Future historians may well agree that the twenty-first century Silk Road first opened for business on December 14, 2009. That was the day a crucial stretch of pipeline officially went into operation linking the fabulously energy-rich state of Turkmenistan (via Kazakhstan and Uzbekistan) to Xinjiang Province in China's far west. Hyperbole did not deter the spectacularly named Gurbanguly Berdymukhamedov, Turkmenistan's president, from bragging, "This project has not only commercial or economic value. It is also political. China, through its wise and farsighted policy, has become one of the key guarantors of global security."
The bottom line is that, by 2013, Shanghai, Guangzhou, and Hong Kong will be cruising to ever more dizzying economic heights courtesy of natural gas supplied by the 1,833-kilometer-long Central Asia Pipeline, then projected to be operating at full capacity. And to think that, in a few more years, China's big cities will undoubtedly also be getting a taste of Iraq's fabulous, barely tapped oil reserves, conservatively estimated at 115 billion barrels, but possibly closer to 143 billion barrels, which would put it ahead of Iran. When the Bush administration's armchair generals launched their Global War on Terror, this was not exactly what they had in mind.
China's economy is thirsty, and so it's drinking deeper and planning deeper yet. It craves Iraq's oil and Turkmenistan's natural gas, as well as oil from Kazakhstan. Yet instead of spending more than a trillion dollars on an illegal war in Iraq or setting up military bases all over the Greater Middle East and Central Asia, China used its state oil companies to get some of the energy it needed simply by bidding for it in a perfectly legal Iraqi oil auction.
Meanwhile, in the New Great Game in Eurasia, China had the good sense not to send a soldier anywhere or get bogged down in an infinite quagmire in Afghanistan. Instead, the Chinese simply made a direct commercial deal with Turkmenistan and, profiting from that country's disagreements with Moscow, built itself a pipeline which will provide much of the natural gas it needs.
No wonder the Obama administration's Eurasian energy czar Richard Morningstar was forced to admit at a congressional hearing that the U.S. simply cannot compete with China when it comes to Central Asia's energy wealth. If only he had delivered the same message to the Pentagon.
That Iranian Equation
In Beijing, they take the matter of diversifying oil supplies very, very seriously. When oil reached $150 a barrel in 2008 -- before the U.S.-unleashed global financial meltdown hit -- Chinese state media had taken to calling foreign Big Oil "international petroleum crocodiles," with the implication that the West's hidden agenda was ultimately to stop China's relentless development dead in its tracks.
Twenty-eight percent of what's left of the world's proven oil reserves are in the Arab world. China could easily gobble it all up. Few may know that China itself is actually the world's fifth largest oil producer, at 3.7 million barrels per day (bpd), just below Iran and slightly above Mexico. In 1980, China consumed only 3% of the world's oil. Now, its take is around 10%, making it the planet's second largest consumer. It has already surpassed Japan in that category, even if it's still way behind the U.S., which eats up 27% of global oil each year. According to the International Energy Agency (IEA), China will account for over 40% of the increase in global oil demand until 2030. And that's assuming China will grow at "only" a 6% annual rate which, based on present growth, seems unlikely.
Saudi Arabia controls 13% of world oil production. At the moment, it is the only swing producer -- one, that is, that can move the amount of oil being pumped up or down at will -- capable of substantially increasing output. It's no accident, then, that, pumping 500,000 bpd, it has become one of Beijing's major oil suppliers. The top three, according to China's Ministry of Commerce, are Saudi Arabia, Iran, and Angola. By 2013-2014, if all goes well, the Chinese expect to add Iraq to that list in a big way, but first that troubled country's oil production needs to start cranking up. In the meantime, it's the Iranian part of the Eurasian energy equation that's really nerve-racking for China's leaders.
Chinese companies have invested a staggering $120 billion in Iran's energy sector over the past five years. Already Iran is China's number two oil supplier, accounting for up to 14% of its imports; and the Chinese energy giant Sinopec has committed an additional $6.5 billion to building oil refineries there. Due to harsh U.N.-imposed and American sanctions and years of economic mismanagement, however, the country lacks the high-tech know-how to provide for itself, and its industrial structure is in a shambles. The head of the National Iranian Oil Company, Ahmad Ghalebani, has publicly admitted that machinery and parts used in Iran's oil production still have to be imported from China.
Sanctions can be a killer, slowing investment, increasing the cost of trade by over 20%, and severely constricting Tehran's ability to borrow in global markets. Nonetheless, trade between China and Iran grew by 35% in 2009 to $27 billion. So while the West has been slamming Iran with sanctions, embargos, and blockades, Iran has been slowly evolving as a crucial trade corridor for China -- as well as Russia and energy-poor India.
Unlike the West, they are all investing like crazy there because it's easy to get concessions from the government; it's easy and relatively cheap to build infrastructure; and being on the inside when it comes to Iranian energy reserves is a necessity for any country that wants to be a crucial player in Pipelineistan, that contested chessboard of crucial energy pipelines over which much of the New Great Game in Eurasia takes place. Undoubtedly, the leaders of all three countries are offering thanks to whatever gods they care to worship that Washington continues to make it so easy (and lucrative) for them.
Few in the U.S. may know that last year Saudi Arabia -- now (re)arming to the teeth, courtesy of Washington, and little short of paranoid about the Iranian nuclear program -- offered to supply the Chinese with the same amount of oil the country currently imports from Iran at a much cheaper price. But Beijing, for whom Iran is a key long-term strategic ally, scotched the deal.
As if Iran's structural problems weren't enough, the country has done little to diversify its economy beyond oil and natural gas exports in the past 30 years; inflation's running at more than 20%; unemployment at more than 20%; and young, well educated people are fleeing abroad, a major brain drain for that embattled land. And don't think that's the end of its litany of problems.
It would like to be a full member of the Shanghai Cooperation Organization (SCO) -- the multi-layered economic/military cooperation union that is a sort of Asian response to NATO -- but is only an official SCO observer because the group does not admit any country under U.N. sanctions. Tehran, in other words, would like some great power protection against the possibility of an attack from the U.S. or Israel. As much as Iran may be on the verge of becoming a far more influential player in the Central Asian energy game thanks to Russian and Chinese investment, it's extremely unlikely that either of those countries would actually risk war against the U.S. to "save" the Iranian regime.