How China’s oil strategy seeks to cut the U.S. out _ About That

Abdullah Afridi

China's thirst for the world's oil has slowed dramatically. Andrew Chang explains how China is guaranteeing its energy security against possible U.S. intervention in the Malacca Strait and achieving dominance in renewables — all while electrifying its economy.  Images provided by Getty Images, The Canadian Press and Reuters. @8:39 Credit: STR/Getty Images  00:00 Intro 1:15 China identifies a vulnerability 4:12 The electrification economy 9:03 Teapots and troves

Transcript

00:00China has pulled off something of a magic trick when it comes to oil independence.

00:05Hundreds of millions of people have moved from the countryside to the city and they are making

00:10things. More than just t-shirts, toys and tables. They're making semiconductors and solar panels,

00:15new port facilities, highways, railways, pipelines, fiber optic networks. But follow the oil.

00:22Like any explosively growing economy, here's how much crude oil China imported over roughly that

00:28same period of time. This is as expected because when you're building factories, infrastructure,

00:34entire cities, you need what oil gives you, which is fuel, plastic, chemicals, even the roads that

00:42gas-burning cars are driving on. But here's the magic trick. The last five or so years,

00:48crude oil imports leveling off, even dropping in some years. How'd they do that? How did they

00:56reduce their dependence on the lifeblood of modern industry? The thing America produces

01:01more of than any other country? So for the last 12, 15 years, certainly,

01:07China has been on a quiet and increasingly visible push to become the renewable energy superpower of the

01:14world. China is the world's number one importer of crude oil. About 11 million barrels of oil,

01:25a day, which is most of the roughly 14, 15 million barrels of oil it uses a day. But over time,

01:33China began to acknowledge the possibility, the threat that if the US decided one day it wanted to

01:40harm China, it could choke off its supply. Because while you can move oil by rail and you can move it

01:46by pipeline, most oil is delivered by ship in giant tankers. China actually gets 90% of its crude oil this

01:54way. And that is a strategic vulnerability. Where the United States becomes important is that because

02:01with the size of its navy, the size of its military bases around the world, the United States is

02:08theoretically in a position to strangle China from access to its oil imports. We can find a really good

02:15example of that in the South China Sea. The US routinely deploys aircraft carriers, destroyers,

02:22and other warships to the area. It operates nearly a dozen military bases there. And consider this

02:28narrow waterway, the Malacca Strait, running between Malaysia, Singapore and Indonesia. It is the main

02:34shipping channel between the Indian and Pacific Oceans. It connects oil exporters in the Middle East

02:40to oil importers like China. And it's one of the busiest shipping lanes in the world, because taking it

02:48can shave a thousand kilometers off your trip, given the alternative, which is to go through

02:53Indonesia's Sunda Strait instead. But let's say tensions over Taiwan boil over, and the US were to

03:00decide to block Chinese traffic through that strait, which would block almost all Chinese oil?

03:06Chinese have been talking about this Malacca dilemma since the year of 2001, 2002, right? Because the

03:12transportation or the shipment of the crude oil can be easily disrupted by the United States, which has

03:18a exceedingly large naval presence in the region. A big worry for the Chinese government is, can it

03:24reliably get those imports into the country without any risk of intervention or interception?

03:30Now, the experts we spoke to mostly agreed that a US naval blockade in this region would be seen as so

03:37damaging to China's interests, that it would amount to an act of war, which means in most cases maybe the

03:44US would prefer not to go that far. But that just underscores the scale of the potential vulnerability,

03:51one that Xi Jinping himself pointed out just a few years ago. As a major manufacturing power,

03:56China has to secure its energy supply in its own hands. For him, this is a matter of national security,

04:04and one solution to this problem, rethinking the use of oil in the first place.

04:15With crude oil, you can make all kinds of things, plastic, rubber, fertilizer,

04:20lubricants, solvents, asphalt is a big one too. But when we're talking about China,

04:25the primary use of crude oil is to make fuel.

04:2812,000 cars lined up in a mad rush at Haikau in the Hainan province.

04:34These visuals have created headlines the world over for being one of the worst traffic jams ever.

04:39And no country in the world has more cars right now than China. But that's only because China has

04:46so many people. And turns out, when you really dig into the numbers, you very quickly realize

04:50450 million cars for 1.4 billion people means that most people do not own a car. Not yet, anyway. So,

05:01there was the opportunity to upend the auto industry before it even really took hold.

05:06For most countries, EV is seen as the future of driving. But for China, the future has arrived.

05:14Whether you're buying the car or building the car, providing the electricity or assembling the battery,

05:20everyone in China is entitled to government money and assistance.

05:25China has invested massively in electric vehicles, but they did it in a really shrewd way.

05:31The priority for China is renewable energy production. There's no point in having EVs if the

05:38EVs have to be charged off non-renewable sources for which you're having to rely on imports. So,

05:46the EV strategy has followed, not preempted, the renewable energy investment strategy.

05:53Yes, and I can show you 60 years of Chinese energy consumption in one simple graph to make this point.

