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2003

CHINA’S ENERGY NEEDS AND STRATEGIES

HEARING

BEFORE THE

U.S.-CHINA ECONOMIC AND SECURITY 

REVIEW COMMISSION

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

OCTOBER 30, 2003

Printed for the use of the 

U.S.-China Economic and Security Review Commission 

Available via the World Wide Web: http://www.uscc.gov

(
U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION

ROGER W. ROBINSON, Jr., Chairman 

C. RICHARD D’AMATO, Vice Chairman 

CAROLYN BARTHOLOMEW, Commissioner 

GEORGE BECKER, Commissioner 

STEPHEN D. BRYEN, Commissioner 

JUNE TEUFEL DREYER, Commissioner 

ROBERT F. ELLSWORTH, Commissioner 

MICHAEL LEDEEN, Commissioner 

PATRICK A. MULLOY, Commissioner 

WILLIAM A. REINSCH, Commissioner 

MICHAEL R. WESSEL, Commissioner 

LARRY M. WORTZEL, Commissioner

DAVID J. OHRENSTEIN, Executive Director 

KATHLEEN J. MICHELS, Associate Director

The Commission was created in October 2000 by the Floyd D. Spence National Defense Authorization Act for 2001 sec. 1238, Public Law 106–

398, 114 STAT. 1654A–334 (2000) (codified at 22 U.S.C. sec. 7002 (2001)), 

as amended, and the ‘‘Consolidated Appropriations Resolution of 2003,’’ 

Public Law 108–7, dated February 20, 2003. Public Law 108–7 changed 

the Commission’s title to U.S.-China Economic and Security Review Commission. 

The Commission’s full charter is available via the World Wide Web: http:// 

www.uscc.gov. 

The Commission’s Statutory Mandate begins on page 127. 

(II) 
iii

U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION

DECEMBER 17, 2003

The Honorable TED STEVENS, 

President Pro Tempore of the U.S. Senate, Washington, D.C. 20510

The Honorable J. DENNIS HASTERT, 

Speaker of the House, Washington, D.C. 20515

DEAR SENATOR STEVENS AND SPEAKER HASTERT:

On behalf of the U.S.-China Economic and Security Review Commission, we are 

pleased to transmit a record of our hearing of October 30, 2003, on China’s energy 

needs and strategies and the implications for global energy markets and China’s 

geopolitical relations. 

The Commission’s statutory mandate (P.L. 108–7, Division P) calls on us to assess, among other issues, ‘‘how China’s large and growing economy will impact upon 

world energy supplies and the role the United States can play, including joint R&D 

efforts and technological assistance, in influencing China’s energy policy.’’ The Commission’s mandate further directs it to examine China’s economic and strategic relations with its regional neighbors and other countries, of which China’s energy policies are an important component. 

During our hearing we heard testimony from nine distinguished experts on the 

economic and security dimensions of China’s energy strategies, including Guy Caruso, Administrator of the Department of Energy’s Energy Information Administration, and former Director of Central Intelligence R. James Woolsey. The Commission 

also conducted a luncheon discussion on the geoeconomic and geopolitical aspects of 

China’s energy strategies with former Secretary of Defense and Energy James R. 

Schlesinger. 

The key issue raised in the hearing is whether China will continue to pursue new 

energy supplies in the Middle East and elsewhere in competition with, or cooperation with, the U.S. and other consuming nations. The continuation of China’s unilateral approach could provide additional price leverage for OPEC member countries. 

It may also encourage China to offer incentives to energy supplier nations, as it has 

in the past, including missile and WMD components and technologies, for secure 

long-term access to energy supplies. This practice substantially undermines U.S. 

global nonproliferation policies. On the other hand, China could pursue its urgent 

quest for new energy on a more multilateral basis, working with the U.S. and other 

nations to manage access to supplies, and put into place, for example, the coordinated release of oil stocks to counter future price spikes. Such cooperation would 

preferably involve the kind of arrangements already in force within the framework 

of the International Energy Agency (IEA), benefiting both U.S. energy security and 

nonproliferation goals. China’s extraordinary rate of economic growth has made it 

a rapidly growing consumer of energy. Currently China stands as the world’s second 

largest consumer of energy (behind the United States) and its third largest consumer of oil (behind the United States and Japan). With this increasing demand has 

come an increasing reliance on imported energy. China became a net oil importer 

in 1993 and now imports nearly 2 million barrels per day, projected to increase to 

more than 6 million barrels per day by 2020, making it a major factor in world energy markets. 

China has a comprehensive energy security strategy, consisting of demand reduction, diversification, leveraging bilateral relationships with key Middle East suppliers, building stronger ties with Russia, and establishing a market position in 

Central Asia. Currently, coal dominates China’s energy consumption (65 percent). 

This poses a tremendous environmental challenge to both China and the world as 

much of this consumption involves unwashed coal and has lead to a surge in air 

pollution and emissions of greenhouse gases. In this area, China is proceeding with 

improving its energy efficiency, and its use of clean coal technology, coal liquefaction 

and gasification and coal-bed methane development, exploration, and production. 

Oil is the second largest source of energy for China, accounting for 25 percent of 

its energy consumption, and China will soon be the world’s second largest oil importer after the U.S. The world’s major oil importing nations belong to the multilateral framework of the IEA. China is the largest oil-consuming nation that does not 

participate in the IEA system, including the IEA’s coordination of joint releases 

from strategic reserves to counter politically motivated supply reductions by oil producers. China has opted to pursue bilateral arrangements and investment in energy 
iv

production and a possible small strategic oil reserve to address its energy security 

concerns. 

To achieve its goal of diversifying oil import sources, and to enhance its energy 

security, China has entered into energy deals with a number of countries, including 

some—Iran and Sudan—that are on the State Department’s list of terrorist-sponsoring states. These arrangements are troubling, especially to the extent they might 

involve political accommodations and sales or other transfers of weapons and military technologies to these nations. 

In sum, China’s growing energy demands, particularly its increasing reliance on 

oil imports, pose economic, environmental, and geostrategic challenges to the United 

States. The Commission will continue its thorough examination of China’s energy 

needs and strategies and advise the Congress as appropriate with regard to developing appropriate U.S. policies to influence China’s energy policies in a manner consistent with U.S. interests. 

Yours truly,

Roger W. Robinson, Jr. 

Chairman 

C. Richard D’Amato 

Vice Chairman 
(V)

CONTENTS 

Page

THURSDAY, OCTOBER 30, 2003

CHINA’S ENERGY NEEDS AND STRATEGIES

Opening remarks of Chairman Roger W. Robinson, Jr. ....................................... 1

Prepared statement .......................................................................................... 2

Opening remarks of Vice Chairman C. Richard D’Amato .................................... 2

Opening remarks of Commissioner Michael R. Wessel, Hearing Co-Chair ........ 3

Prepared statement .......................................................................................... 4

Opening remarks of Commissioner Michael Ledeen, Hearing Co-Chair ............ 5

Prepared statement .......................................................................................... 6

PANEL I: CHINA’S ENERGY OUTLOOK: RECENT TRENDS AND FUTURE FORECASTS

Statement of Guy Caruso, Administrator, Energy Information Administration 6

Prepared statement .......................................................................................... 10

Discussion, Questions and Answers ....................................................................... 19

PANEL II: ENERGY MARKET AND SUPPLY IMPLICATIONS OF CHINA’S ECONOMIC

GROWTH

Statement of Amy Myers Jaffe, Wallace Wilson Fellow for Energy Studies, 

James A. Baker III Institute for Public Policy, Rice University ...................... 27

Prepared statement .......................................................................................... 30

Statement of Kang Wu, Ph.D., Fellow and Head of China Energy Project, 

East-West Center ................................................................................................. 36

Prepared statement .......................................................................................... 39

Statement of Dean P. Girdis, Director, PFC Energy ............................................ 43

Prepared statement .......................................................................................... 46

Discussion, Questions and Answers ....................................................................... 58

LUNCHEON SESSION

Statement of James R. Schlesinger, Chairman, Board of Trustees, The Mitre 

Corporation ........................................................................................................... 66

PANEL III: CHINA’S ENERGY DIPLOMACY AND ITS GEOPOLITICAL IMPLICATIONS I 

Statement of R. James Woolsey, Vice President, Booz Allen & Hamilton .......... 72

Discussion, Questions and Answers ....................................................................... 73

PANEL IV: CHINA’S ENERGY DIPLOMACY AND ITS GEOPOLITICAL IMPLICATIONS II 

Statement of Robert E. Ebel, Chairman, Energy Program, Center for Strategic and International Studies .......................................................................... 83

Prepared statement .......................................................................................... 86

Statement of Edward L. Morse, Executive Advisor, Hess Energy Trading 

Company ............................................................................................................... 88

Statement of Kent E. Calder, Director, Reischauer Center for East Asian 

Studies, Nitze School for Advanced International Studies, Johns Hopkins 

University ............................................................................................................. 91

Prepared statement .......................................................................................... 93

Statement of Constantine C. Menges, Ph.D., Senior Fellow, Hudson Institute . 98

Prepared statement .......................................................................................... 101

Discussion, Questions and Answers ....................................................................... 117

(1)

CHINA’S ENERGY NEEDS AND STRATEGIES 

THURSDAY, OCTOBER 30, 2003

U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION, 

Washington, D.C. 

The Commission met in Room 124, Dirksen Senate Office Building, Washington, D.C. at 10:05 a.m., Commissioners Michael R. 

