protocol will hit coal based plants.

Unfortunately, the PM and his people are banking on the Nuclear Deal and travelling to and fro, but no one is saying where the capital for such nuclear power plants will come from, where is the time schedule –– in India save Delhi's Metro no Government projects have been built on time. Nuclear plants take at least 5 to 7 years to build and India will never have more than 7 to 8% of its demand met by nuclear energy. The PWHR reactors we have work at 47% capacity due to many reasons.

The US Nuclear deal is still to be reviewed as a military deal by USA, to curb India's proliferation in the main and do nuclear plant business as a side effect. In fact France may gain and on 29th May the NSG meets in Rio so all our brains will be there as locally LTTE go into fighting mode, Nepal yearns for democracy and Bangladesh slips towards China. The region is in neglect by big brother India.

In this context the following summary on China is timely.

China and the Middle East –– Building Market Share

It is no secret that China's demand for energy imports, especially oil, will increase as the country continues to modernize. Already the world's second largest oil importer, the addition of new vehicles, additional housing, richer citizens capable of greater consumption and environmental degradation as a result of coal-fired generators portend that demand for imported energy resources will only increase in the near future. Estimates suggest that demand will balloon from current consumption levels of over 6 million barrels of oil per day to more than 14 million by 2025. However, the question remains: how will China meet its future energy needs? China’s oil diplomacy initiatives are based on China’s growing relationship with the states of the Middle East.

Finding a Niche

China’s charm offensive in Africa, Latin America and Central Asia represents an opportunistic strategy that aims to take advantage of a diplomatic vacuum ( India is not following up in Middle East) with respect to bilateral relationships. That is to say, to date, China has largely been happy to set its sights on potential oil and gas partners that have been maligned, or at least ignored, by the United States. China has been happy to exploit this void, moving aggressively into markets not explicitly unfriendly, but increasingly estranged from Washington. These include markets in Central Asia, and Central and South America. For China, these states are the low-hanging fruit, and while cultivating new bilateral relationships among them has required some investment and effort from Beijing, they have not challenged the dominance of the United States as a global energy importer.

Much more challenging has been China’s attempts to enter into the Middle Eastern market. Though there are ample opportunities to develop energy relationships outside of the Middle East, China is drawn to the region for several reasons. First, Middle Eastern oil is ‘sweeter’ or of a higher grade than oil found elsewhere. This means that the oil comes out of the ground almost ‘ready-to-consume’, that is, there are lower and fewer refining costs for the consumer. Second, oil and gas fields in Middle Eastern deserts are largely already identified, tapped and/ or easily brought online. For the consumer, this means not only lower capital outlays at the front end of an energy deal, but also lower operating costs as the oil is extracted and shipped abroad. Though new partners in Africa, Latin America and Central Asia give Beijing some hope that energy security might be within reach, Chinese players are rightly concerned that real energy security cannot be guaranteed until China can increase its market share in the Middle East.

Reflecting this reality, China has begun to approach the Middle Eastern region as an energy consumer. China is acutely aware that the region’s leaders are already deeply involved with powers in Washington, as well as aware that the oil trade in the region is associated with colonial ambition of the sort that China’s diplomacy offensive since 2003 has actively attempted to dispel. Any Chinese strategy to enter into the Middle Eastern oil trade needs to be consistent with China’s commitment to a ‘peaceful rise’. If it does not, alarm bells may sound not only in New Delhi, but also in parts of Southeast Asia.

Low Hanging Fruit

China’s path to energy security then necessarily leads through the Middle East, though the routing is unclear. Not surprisingly, Beijing has begun its approach using its tested method of gathering the low-hanging fruit in states already estranged from Washington. In the Middle East, this means courting Iran and Syria.

Assessing Risk

China has evidently already made significant inroads into the Middle Eastern energy market. With important cornerstone suppliers in Iran and Saudi Arabia, China is maneovring to position itself as a customer-of-choice among the smaller oil exporters of the region, including Syria, Yemen and the states of the GCC. While there are several advantages for the states of the region to diversify their reliance away from Washington, there should be real hesitation when we consider that China is not in a position to provide the kind of umbrella security traditionally provided by the United States. China may be a more comfortable partner for many Middle Eastern regimes, because of the predictability of Chinese demand and market operation and because of China’s willingness to respect the absolute sovereignty of its commercial partners. However, as many states in the region, including Saudi Arabia, Yemen, Oman and Kuwait owe much of their internal and external security to a strong relationship with Washington, there is only so much room for manoeuvre. Until the fundamental security calculus in the Middle East changes, there will be little opportunity for states in the region to diversify their economic interests away from Washington in any way that threatens US energy security. In the meantime, China will continue to pursue soft power and diplomacy, and small-scale energy projects in the region, that define its energy niche in the region.

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