06:00If you go back to 1965, you can see how China relied almost entirely on coal to generate electricity.

06:08Over time, oil came to form a more and more important part of the picture. But look what's

06:13happening here with hydro and nuclear and wind and solar. They've cut dramatically into the need for

06:21oil and coal. Today, China generates more wind and solar power than anybody. And just to give you a

06:28glimpse into what went into achieving that. With wind, for example, the magnets that help convert spin

06:35into electricity, those are made using rare earth elements for which China controls roughly 60 to

06:4270 percent of worldwide production. If you want to talk about refining those raw materials, it's even

06:48higher. It's closer to 90 percent of global capacity. China has gone to great lengths to insulate its

06:54supply chain from outside interference. China thought strongly right at the beginning, let's build the supply

07:02chain for the energy, then let's get the renewable energy construction going, and then let's move over

07:08to the EV capability. It's been intelligently sequenced. And the Chinese government has played a very direct

07:16role in building that EV capability from the ground up. The Center for Strategic and International Studies in

07:22Washington figures over the last 15 or so years, China has spent north of 200 billion dollars supporting the electric

07:31vehicle industry. And just to give you an example, for the last 10 years, China has exempted qualifying EVs from a 10%

07:40sales tax, which can be thousands of dollars per car. But there were also consumer subsidies, manufacturer

07:48incentives, priority for R&D funding, preferential lotteries for handing out license plates, all of

07:55which help the industry survive and thrive at lower and lower price points. Look at this car right here.

08:01It's called the Seagull by BYD. It's the cheapest EV in their lineup starting at under $10,000 US. And BYD

08:10recently overtook Tesla to become the number one selling electric automaker in the world. Today,

08:18seven out of every 10 EVs globally are made in China. Look how their industry has transformed in just the last 10 years.

08:25In 2015, 331,000 EVs sold in China. By last year, that number ballooned to 12.9 million, representing a larger and larger

08:35share of all cars sold. There are an estimated 14 million charging points across China for crying out loud.

08:43You know how many there are in the United States? About 1 60th that number.

08:48So, you know, China's gone on a really interesting journey from infrastructure, critical minerals,

08:55domestic renewable energy production, EVs, exports, you know, and the whole thing is a self-reinforcing chain.

09:02As China builds out its EV industry, it has also worked to undermine America's authority in the

09:15global oil trade, circumventing it where they can. Despite a raft of sanctions, Russia has continued

09:22shipping and selling its crude oil to the world. It's estimated more than a fifth of China's oil imports

09:28last year was sanctioned oil, as in oil from countries that the U.S. tries to block. From

09:36Venezuela, an estimated 268,000 barrels per day. From Russia, 821,000 per day. And from Iran, 1.4 million

09:47barrels per day. Oftentimes, the buyers, independent refineries known as Chinese teapots. They're smaller,

09:55harder to track, and they operate with less scrutiny. What a lot of them have been doing is

10:00importing cheap oil, refining it, and then selling it elsewhere in Asia. And they have made a lot of

10:06money doing that. It's apparently a very lucrative business for them. And this isn't the only way

10:11China's reshaping the global flow of energy bit by bit. Another example. Right now, the U.S. holds the

10:18world's largest strategic oil reserve. Hundreds of millions of barrels, enough in theory to replace

10:24months of oil imports. China is trying to build something similar. China is one of these countries

10:30that when oil prices are low, when crude oil prices are low, they will increase their imports,

10:36and they'll dump some of that oil just into these giant storage tanks that they're constantly building.

10:41So they have massive inventories of crude oil. A stockpile that would insulate China if the U.S.

10:48were to find a way to choke its supply. And China's other long-term play? What Donald Trump might call

10:56drill baby drill. In 2019, we saw China's national oil companies roll out their first-ever

11:04seven-year action plan for increasing exploration and production of oil and natural gas in China. And

11:12they started to pump tens of billions of dollars into this endeavor. And this is an important detail

11:18because Chinese oil is notoriously hard to get at. It's deeper, more complex to extract. But consider,

11:26the ExxonMobil of China, it's called PetroChina, the country's largest oil and gas company

11:32state-owned. Last year, they spent $38 billion on new infrastructure and new exploration. That's more than

11:40ExxonMobil and Chevron combined. They've been digging wells that, in some cases, run deeper than

11:46Mount Everest is high. Over the last several years, since around 2018, you can see what this growth in

11:54domestic production looks like. This climb represents millions of additional barrels of oil per day.

12:01Not enough to cover what China needs on a daily basis, mind you, but certainly enough to reduce what

12:07it needs to bring in. And that's really the subtlety of China's position in 2025. To be clear, it needs

12:16oil and it will continue to need oil for a long time. But what was only a few years ago, explosive

12:23growth in its thirst for world oil has slowed dramatically. Some estimates even figure China's

12:30growth and demand will peak in just a couple of years and then actually start dropping thereafter.

12:36That would be a big turning point for a country that sees itself as eventually replacing the United

12:44States as the world's largest economy.

12:55...

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