Wessel and Michael Ledeen (Hearing Co-Chairs), presiding. 

OPENING REMARKS OF CHAIRMAN ROGER W. ROBINSON, JR. 

Chairman ROBINSON. Thank you. We’d like to begin our scheduled hearing for today. First, we would like to welcome all of you 

to the U.S.-China Economic and Security Review Commission’s 

fourth hearing during the 108th Congress. Today, the Commission 

will be examining China’s energy requirements and strategies and 

addressing the potential impact of those requirements on global energy markets and China’s geopolitical relations. These are very significant questions for both U.S. economic and national security interests and ones that have not been given significant attention to 

date. 

Today’s discussion is a timely one. Energy concerns in the U.S. 

have come to the forefront. There is an energy bill currently pending before Congress, and the country is examining its antiquated 

electrical grid in the wake of last summer’s widespread blackout. 

Perhaps not since the 1970s are Americans as focused on our increased dependence on oil imports and their vulnerability to political events overseas. 

China’s energy picture poses a unique set of challenges for the 

United States. With a rapidly expanding economy and improved 

standard of living, it should come as no surprise that China is now 

the world’s second largest energy consumer after the United States 

and its third-largest consumer of oil. In the early 1990s, China became a net importer of oil and now imports nearly 2 million barrels 

a day. At the same time, China remains both the largest producer 

and consumer of coal in the world. 

Given these dynamics, it is clear that how China chooses to meet 

its future energy demands will have profound implications for global energy markets, the environment and its relationships in Asia, 

the Middle East, Central Asia and beyond. This last point provides 

a clear indication of the intersection between economic and security 

concerns. In its 2002 report to Congress, the Commission expressed 

concern that China’s energy needs may be a driver in its relations 

with certain oil-producing state sponsors of terrorism, particularly 

Iran and Sudan, and that arms sales and components for weapons 
2

of mass destruction and missile programs may be part of China’s 

efforts to secure oil and gas contracts and concessions. 

This potential nexus deserves more attention by the U.S. Government, and the Commission will continue to follow these developments closely, particularly with respect to Chinese energy relations 

with Iran, Libya, Sudan and Syria. I look forward to today’s testimony from a distinguished group of panelists and will now turn it 

over to our Vice Chairman, Richard D’Amato and today’s hearing 

Co-Chairs, Commissioners Michael Wessel and Michael Ledeen. 

[The statement follows:]

Prepared Statement of Chairman Roger W. Robinson, Jr. 

Welcome to the U.S.-China Economic and Security Review Commission’s fourth 

hearing during the 108th Congress. Today the Commission will be examining China’s energy requirements and strategies and addressing the potential impact of 

those requirements on global energy markets and China’s geopolitical relations. 

These are very significant questions for both U.S. economic and national security 

interests, and ones that have not been given significant attention to date. 

Today’s discussion is a timely one. Energy concerns in the U.S. have come to the 

forefront. There is an energy bill currently pending before Congress and the country 

is examining its antiquated electrical grid in the wake of last summer’s widespread 

blackout. Perhaps not since the 1970’s are Americans as focused on our increased 

dependence on oil imports and their vulnerability to political events overseas. 

China’s energy picture poses a unique set of challenges for the United States. 

With a rapidly expanding economy and improved standard of living, it should come 

as no surprise that China is now the world’s second largest energy consumer (after 

the U.S.) and its third largest consumer of oil. In the early 1990’s, China became 

a net importer of oil, and now imports nearly 2 million barrels per day. At the same 

time, China remains both the largest producer and consumer of coal in the world. 

Given these dynamics, it is clear that how China chooses to meet its future energy 

demands will have profound implications for global energy markets, the environment, and its relationships in Asia, the Middle East, Central Asia and beyond. This 

last point provides a clear indication of the intersection between economic and security concerns. In its 2002 Report to Congress, the Commission expressed concern 

that China’s energy needs may be a driver in its relations with certain oil producing 

state-sponsors of terrorism—particularly Iran and Sudan—and that arms sales and 

components for weapons of mass destruction (WMD) and missile programs may be 

a part of China’s efforts to secure oil and gas contracts and concessions. This potential nexus deserves more attention by the U.S. Government, and the Commission 

will continue to follow these developments closely, particularly with respect to Chinese energy relations with Iran, Libya, Sudan, and Syria. 

I look forward to today’s testimony from a distinguished group of panelists and 

will now turn it over to our Vice Chairman Richard D’Amato and today’s hearing 

Co-Chairs, Commissioners Michael Wessel and Michael Ledeen.

OPENING REMARKS OF VICE CHAIRMAN C. RICHARD D’AMATO 

Vice Chairman D’AMATO. Thank you, Mr. Chairman. I would just 

like to make one point to reiterate the Chairman’s remarks. The 

Congress has asked this Commission, by statute, to examine the 

potential impacts of China’s growing and voracious appetite for energy, on U.S. global national security interests. 

China is traveling down the road the United States has been on 

and is increasing its imports of oil, natural gas and coal into the 

foreseeable future. Those requirements are going to be escalating 

rapidly until China will, like the U.S., be dependent on half or 

more of its oil needs from imports. Where and how the Chinese go 

to satisfy that appetite is going to say a lot about whether or not 

the Chinese are prepared to act cooperatively or competitively with 

the West and the United States in managing that share of world 

supply. The jury is, in some ways, out, but there are some danger 
3

signs on the horizon, which is the reason for today’s hearing, and 

we will be interested to hear our witnesses’ testimony on it. 

And with that, I want to turn it over to our hearing Co-Chairman, Commissioner Wessel, who has invested considerable time 

and thought in putting today’s session together.

OPENING REMARKS OF COMMISSIONER MICHAEL R. WESSEL

HEARING CO-CHAIR 

Co-Chairman WESSEL. Thank you. I appreciate it, and thank 

you, Mr. Caruso, for being here. 

Today, the Commission will be examining the increasingly important issue of China’s growing energy needs; its strategies for meeting those demands and the implications for the U.S. economy and 

our national security. This is an important component of our legislative mandate from Congress and one that China analysts both inside and outside the government likely will be devoting increasing 

attention to over the next decade. 

The Commission will address several issues today. We will first 

examine China’s current trajectory of energy consumption and production. China’s stated energy policy goals are to reduce reliance 

on imports by further diversifying the types of energy used, diversifying the countries of origin of its energy imports and raising the 

level of technological sophistication in its energy production. 

We will explore whether China is pursuing these stated goals in 

practice. We also will examine the impact of China’s energy demand on world supply and pricing. China currently pursues a far 

more bilateral approach toward its oil imports than does the larger 

oil-consuming nation community. We will investigate whether this 

impacts the supply availability and pricing situation for the U.S. 

and its allies. We will also discuss the impact of fluctuating energy 

prices on China’s GDP and export output. 

We will further examine the effectiveness of current Sino-U.S. bilateral energy cooperation programs; whether such programs are 

furthering U.S. interests and what other ways the U.S. can act to 

favorably affect China’s energy policy. Beyond the energy market 

and economic issues, we will explore the geopolitical dynamics at 

work. How does China’s growing energy needs drive its diplomacy 

in Asia and beyond? Where is China investing money in resources 

to secure energy supplies? And how do these relationships enhance 

or diminish the prospects for conflict? 

Of particular concern is whether China engages with any terrorist-sponsoring and other rogue nations in pursuit of energy supplies and whether non-monetary considerations, including arms 

sales, as has been noted earlier, are part of such arrangements. 

I will chair the morning session of the hearing, and my hearing 

Co-Chair, Michael Ledeen, will chair the afternoon session. We will 

begin by hearing from Guy Caruso, Administrator of the Energy Information Administration, who will provide the Commission with 

an overview of China’s current energy situation and the forecasted 

trends over the next two decades. Administrator Caruso will also 

discuss the U.S. Government’s bilateral energy programs with 

China. 

The normal approach of the Commission is to ask each of our 

panelists to present their views in approximately 10 minutes or 
4

less so that there is enough time for Commissioners to ask questions. Any prepared comments and/or written materials of the panelists will be made part of the record at their request. Commissioners will be limited to seven minutes of questions. That includes 

both the questions and the answers. We want to have time for everyone to participate in today’s hearing. 

Mr. Caruso, we understand that you have a PowerPoint presentation, and we will be liberal with our time demands or time limitations so that we can have the opportunity to hear all of that, and 

Mr. Ledeen, did you wish to make comments at this time or later 

this afternoon? 

[The statement follows:]

Prepared Statement of Commissioner Michael R. Wessel

Hearing Co-Chair 

Today the Commission will be examining the increasingly important issue of China’s growing energy needs, its strategies for meeting those demands, and the implications for the U.S. economy and our national security. This is an important component of our legislative mandate from Congress and one that China analysts, both 

inside and outside the government, likely will be devoting increasing attention to 

over the next decade. 

The world’s developed and developing economies increasingly rely on oil imports 

for their economic growth. Global energy demand is rapidly increasing due to the 

growing numbers of countries, including China and India, which have joined the 

ranks of oil dependent economies. China became a net oil importer in 1993 and currently imports nearly two million barrels per day, with that level projected to increase greatly in the next twenty years. 

Our mandate from Congress directs the Commission to ‘‘evaluate and assess how 

China’s large and growing economy will impact upon world energy supplies and the 

role the United States can play, including joint R&D efforts and technological assistance, in influencing China’s energy policy.’’ The Commission’s mandate further directs it to examine China’s economic and strategic relations with its regional neighbors and other countries, of which China’s energy policies are an important component. How China addresses its escalating energy needs over the next decade likely 

will have significant implications for both U.S. economic and security interests as 

well as on the world’s environment. 

The Commission will address several issues today. We will first examine China’s 

current trajectory of energy consumption and production. China’s stated energy policy goals are to reduce reliance on imports by further diversifying the types of energy used, diversifying the countries of origin of its energy imports, and raising the 

level of technological sophistication in its energy production. We will explore whether China is pursuing these stated goals in practice. We also will examine the impact 

of China’s energy demand on world supply and pricing. China currently pursues a 

far more bilateral approach towards its oil imports than does the larger oil-consuming nation community. We will investigate whether this impacts the supply 

availability and pricing situation for the U.S. and its allies. We will also discuss the 

impact of fluctuating energy prices on China’s GDP and export output. We will further examine the effectiveness of current Sino-U.S. bilateral energy cooperation programs—whether such programs are furthering U.S. interests—and what other ways 

the U.S. can act to favorably affect China’s energy policy. 

Beyond the energy market and economic issues, we will explore the geopolitical 

dynamics at work. How does China’s growing energy needs drive its diplomacy in 

Asia and beyond? Where is China investing money and resources to secure energy 

supplies and how do these relationships enhance or diminish the prospects for conflict? Of particular concern is whether China engages with any terrorist-sponsoring 

and other rogue nations in pursuit of energy supplies and whether non-monetary 

considerations—including arms sales—are part of such arrangements. 

I will chair the morning session of the hearing and my hearing Co-Chair Michael 

Ledeen will chair the afternoon session. We will begin by hearing from Guy Caruso, 

Administrator of the Energy Information Administration, who will provide the Commission with an overview of China’s current energy situation and the forecasted 

trends over the next two decades. Administrator Caruso will also discuss the U.S. 

Government’s bilateral energy programs with China. 
5

The next panel will focus on the economic and energy market implications of China’s current and future energy demands. We will hear from Amy Myers Jaffe, Dr. 

Kang Wu, and Dean Girdis. Ms. Jaffe is the Wallace Wilson Fellow for Energy Studies at the James A. Baker Institute for Public Policy and Associate Director of the 

Rice University Energy Program. She is the principal author and research director 

for eight energy studies published by the Baker Institute, which include topics such 

as Chinese Energy Policy and Global Oil Geopolitics. Dr. Wu comes to us from the 

East-West Center in Hawaii where he is head of the China Energy Project. His 

work includes energy modeling and Asia-Pacific energy demand forecasting. Dean 

Girdis, Director of the Gas and Power Group of PFC Energy has had extensive experience consulting on energy development and reform and energy security in China. 

During the afternoon session we will turn our attention to the geopolitical dimensions of China’s energy strategies. We will hear first from the Hon. R. James Woolsey, former Director of the Central Intelligence Agency, followed by Robert Ebel, 

Project Director for the Center for Strategic and International Studies’ Strategic Energy Initiative, Constantine Menges of the Hudson Institute, and Professor Kent 

Calder of the Johns Hopkins School for Advanced International Studies. My CoChair Michael Ledeen will expand further on this panel after lunch. 

The Commission welcomes these distinguished panelists and we look forward to 

dialoguing with them on the important issues before us. 

The normal approach of the Commission is to ask each of our panelists to present 

their views in approximately 10 minutes or less so that there is enough time for 

the Commissioners to ask questions. Any prepared comments and/or written materials of the panelists will be made part of the record, at their request. 

Commissioners will be limited to 5 minutes of questions—that includes both the 

questions and the answers. We want to have time for everyone to participate in today’s hearing. 

With that, we will begin with Mr. Caruso.

OPENING REMARKS OF COMMISSIONER MICHAEL LEDEEN

HEARING CO-CHAIR 

Co-Chairman LEDEEN. In the interests of saving time, I thought 

I would just read my statement. 

We here at the Commission have been trying to figure out what 

China means for our future and what we might choose to do about 

it. To that end, we have looked at various aspects of Chinese activity as well as the mirror image, Chinese efforts to figure out what 

we mean for their future and what they might choose to do about 

it. 

This session deals with the growing Chinese appetite for energy 

to drive what they hope will be their constant, rapid economic 

growth. Many energy experts believe that China’s huge appetite 

will drive up prices for everyone, including the United States. Others are more optimistic about supply and resist this conclusion. In 

either case, it is likely there will be some strains in the U.S.-China 

relationship revolving around competition for energy sources, and 

there may well be internal American problems as well. 

Finally, a considerable amount of the world’s energy supply is in 

the hands of rogue nations like Iran and Libya and also in countries with increasingly ambiguous and worrisome relations with 

international terrorists such as Saudi Arabia and Venezuela. Basic 

geopolitical prudence requires that we carefully watch China’s 

choice of suppliers and attempt to analyze this in terms of our 

broader concerns. 

As we reported a year ago, Chinese military doctrine foresees 

conflict with the United States, and China’s choice of suppliers undoubtedly figures in their planning for such contingencies. We’re 

very happy to have you with us today, Mr. Caruso. Thanks for coming. Please proceed. 

[The statement follows:]
6

Prepared Statement of Commissioner Michael Ledeen

Hearing Co-Chair 

We here at the Commission have been trying to figure out what China means for 

our future, and what we might choose to do about it. To that end, we have looked 

at various aspects of Chinese activity as well as at the mirror image; Chinese efforts 

to figure out what we mean for their future, and what they might do about it. 

Today’s session deals with the growing Chinese appetite for energy, to drive what 

they hope will be their constant, rapid economic growth. Many energy experts believe that China’s huge appetite will drive up prices for everyone, including the 

United States. Others are more optimistic about supply, and resist this conclusion. 

In either case, it is likely there will be some strains in the U.S.-China relationship 

revolving around competition for energy sources, and there may well be internal 

American problems as well. 

Finally, a considerable amount of the world’s energy supply is in the hands of 

rogue regimes like Iran and Libya, and also in countries with increasingly ambiguous and worrisome relations with international terror, such as Saudi Arabia and 

Venezuela. Basic geopolitical prudence requires that we carefully watch China’s 

choice of suppliers, and attempt to analyze this in terms of our broader concerns. 

As we reported a year ago, Chinese military doctrine foresees conflict with the 

United States, and Chinese choice of suppliers undoubtedly figures in their planning 

for such contingencies.

PANEL I: CHINA’S ENERGY OUTLOOK: RECENT TRENDS AND 

FUTURE FORECASTS 

STATEMENT OF GUY CARUSO

ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION 

Mr. CARUSO. Thank you, Mr. Chairman, Members of the Commission, today’s Co-Chairs. I appreciate the opportunity to be here 

today and speak about this very important country that is critically 

important to energy markets, even more so as we look out a decade 

or two. 

China and energy are inextricably linked. If one thinks of the 

last half-century of energy markets and asks what was the prize 

that energy companies, energy-dominated government organizations were after, it was really focused on supply and the Middle 

East, and we have all seen what has happened to that picture as 

the second half of the last century evolved. 

When one looks over the next couple decades, the prize is where 

can the oil and gas reserves that have been discovered in that 

search since World War II be marketed? And inevitably, whether 

one is at an international conference or industry meeting, all are 

looking toward China, particularly in oil, as a key market for their 

oil, whether it is a government company or a major oil company. 

So China represents the demand prize of the next couple decades, as our numbers will show. And the implications, of course, 

are important not only for global energy markets but, as the Chairman mentioned in his opening remarks, the geopolitical scene, energy security, and where is the oil going to come from and what 

kind of relationships does that mean? 

And probably equally important to energy security is the environmental implications of the China picture that you have been 

studying and that I will present over the coming minutes. China 

is the second-largest energy consumer in the world already and 

growing faster than anyone else. It continues to rely on coal as its 

dominant fuel, and this will not change, and this has important implications for the global environment. Its oil consumption and imports will grow faster than any other country, and our projection 
7

is that 15 percent of incremental growth in oil demand in the world 

over the next 20 years will go to China. 

They are trying to do what they can to improve the energy and 

environment mix in their country by shifting away from coal to 

natural gas and, to a lesser extent, to the building of nuclear power 

plants to alleviate coal’s dominant share in the electricity sector. 

So China will continue to be the fastest growing world energy 

consumer and will account for 13 percent of world energy use and 

9 percent of world oil consumption by 2020 in our latest forecast. 

And even with this desire to move away from coal, nearly twothirds of incremental coal demand in the world over the next 20 

years will be consumed in China. 

China’s oil consumption is presently at 40 quads; the U.S. is 

close to 100 quads. But they are growing fast, and we expect China’s growth over the next 20 years to average about 3.5 or 3.6 percent, compared with our average growth of less than half of that. 

And it will be an increasingly important player on the world market. 

China’s energy intensity is improving. Their ability to use energy 

more efficiently is actually being reduced in our Outlook, but still, 

even with that improved energy efficiency and structural change, 

they will grow more rapidly than any other country, any other 

large economy, mainly because of the GDP growth that we expect. 

And they have improved that ability to produce gross domestic 

product per unit of energy. 

They are moving, like we are, to a more service-oriented economy. They are improving the efficiency of their state-owned enterprises and the way they use energy, and they are moving toward 

more efficient uses in capital stock, both in electric power and other 

industrial and residential consumption of energy. All are moving 

toward a more efficient way. But nevertheless, they will continue 

to be growing much faster than we will. 

The next slide shows the GDP growth that I mentioned. We 

think GDP growth will be averaging about 6.4 percent over the 

next two decades in China, the highest of any major country. Ours 

is about 3 percent; the EU, about 2.3; and Japan, 1.8. Other developing countries we don’t see growing much more, on average, than 

about 4 percent. So clearly, this is the driver behind their demand 

growth in energy. This is the driver of that world energy demand 

outlook that I mentioned in the opening remarks. 

And, of course, that GDP number has been the subject of some 

concern about its estimation, given the artificially low exchange 

rates and other measurement issues, but, nevertheless, the trend 

is still, whether it’s 6.4 or plus or minus a half percent, by far the 

driving force behind these energy demand numbers that we speak 

of. 

Coal dominates China’s energy now. It has for decades, and even 

with policies that they have in place to reduce coal use in electric 

power and other sectors, it still will dominate for the next two decades. It’s 70 or so percent of their total energy now, and, even with 

improvements, it’s still going to be over 60 percent in 2020. Seventy percent of their electricity is generated by coal. It’s both the 

largest producer and consumer of coal in the world and will continue to maintain that role. 
8

We anticipate that China’s demand for coal will grow to more 

than 2,500 million short tons by 2020. That’s an 80 percent increase over their consumption this year. They’ve got abundant coal 

reserves, some of which are lower quality, but nevertheless, by far, 

the largest coal reserves in the world. 

So we expect that they may even become major exporters. They 

may move in that direction as they try to develop this surplus coal. 

And coal’s share in the overall mix, as I mentioned, although it will 

decline a bit, will still be more than two-thirds of total energy. 

Oil is most rapidly growing share of China’s energy mix. Just a 

short 10 years ago, China was a net exporter of oil. They became 

a net importer last decade, and their imports are growing rapidly 

from virtually nothing in 1993 to one-third of their total oil consumption this year. They’ve got about 5 million barrels a day oil 

consumption; about 1.7 of that was imported last year, and this, we 

expect, will grow dramatically over the next 20 years to the point 

where perhaps three-quarters of their demand by 2020 will have to 

be imported. Consumption we forecast to be more than 9 million 

barrels a day in 2020, up from 5 million barrels a day today, and 

their domestic production is flat-to-declining over this period. 

We anticipate that perhaps this year or next, China will surpass 

Japan in terms of oil consumption, and even though their rate of 

growth in demand for oil will trail behind their GDP outlook rate 

of growth, it will still grow rapidly. 

Now, the key issue that was mentioned in both the Chairman 

and the Co-Chairman’s remarks is where will that oil come from? 

Up to now, about one-half has been coming from the Middle East; 

and the major countries supplying China thus far have been Iran, 

Saudi Arabia and Oman. The Omani situation is such that the 

higher quality Omani crude is needed for the Japanese requirements of their refineries, which are unable to handle some of the 

heavier, higher-sulphur crudes, and Omani crude happens to be 

relatively of good quality to meet China’s needs for their refineries. 

Co-Chairman LEDEEN. I thought you said Japan, Japan’s needs, 

and then, you reverted to China. You meant China all along? 

Mr. CARUSO. Yes, sorry. 

Co-Chairman LEDEEN. Thank you. 

Mr. CARUSO. China will surpass Japan as number two in the 

world. 

China embarked on some equity investments a number of years 

ago through China National Petroleum Company. They have made 

investments in Sudan, Kazakhstan, even in Venezuela, and certainly are looking in other places. These investments have been relatively small, certainly on a global scale, and they have led to some 

success with respect to acquiring equity oil. But it still represents 

a very small part of even their current imports. As I mentioned, 

they imported about 1.7 million barrels a day last year. Of that, 

only a bit more than 100,000 barrels a day was acquired through 

these equity investments in places like Sudan and elsewhere. 

We don’t anticipate that situation to change that much based on 

what we’ve seen in the pace of these types of investments, so that 

most of the oil being acquired, as best we can tell, is through commercial transactions between the Chinese refining companies or 

the Chinese national companies and their suppliers. They’re also 
9

getting oil from Indonesia and Vietnam, but we would expect that, 

as one looks out over the next 20 years, the growing share would 

come from the Middle East. 

Another possibility to supply some of that growth is Russia. They 

have been talking with the Russian companies about the possibility 

of an export pipeline from eastern Siberia in the oil fields of 

Angarsk to the Daqing area of China, and that pipeline still is in 

the discussion stages. It is uncertain among the Russians as to 

whether to build the line from Angarsk into eastern China or 

whether to continue that line to Nakhodka. That decision has yet 

to be made and continues to be discussed, but the scale of that 

pipeline will be about 500,000 barrels a day from Russia to China. 

Currently, there’s only a small amount of Russian oil coming into 

China. There’s also a possibility of a natural gas pipeline from Russia. 

China is concerned about its environmental situation. This situation is dwarfed by domestic concerns over air quality as opposed to 

global emissions of CO2, although that is certainly an issue as well. 

China can be expected to move, as fast as possible, substituting 

natural gas for coal, in particular, in the electric power sector, but 

also in the residential sector where much coal is burned for both 

cooking and heating. 

So we expect that natural gas will grow rapidly in China’s mix 

but from a very small base. Something like 3 percent of China’s energy is now provided by natural gas. In our long-term Outlook to 

2020 that number is only about 7, which, of course, is quite an impressive growth but still not making a dent in this environmental 

problem. Part of the issue is all of China’s gas right now is domestically produced, and they now are anticipating an improvement in 

that by the building of a west-east pipeline from the Tarin Basin 

in the west of China to the Shanghai area. That should be completed in the 2005 time frame. 

There are no international pipelines coming into China, but there 

is discussion of one from Russia and the possibility that LNG imports will begin as early as 2005. Some of these projects have now 

been delayed to 2007. But LNG will increase, and the potential 

sources of natural gas are Russia, Australia, Indonesia and perhaps Qatari gas from the Persian Gulf. 

Co-Chairman WESSEL. Mr. Caruso, we want to make sure that 

there is enough time for questions. If you could finish up in a 

minute or so. 

Mr. CARUSO. Yes. 

Co-Chairman WESSEL. So that we can move on to questions, we 

would appreciate it. 

Mr. CARUSO. Thank you, Mr. Co-Chairman. 

The implications of this for the environment are shown by this 

next slide, which shows carbon emissions growing dramatically 

over the next couple of decades, something like 832 million metric 

tons of CO2 in 2001 to almost 1,600, nearly doubling in the next 

20 years, which is clearly a concern in global climate change. 

The next slide shows how China fits into the overall picture, and 

you can see it is small but growing—13 percent of total energy and 

9 percent of oil. 
10

Finally, the key conclusions are that China is a growing player 

in world energy markets and will grow even more dramatically 

over the next 20 years. Coal dominates. Oil’s import share will 

grow and become an important energy security issue. Even with 

this policy to rapidly expand its use of natural gas that will not 

change. 

Mr. Chairman, I would be pleased to answer any questions that 

the Commission may have, and I may also make another comment 

about the bilateral U.S.-China bilateral energy agreements. As you 

know, Undersecretary Card and Assistant Secretary Bailey are in 

China, as we speak, and one of them certainly would have been 

here to discuss these in more detail, but the staff of Undersecretary 

Card has informed me that they will be putting together a list of 

these bilateral agreements and will be delivering them to the Commission perhaps this afternoon but certainly as soon thereafter as 

possible. 

Co-Chairman WESSEL. We appreciate it, and we look forward to 

receiving it. 

[The statement follows:]

Prepared Statement of Guy Caruso

Administrator, Energy Information Administration 

SUMMARY 

The People’s Republic of China (China) is the world’s most populous country and 

the second largest energy consumer (after the United States). Production and consumption of coal, its dominant fuel, is the highest in the world. Rising oil demand 

and imports have made China a significant factor in world oil markets. China is 

expected to surpass Japan as the world’s second-largest petroleum consumer for 

2003, and its petroleum demand is forecast to continue to increase at a rapid pace 

over the next two decades. Much of this imported oil will come from the Middle 

East. China also is set to become an importer of Liquefied Natural Gas (LNG) by 

2005. 

GENERAL BACKGROUND 

China is the world’s most populous country, with a rapidly growing economy. Economic development has proceeded unevenly, with urban coastal areas, particularly 

in the Southeast, experiencing more rapid economic development than other areas 

of the country. China has a mixed economy, with a combination of state-owned and 

private firms. A number of state-owned firms have undergone partial or full privatization in recent years. The Chinese government has encouraged foreign investment—in some sectors of the economy and subject to constraints—since the 1980s, 

offering several ‘‘special economic zones’’ in which foreign investors receive preferable tax, tariff, and investment treatment. 

With China’s entry into the World Trade Organization (WTO) in November 2001, 

the Chinese government made a number of specific commitments to trade and investment liberalization which, if fully implemented, will partially open the Chinese 

economy to foreign firms. In the energy sector, this will mean the lifting or sharp 

reduction of tarriffs associated with imports of some classes of capital goods, and 

the eventual opening to foreign competition of some areas such as retail sales of petroleum products. 

China’s real GDP grew by 8.0% in 2001, according to official Chinese figures, 

though some outside analysts have questioned the reliability of China’s official economic data. Real GDP growth for 2003 is forecast at 7.5%. The Chinese government’s current Five Year Plan (2001–2005) sets a target of 7.0% real annual GDP 

growth.
11

Inflows of Foreign Direct Investment (FDI) into China in 2002 totalled $52.7 billion, a new record, and data from the first four months of 2003 shows continuing 

strength. Japan, Taiwan, and the United States are China’s most important sources 

of FDI. 

After three years of decline from 1999 to 2001, China’s trade surplus has rebounded. The 2002 trade surplus was $50.0 billion, up from $30.3 billion in 2001. 

Imports have been increasing, largely capital goods being acquired to refurbish outdated industrial facilities, but it was offset by a strong 19.6% surge in merchandise 

exports in 2002. 

OIL 

China was the world’s third largest consumer of petroleum products in 2002, following the United States and Japan, with total demand of 5.26 million barrels per 

day (bbl/d). Since Japan’s demand is stagnant and China’s is still growing rapidly, 

2003 will likely be the year that China surpasses Japan in petroleum consumption. 

China’s oil demand is projected by EIA to reach 9.4 million bbl/d by 2020, with net 

imports of 5.9 million bbl/d, making it a major factor in the world oil market. 

China’s petroleum industry has undergone major changes in recent years. In 

1998, the Chinese government reorganized most state owned oil and gas assets into 

two vertically integrated firms—the China National Petroleum Corporation (CNPC) 

and the China Petrochemical Corporation (Sinopec). Before the restructuring, CNPC 

had been engaged mainly in oil and gas exploration and production, while Sinopec 

had been engaged in refining and distribution. This reorganization created two regionally-focused firms, CNPC in the north and west, and Sinopec in the south, 

though CNPC is still tilted toward crude oil production and Sinopec toward refining. 

Other major state sector firms in China include the China National Offshore Oil 

Corporation (CNOOC), which handles offshore exploration and production and accounts for more than 10% of China’s domestic crude production, and China National 

Star Petroleum, a new company which was created in 1997. Regulatory oversight 

of the industry now is the responsibility of the State Energy Administration (SEA) 

which was created in early 2003.
12

The intention of the restructuring was to make these state firms more like similar 

vertically integrated corporate entities elsewhere. In connection with this process, 

the firms have been spinning off or eliminating many unprofitable ancillary activities such as running housing units, hospitals, and other services near company facilities. Massive layoffs also have been undertaken, as like many other Chinese 

SOEs, they were severely overstaffed. 

The three largest Chinese oil and gas firms—Sinopec, CNPC, and CNOOC—all 

have successfully carried out initial public offerings (IPOs) of stock between 2000 

and 2002, bringing in billions of dollars in foreign capital. CNPC separated out most 

of its high quality assets into a subsidiary called PetroChina in early 2000, and carried out its IPO of a minority interest on both the Hong Kong and New York stock 

exchanges in April 2000. The IPO raised over $3 billion, with BP the largest purchaser at 20% of the shares offered. Sinopec carried out its IPO in New York and 

Hong Kong in October 2000, raising about $3.5 billion. Like the PetroChina IPO, 

only a minority stake of 15% was offered. About $2 billion of this amount was purchased by the three global supermajors—ExxonMobil, BP, and Shell. CNOOC held 

its IPO of a 27.5% stake in February 2001, after an earlier attempt in September 

1999 was canceled. Shell bought a large block of shares valued at around $200 million. In 2002, Chinese oil companies began to look at separating out some of their 

business units into subsidiaries. CNPC has set up subsidiaries for drilling services 

and geological survey work, and plans to eventually spin them off through international IPOs. CNOOC also has created an oilfield services unit—China Oilfield 

Service, Ltd. (COSL)—which was listed on the Hong Kong stock exchange in November 2002. 

Several aspects of these stock offerings were very atypical. First, they all involved 

only minority stakes. Second, they have not given the foreign investors a major 

voice in corporate governance. The Chinese government still holds majority stakes 

in all three firms, and the foreign investors have not received seats on their boards 

of directors. Analysts have generally seen these investments as attempts by the 

supermajors to gain a foothold in China, which will necessarily involve partnerships 

with the Chinese majors. Even with the opening to foreign investment envisioned 

in China’s commitments for membership in the WTO, it is still likely that almost 

all major oil and gas projects in China will involve one of the Chinese majors. The 

Chinese government stipulated in July 2001 that only CNPC and Sinopec will be 

allowed to open new retail filling stations prior to fulfillment of China’s marketopening commitment in 2004. This is seen as an attempt to strengthen their control 

of retail sales of petroleum products and ensure that foreign firms will have to partner with one or the other of the Chinese majors to enter the retail market, even 

after 2004. All three of the global supermajors, BP, ExxonMobil, and Shell, are planning to enter the Chinese retail market in partnership with CNPC, Sinopec, or both. 

As a net oil importer since 1993, China’s petroleum industry is focused on meeting 

domestic demand, but it does still export a modest amount of crude oil. The largest 
13

export customer by far is Japan, which imports Daqing crude oil to burn directly 

in electric power plants. As of early 2003, China’s exports of Daqing crude oil to 

Japan were around 65,000 bbl/d, down substantially from export levels during the 

1990s, but up from the previous year due to problems with Japan’s nuclear power 

sector. 

Most Chinese oil production capacity, close to 90%, is located onshore. One field 

alone, Daqing in northeastern China, accounts for about 1.0 million bbl/d of China’s 

production, out of a total crude oil production of around 3.3 million bbl/d. Daqing 

is a mature field, however, having begun production in 1963, and production fell by 

nearly 3% in 2002. At China’s second-largest producing field, Liaohe in northeastern 

China, CNPC has solicited proposals from potential foreign partners to help it enhance recovery rates and extend production, though no contracts have yet been 

signed. In December 2000, regulatory changes were announced which will remove 

some of the barriers to foreign firms forming partnerships with Chinese oil majors. 

Government priorities focus on stabilizing production in the eastern regions of the 

country at current levels, increasing production in new fields in the West, and developing the infrastructure required to deliver western oil and gas to consumers in the 

East. Offshore development also is a high priority. Chinese officials have said that 

they expect production in Xinjiang to reach 1 million bbl/d by 2008, but that seems 

ambitious, given that transportation of that oil to consumers in the East remains 

a major obstacle. 

Recent offshore oil exploration interest has centered on the Bohai Sea area, east 

of Tianjin, believed to hold more than 1.5 billion barrels in reserves, and the Pearl 

River Mouth area. Phillips Petroleum announced in March 2000 that it had completed its appraisal drilling of the Peng Lai find in Block 11/05, and would proceed 

with development. Commercial production began in December 2002, and the field 

is expected to reach its full output of 100,000 bbl/d in 2004. Shell and CNOOC currently are negotiating over a possible production sharing agreement for the Bonan 

project in the Bohai Sea, after a successful exporation effort which began in 2001. 

CNOOC also signed a production sharing contract with Canadian independent 

Husky Oil in July 2001 for Block 39–05 in the Pearl River Mouth, near the 

Wenchang 13–1/13–2 blocks, where Husky Oil and CNOOC currently are producing 

about 50,000 bbl/d. Another major offshore oilfield has been developed in the Pearl 

River Mouth area by a consortium including ChevronTexaco, ENI, and CNOOC. The 

field began production in February 1999. ChevronTexaco also concluded an agreement with CNOOC in October 2002 for the development of the Bozhong field in the 

Bohai Sea, which has reserves estimated at 1.3 billion barrels. Meanwhile, improvement in Sino-Vietnamese relations has opened the way for oil and gas exploration 

in the Beibu Gulf (known in Vietnam as the Gulf of Tonkin). China and Vietnam 

signed an agreement in December 2000 which settled their outstanding disputes 

over sovereignty and economic rights in offshore areas near their border. 

With China’s expectation of growing future dependence on oil imports, China has 

been acquiring interests in exploration and production abroad. CNPC has acquired 

oil concessions in Kazakhstan, Venezuela, Sudan, Iraq, Iran, and Peru, and Azerbaijan. Sinopec also has begun seeking to purchase overseas upstream assets. The 

most significant deal thus far is CNPC’s acquisition of a 60% stake in the Kazakh 

oil firm Aktobemunaigaz, which came with a pledge to invest significantly in the 

company’s future development over the next twenty years. While there had been 

some discussion of a possible oil pipeline from Kazakhstan to China, CNPC has said 

that it would only be considered if reserves were sufficient and it was economical, 

which looks doubtful. CNPC’s position in Kazakhstan also suffered a major blow in 

May 2003, when the consortium partners in the Kashagan oilfield in the Caspian 

exercised their rights to block the sale of a 16.7% interest in the project from BG 

to CNPC. The Greater Nile Petroleum Operating Company (GNPOC), the Sudanese 

oil project in which CNPC owns a stake, began exports in August 1999. CNOOC 

also has purchased an upsteam equity stake in the small Malacca Strait oilfield in 

Indonesia. 

Russia’s Far East is seen as a potential source of Chinese crude oil imports. The 

Russian and Chinese governments have been holding regular discussions on the feasibility of pipelines to make such exports possible. One proposed plan is a pipeline 

which would carry 600,000 bbl/d of crude oil from Anagarsk in Russia to join the 

existing Chinese pipeline network at Daqing. Yukos Oil of Russia and CNPC signed 

a memorandum of understanding in June 2003 for sales of oil via the pipeline, contingent on the pipeline being built. An alternative plan, proposed by Russian pipeline operator Transneft, would take Russian crude from both West Siberia and East 

Siberia via a 1 million bbl/d pipeline to an export terminal at the Pacific coast port 

of Nakhodka. China presumably would be one of the major consumers of oil from 

such a project, but it would also give Russia increased access to the Japanese, South 
14

Korean, and other East Asian markets. Both options, or possibly both eventually if 

oil reserves are sufficient, are still officially under consideration, according to recent 

Russian government statements. Japan has been actively promoting the Nakhodka 

option, offering to assist with financing, but the line to Daqing appears to be more 

likely to be built in the near future. 

Downstream infrastructure development in China centers primarily on upgrading 

existing refineries rather than building new ones, due to overcapacity. In the late 

1990s, the Chinese government shut down 110 small refineries, which generally 

made inferior quality petroleum products. Dozens of other small refineries owned by 

provincial and local governments have been merged into CNPC and Sinopec. Another major issue in the Chinese downstream sector is the lack of adequate refining 

capacity suitable for heavier Middle Eastern crude oil, which will become a necessity 

as Chinese import demand rises in the mid-term future. Several existing refineries 

are being upgraded to handle heavier and more sour grades of crude oil. 

Chinese officials have spoken of their intention to build a national strategic petroleum reserve, and Chinese officials announced a policy decision in February 2003 

to support the creation of a strategic petroleum reserve, and have reportedly been 

studying several options for the development of storage capacity. In the meantime, 

anecdotal evidence has suggested that China may have built up its petroleum stocks 

earlier this year in anticipation of possible war in Iraq. 

NATURAL GAS 

Historically, natural gas has not been a major fuel in China, but given China’s 

domestic reserves of natural gas, which stood at 53.3 trillion cubic feet (Tcf) at the 

beginning of 2003, and the environmental benefits of using natural gas, China has 

embarked on a major expansion of its gas infrastructure. Until the 1990s, natural 

gas was used largely as a feedstock for fertilizer plants, with little use for electricity 

generation. Natural gas currently accounts for only around 3% of total energy consumption in China, but consumption is expected to more than double by 2010. This 

will involve increases in domestic production, and imports, by pipeline and in the 

form of liquefied natural gas (LNG). 

The country’s largest reserves of natural gas are located in western and northcentral China, necessitating a significant further investment in pipeline infrastructure to carry it to eastern cities. China has a pipeline under construction, the ‘‘Westto-East Pipeline,’’ from natural gas deposits in the western Xinjiang province to 

Shanghai, picking up additional gas in the Ordos Basin along the way. Shell was 

chosen in February 2002 as the lead firm for the project, and Gazprom and 

ExxonMobil hold significant stakes. Sinopec also has been added as an equity partner. Construction began in July 2002, and a section of the pipeline east of the Ordos 

Basin is scheduled to begin operation in early 2004. The segment connecting to 

Xinjiang will be completed by early 2005. While it is unlikely to happen in the near 

future, the West-to-East Pipeline eventually could serve as a trunkline which could 

be extended to receive natural gas from Central Asia. 

China announced the discovery of a major gas field at Sulige in the Ordos Basin 

in the Inner Mongolia Autonomous Region, adjacent to the Changqing oilfield, in 

2001. While the field is still under evaluation, unofficial reserve estimates cited in 

the trade press put reserves in the range of 16–21 Tcf, substantially more than was 

assumed when the discovery was first announced. Some natural gas from the Ordos 

Basin is likely to be put into the West-to-East Pipeline, which was to run through 

the area in any case, to help make it economically viable. A pipeline was completed 

in 1997 between the Ordos Basin and Beijing, and a second pipeline may become 

necessary, as demand for natural gas in Beijing, Tianjin, and nearby Hebei province 

already is outstripping the capacity of the original pipeline. 

Another proposed pipeline project would link the Russian natural gas grid in Siberia to China and possibly South Korea via a pipeline from the Kovykta gas fields 

near Irkutsk, which hold reserves of more than 50 Tcf. The cost of the project has 

been estimated at $12 billion, and a feasibility study is underway, due to be completed at the end of July 2003. The pipeline would have a planned capacity of 2.9 

billion cubic feet per day (Bcf/d), of which China would likely consume about 1.9 Bcf/

d and South Korea 1 Bcf/d. The main South Korea gas company, Kogas, formally 

joined the feasibility study in November 2000. The main foreign backer of the 

project is BP, which owns a 30% stake in Rusia Petroleum, the license holder for 

the Kovykta gas field. Due to tensions on the Korean peninsula, the route currently 

under consideration for the section of the pipeline to South Korea would bypass 

North Korea by running undersea from the city of Dalian in China to the South Korean coast near Seoul. The new route also would bypass Mongolia. 

Aside from these huge projects, other pipelines are being developed to link smaller 

natural gas deposits to other consumers. A pipeline was completed in early 2002 
15

linking the Sebei natural gas field in the Qaidam Basin with consumers in the city 

of Lanzhou. Another planned project would link gas deposits in Sichuan province 

in the southwest to consumers in Hubei and Hunan provinces in central China at 

an estimated cost of $600 million. 

One major hurdle for natural gas projects in China is the lack of a unified regulatory system. Currently, natural gas prices are governed by a patchwork of local 

regulations. The Chinese government is in the process of drafting a new legal framework for the natural gas sector, but the process has been slow, and there are still 

considerable uncertainties regarding price regulation and taxation issues dealing 

with natural gas sales. 

Offshore gas projects also are becoming a significant part of China’s gas supply. 

The Yacheng 13–1 field, developed in the mid-1990s, has been producing gas for 

Hong Kong and Hainan Island since 1996. The Chunxiao gas field in the East China 

Sea, being developed by China National Star Petroleum, is also expected to become 

a significant producer within the next decade. The company puts the field’s reserves 

at more than 1.6 Tcf. Another area where exploratory drilling is planned is the Xihu 

Trough, in the East China Sea about 250 miles east of Shanghai. Shell reportedly 

has been in negotiations with Sinopec and CNOOC for the development of natural 

gas reserves in the area, but no agreement has been concluded. 

Imported liquefied natural gas (LNG) will be used primarily in China’s southeastern coastal region. Guangdong province already has launched a project to build 

six, 320-megawatt (MW) gas-fired power plants, and to convert existing oil fired 

plants with a capacity of 1.8 gigawatts (GW) to LNG. In March 2001, it was announced that BP had been selected to build China’s first LNG import terminal, to 

be located near the city of Guangdong. BP will take a 30% equity stake in the 

project, with CNOOC holding 31% and the rest held by local firms from Guangdong 

and Hong Kong. A supply contract has been signed for LNG from Australia’s North 

West Shelf LNG terminal. The project has been delayed somewhat, due to slow 

progress in concluding sales agreements with end-users of the natural gas. It is likely that the commercial operation of the project will be delayed until early 2007. A 

second LNG terminal is planned for Zhangzhou, in Fujian province farther up the 

coast. A supply agreement has been concluded with BP for LNG from its Tangguh 

project in Indonesia. A third LNG import project is under consideration for a startup 

date around 2010, but it is in the preliminary stages and has not secured government approval. If built, it would likely be located somewhere near the Yangtze River 

Delta. 

COAL 

Coal makes up the bulk, 64%, of China’s primary energy consumption, and China 

is both the largest consumer and producer of coal in the world. China’s coal consumption in 2001 was 1.38 billion short tons, or over 26% of the world total. The 

Chinese government has made major upward revisions to coal production and consumption figures covering the last several years. The new figures show coal consumption rising sharply in 2001, reversing the decline seen from 1997 to 2000. The 

decline during that period also is much less than the previously reported data. 

China’s coal industry has had a serious oversupply problem in recent years, particularly in the late 1990s, and the government has begun implementing major reforms aimed at reducing the oversupply, returning large state-owned mines to profitability as a prelude to possible future privatization, and reducing mine accidents. 

Large state-owned coal mines had experienced buildups of unused inventories in the 

mid-to-late 1990s, and many were operating at a financial loss. A large number of 

small, unlicensed mines also have added to the oversupply. In 1998, the government 

launched a large-scale effort to close down the small mines. Many small coal mines 

were ordered closed. It has become clear, however, through much anecdotal evidence, that not all of the ‘‘closed’’ mines have actually ceased operation, and the upward revisions to the Chinese State Statistical Bureau’s production and consumption figures appears to reflect this. China also is increasingly seeking export markets for its coal as a way of dealing with its surplus production, and as of 2002 it 

was the world’s second-largest coal exporter. Japan and South Korea are the primary markets, and China is beginning to emerge as a serious competitor to Australia for Japanese coal imports. India also has been importing modest quantities 

of Chinese coal. 

Over the longer term, China’s coal demand is projected to rise significantly. While 

coal’s share of overall Chinese energy consumption is projected to fall, coal consumption will still be increasing in absolute terms. Several projects exist for the development of coal-fired power plants co-located with large mines, so called ‘‘coal by wire’’ 

projects. Other technological improvements also are being undertaken, including the 

first small-scale projects for coal gasification, and a coal slurry pipeline to transport 
16

coal to the port of Qingdao. Coalbed methane production also is being developed, 

with recent American investors in this effort including BP, Texaco, and Virgin Oil, 

which was awarded a concession for exploration in Ningxia province in January 

2001. ChevronTexaco is the largest foreign investor in coalbed methane, with activities in several provinces. 

In contrast to the past, China is becoming more open to foreign investment in the 

coal sector, particularly in modernization of existing large-scale mines and the development of new ones. The China National Coal Import and Export Corporation is 

the primary Chinese partner for foreign investors in the coal sector. Areas of interest in foreign investment concentrate on new technologies only recently introduced 

in China or with environmental benefit, including coal liquefaction, coal bed methane production, and slurry pipeline transportation projects. Over the longer term, 

China plans to aggregate the large state coal mines into seven corporations by the 

end of 2005, in a process similar to the creation of CNPC and Sinopec out of state 

assets. Such firms might then seek to pursue foreign capital through international 

stock offerings. 

China has expressed a strong interest in coal liquefaction technology, and would 

like to see liquid fuels based on coal substitute for some of its petroleum demand 

for transportation. A coal liquefaction facility is under construction by the Shenhua 

Group in Inner Mongolia, with a projected startup date of 2005. 

ELECTRICITY 

As with coal, China’s electric power industry experienced a serious oversupply 

problem in the late 1990s, due largely to demand reductions from closures of inefficient state-owned industrial units, which were major consumers of electricity. The 

Chinese government responded to the short-term oversupply in part by implementing a drive to close down small thermal power plants and by imposing a moratorium (with a few exceptions) on approval of new power plant construction, which 

ran through January 1, 2002. Until recently, the backlog of projects approved in the 

mid-1990s had kept pace with demand increases. In the first half of 2003, however, 

the Chinese government has approved 30 major new electric power projects, with 

a total of around 22 gigawatts (GW) of capacity. Construction has begun on 17 of 

these projects. A total of 18.5 GW of new capacity is scheduled to be completed this 

year. 

The largest project under construction, by far, is the Three Gorges Dam, which, 

when fully completed in 2009, will include 26 separate 700-MW generators, for a 

total of 18.2 GW. Plans were announced in March 2002 to reorganize the Three 

Gorges project into the China Yangtze Three Gorges Electric Power Corporation. 

The corporation is expected to seek capital through an equity offering open to foreign and domestic investors, similar to those already carried out by the major Chinese oil companies. The IPO has been scheduled for September 2003. The reservoir 

created by the dam began to fill in June 2003, and the first test runs of the initial 

group of electric turbines is set for August 2003. 

Another large hydropower project involves a series of dams on the upper portion 

of the Yellow River. Shaanxi, Qinghai, and Gansu provinces have joined to create 

the Yellow River Hydroelectric Development Corporation, with plans for the eventual construction of 25 generating stations with a combined installed capacity of 

15.8 GW. 

Many of the major developments taking place in the Chinese electricity sector recently involve nuclear power. China’s total installed capacity for nuclear power generation increased from 2.1 GW at the beginning of 2002 to 5.4 GW at the beginning 

of 2003. The first generation unit of the Lingao nuclear power plant in Guangdong 

province began commercial operation in May 2002, with a capacity of 1 GW. The 

second 1-GW generating unit began operating in January 2003. An additional 600-

MW generating unit at the Qinshan nuclear power plant in Zhejiang province began 

operation in February 2002, and another 600-MW unit at the same site came online 

in December 2002. 

A major issue for China’s electric power industry is the distribution of generation 

among power plants. China’s stated intention eventually is to create a unified national power grid, and to have a modern power market in which plants sell power 

to the grid at market-determined rates. In the short term, though, traditional arrangements still hold sway, and state-owned power plants which have government 

connections tend to have a higher priority than independent private plants. Additionally, some private plants with ‘‘take-or-pay’’ contracts, which provide for guaranteed minimum sales amounts, have had trouble getting the provincial authorities 

running the local grids to honor those terms. 

Growth in Chinese electricity consumption is projected at an average of 4.3% per 

year through 2025. The largest gainer in terms of fuel share in the future is ex-
17

pected to be natural gas, due largely to environmental concerns in China’s rapidly 

industrializing coastal provinces, though the largest increase in absolute terms is 

likely to be coal. If a truly competitive market for electric power develops as 

planned, the Chinese market may once again become attractive to foreign investment. At present, foreign direct investment is allowed only in power generation, but 

loan financing has been obtained for some power transmission projects. 

The Chinese government is in the early stages of formulating a fundamental longterm restructuring of their electric power sector, embodied in the National Power 

Industry Framework Reform Plan promulgated by the State Council in April 2002. 

As with many other countries reform programs, generating assets are being largely 

separated from transmission and distribution. The State Power Corporation (SPC) 

divested most of its generating assets and was split into 11 regional transmission 

and distribution companies in December 2002. Electricity prices will still be regulated, but there are likely to be major changes in tariffs and the overall regulatory 

structure for electricity pricing. The process is at an early stage, and many of the 

details remain to be worked out. A new electricity law, superseding the one established in 1995, is expected to be promulgated within the next year. 

ENVIRONMENT 

China suffers from major energy-related environmental problems. According to a 

report by the World Health Organization (WHO), seven of the world’s ten most polluted cities are in China. The country’s heavy use of unwashed coal leads to large 

emissions of sulfur dioxide and particulate matter. China also is important to any 

effort to curb emissions of greenhouse gases, as it is projected to experience the largest absolute growth in carbon dioxide emissions between now and the year 2020. 

China is a non-Annex I country under the United Nations Framework Convention 

on Climate Change, meaning that it has not agreed to binding targets for reduction 

of carbon dioxide emissions under the Kyoto Protocol. While the Chinese government is concerned with its environmental problems, it tends to be more concerned 

with local problems, such as particulate matter and sulfur dioxide emissions. Thus, 

it is undertaking efforts to lessen emissions of pollutants such as sulfur dioxide and 

nitrogen oxide, through improved pollution controls on power plants as well as policies designed to increase the share of natural gas in the country’s fuel mix, particularly around major metropolitan areas.
18

China’s Energy Trends 

1985 1990 1995 2001 2005 2010 2015 2020

Average 

Annual 

Percent 

Change 

1985–

2020

Energy Consumption (Quadrillion Btu)

Oil 4.0 4.9 7.0 10.2 11.3 13.4 15.8 19.2 4.6

Natural Gas 0.5 0.6 0.7 1.1 1.6 2.5 4.2 5.0 6.6

Coal 16.7 20.3 25.5 25.4 26.5 33.3 38.9 46.2 3.0

Nuclear 10.0 0.0 0.1 0.2 0.6 0.7 1.3 1.3 N/A 

Renewables 1.0 1.3 1.9 2.8 3.2 4.6 5.2 5.9 5.3

Total 22.2 27.0 35.2 39.7 43.2 54.4 65.5 77.6 3.6

Oil (mbbd) 1.9 2.3 3.4 5.0 5.5 6.5 7.7 9.4 4.7

Natural Gas (tcf) 0.5 0.5 0.6 1.0 1.4 2.3 3.8 4.5 6.8

Coal (mst) 921 1,124 1,498 1,383 1,442 1,811 2,115 2,511 2.9

Nuclear (bkwh) 0 0 12 17 57 66 129 131 N/A 

Renewables 

(quads) 1.0 1.3 1.9 2.8 3.2 4.6 5.2 5.9 5.3

Net Electricity 

Consumption 

(bkwh) 364 551 883 1,312 1,545 1,966 2,428 2,986 6.2

Energy Use for Electricity Generation (Quadrillion Btu)

Oil 0.8 0.7 0.6 0.7 0.8 0.9 1.1 1.3 1.5

Natural Gas 0.0 0.0 0.0 0.1 0.3 0.7 1.0 1.0 13.0

Coal 3.4 5.4 8.4 13.7 14.5 19.3 23.9 28.7 6.3

Nuclear 0.0 0.0 0.1 0.2 0.6 0.7 1.3 1.3 N/A 

Renewables 1.0 1.3 1.9 2.8 3.2 4.6 5.2 5.9 5.3

Total 5.1 7.4 11.1 17.4 19.4 26.2 32.5 38.3 5.9

Carbon Dioxide Emissions (Million Metric Tons Carbon Equivalent)

Oil 76 94 132 175 194 229 271 330 4.3

Natural Gas 8 8 10 18 26 40 68 81 7.0

Coal 424 514 645 639 668 840 980 1,164 2.9

Total 508 617 788 832 888 1,109 1,319 1,574 3.3

Energy Production Note: EIA currently only projects oil supply.

Oil (mbbd) 2.5 2.8 3.0 3.2 3.5 3.6 3.5 3.5 1.0

Natural Gas (tcf) 0.5 0.5 0.6 1.1 N/A N/A N/A N/A —

Coal (mst) 962 1,190 1,537 1,459 N/A N/A N/A N/A —
19

China Energy Comparisons 

1985 1990 1995 2001 2005 2010 2015 2020

Average 

Annual 

Percent 

Change 

1985–

2020

Energy Consumption (Quadrillion Btu)

China 22.2 27.0 35.3 39.6 43.2 54.4 65.5 77.6 3.6

United States 76.7 84.6 91.5 97.0 103.2 113.3 121.9 130.1 1.5

World 311.1 348.4 368.7 404.1 433.3 480.6 531.7 583.0 1.8

Oil Consumption (Million Barrels per Day)

China 1.9 2.3 3.4 5.0 5.5 6.5 7.7 9.4 4.7

United States 15.7 17.0 17.7 19.6 20.5 23.0 25.2 27.1 1.6

World 60.1 66.1 70.0 77.1 81.1 89.7 98.8 108.2 1.7

Energy Consumption per Capita (Million Btu per Person)

China 20.7 23.4 28.9 30.8 32.7 39.8 46.4 53.7 2.8

United States 316.4 331.9 340.5 348.9 358.1 377.2 389.9 400.0 0.7

World 64.5 66.3 65.1 66.0 67.4 70.5 73.9 77.0 0.5

Energy Intensity (Thousand Btu per 1997 U.S. Dollar of GDP)

China 75.9 63.2 46.9 33.0 27.0 24.8 22.2 19.7 ¥3.8

United States 13.2 12.4 11.9 10.3 9.8 9.1 8.4 7.8 ¥1.5

World 15.1 14.3 13.7 12.5 11.9 11.2 10.6 10.0 ¥1.2

Carbon Intensity (Metric Tons Carbon Equivalent per 1997 U.S. Dollar of GDP)

China 1,736 1,445 1,047 693 555 506 447 400 ¥4.1

United States 213 198 185 166 154 144 134 124 ¥1.5

World 258 241 223 202 191 180 170 161 ¥1.3

Discussion, Questions and Answers

Chairman ROBINSON. First, Mr. Caruso, thank you again for a 

very insightful and expert set of views. I was struck by the statistic 

on the level of oil derived for China via equity arrangements. As 

you pointed out, of the 1.7 million barrels per day that is involved 

now, only a little more than 100,000 barrels per day stem from equity arrangements and isn’t likely to increase markedly, at least, 

in the period ahead. 

It is true, isn’t it, that China likes to put, in effect, a flag in the 

ground in terms of securing energy supplies. It’s not big on the spot 

market or very trusting of it, it seems, and that I was of the belief 

that they would be more inclined to accelerate their equity positions and try to lock in supplies through a host of means in terms 

of their relationships with these governments. 

Is that understanding correct, that they’re far more inclined to 

get into this physical supply-securing business than most of the industrialized democracies like ourselves? And the second question 

has to do with the competition, as I read it, between the Japanese 

and the Chinese on the large oil pipeline that is being contemplated presently. Of course, Japan would like the longer, more 

expensive line for their own energy needs, and China is pressing 

for the Russia-China pipeline that you discussed. 

It seems to be a pretty animated competition that could even create tensions between China and Japan, because this is not a trivial 

matter. So I was wondering what observations you have as to how 

serious this competition is, whether there could actually be tensions 

involved, and whether the China-Russia arms trade, as robust as 

it is, and other arrangements might come into play in influencing 

Putin to go in the direction of China versus the Japanese request. 

Thank you. 
20

Mr. CARUSO. On the issue of equity investments, we saw pretty 

robust growth in that about 7 to 10 years ago, and it has not really 

expanded a great deal. And I think there are two reasons. One is 

the reorganization that China went through within its own domestic energy industry, particularly oil, by splitting the Chinese oil industry into the three companies: CNPC, SINOPEC and China National Offshore Oil Company. 

I think that has reduced the amount of cash flow available to 

those three companies to make these kind of international equity 

investments, so we’ve seen the flow reduced, even though I would 

agree with your statement that, all other things being equal, the 

Chinese would prefer to secure, let’s say, equity oil. 

Japan did the same with the Japan National Oil Company after 

the Arab oil embargo and made a lot of upstream investments, 

most of which were not that fruitful. They abandoned that approach and basically have relied on commercial arrangements since 

then. 

I think there’s the combination of those two things: less cash flow 

available and the discovery that successful investments are not 

easy to come by. So they have tended to look for targets of opportunity like Sudan where most Western companies felt the political 

risk was too great and that’s where most of their equity oil is now 

coming from. 

Kazakhstan, a very difficult environment to operate in, has no 

real transit capabilities. 

So I think that’s our thinking with regard to the longer-term. 

Competition over the Russian, eastern Siberian pipeline, whether 

it goes to China or Japan certainly has created some tension. My 

understanding is that the main decision there is, of course, with 

the private companies who are developing the Angarsk field in 

eastern Siberia, so that up to now, at least, it hasn’t reached the 

level of political tension either bilaterally or trilaterally when you 

bring in the Japanese. 

It certainly could reach that level, but as of now, we don’t really 

see that, and I know most of Russian oil and gas development now 

is in the hands of the private sector, but we’ve seen, just from this 

week’s activities with Khodorkovsky that there are also limits in 

that country. 

Mr. Chairman. 

Chairman ROBINSON. Thank you. 

Co-Chairman WESSEL. Commissioner Dreyer. 

Commissioner DREYER. In a way, Commissioner Robinson’s question anticipated what I was going to say, but I’d like to carry it a 

little further. Do you actually think in this bidding for the Angarsk 

to Daqing versus the Angarsk to Nakhodka that this really is in 

the hands of Transneft and Yukos? Because it seems to me that 

there are terribly important geopolitical considerations here. If 

Japan has offered to put up the extra money, which I know it has, 

and Russia then has the option of being able to sell oil not just to 

China but to Japan and South Korea and beyond—because after 

all—it will be on tankers after it leaves Nakhodka—don’t you think 

that given the Russian apprehension about selling the Chinese the 

rope that they eventually hang the Russians with, that they might 

be more inclined to favor Japan? 
21

I was puzzled by your statement that you think that the Russians will opt for the Angarsk to Daqing pipeline. Can you expand 

on that? 

Mr. CARUSO. I was trying to be neutral about that. I’m not sure 

I would lean to either one. 

Commissioner DREYER. But [reading Mr. Caruso’s written statement] you said it would be more likely, in your opinion, that it 

would be the Daqing one that got built. 

Mr. CARUSO. Yes; I think China, of course, represents a growing 

market, it’s more flexible if you have a Pacific coast Nakhodka terminal. If they built that line, it will have a 1 million barrel a day 

capacity compared with the 500,000 barrel a day to Daqing. It will 

be more costly. It wouldn’t necessarily be tied to the Japanese market; in fact, certainly, some of it would go to South Korea. 

Commissioner DREYER. Okay. 

Mr. CARUSO. I’d be neutral on the commercial aspect. And, indeed, it may turn on the geopolitical, the pressures that would be 

brought to bear on this. Right now, as you and the Chairman have 

mentioned, the Japanese have put a lot of pressure on this and 

even have raised it at the Koizumi-Putin level. 

Commissioner DREYER. And second, I wonder how confident you 

are in your growth projections, and I say this as someone who in 

the 1980s used to watch Japanese economic growth projected into 

the 21st century. Extrapolating like that, Japan would soon own 

everything, but those growth rates stopped in 1990 and have still 

not resumed. 

And I see a lot of constraining factors in Chinese growth. The 

more energy they consume, for example, the more pollution they 

create, and the PRC is already high up there on the pollution 

index. There is also a great deal of social unrest-ethnic minorities, 

farmers, laborers, and so on. It’s possible that Daqing oil workers 

will rebel. As you mention in your testimony, there is a certain 

amount of apprehension about the future. 

Where do these pipelines go? They go through Xinjiang. Xinjiang 

has, at least according to the Chinese government, a number of 

Uygur terrorists trained by Osama bin Laden that they haven’t 

caught yet, and so you’re your projections for future growth are tremendously optimistic, and I wonder if you have, somehow, in the 

back of your mind any apprehensions about those. 

Mr. CARUSO. China, by far, outweighs any other country in terms 

of the global outlook. How China goes, in many ways, will determine how world global energy markets develop over the next 20 

years. 

I guess the main concern, in addition to the accurate points you 

made is the GDP growth, the ability of China to keep this economic 

momentum going at the same time knowing that the political system remains centrally-planned, and can this balancing act, if one 

calls it that——

Commissioner DREYER. It is. 

Mr. CARUSO. —continue to be maintained and, indeed, strengthened. And I think there is a real question mark there. 

Commissioner DREYER. Yes. 

Mr. CARUSO. So we are being optimistic in the sense that the economic numbers are fairly clear. The transportation sector, which 
22

has a very small share of China’s oil demand sector. Whereas, if 

you take the U.S., two-thirds of our oil demands is for transportation; China, it’s less than 10 percent; 13 cars per 1,000 Chinese 

population; U.S. almost 800. 

Commissioner DREYER. There is a huge demand in China for 

more cars. 

Mr. CARUSO. So even moving that to the level of a Malaysia gives 

you an enormous growth in demand. So I think the potential 

growth, both for broader macro measures like GDP and translating 

to specific sectoral and fuel-specific demands, and the numbers, of 

course, can be mind-boggling if you actually multiply any per capita analogy, for even a developing country in Asia, to China. You 

get numbers that make our major oil companies salivate. 

Commissioner DREYER. Finally, what is a quad? 

Mr. CARUSO. Quadrillion BTUs. 

Commissioner DREYER. Oh, thank you. 

Mr. CARUSO. Translated into oil, 2 quadrillion BTUs equals 1 

million barrels a day of oil-equivalent. 

Commissioner DREYER. Two—I’m sorry; what did you say? 

Mr. CARUSO. Two quadrillion BTUs equals 1 million barrels a 

day of oil-equivalent. 

Commissioner DREYER. Thank you. 

Co-Chairman WESSEL. Commissioner Becker. 

Commissioner BECKER. Yes, I suppose if you’re far enough down 

this chain, you’re going to be answering everything that would at 

least give rise, in my mind. I appreciated your projections on this. 

They’re rather startling, and to carry those numbers out, it seems 

that in addition to just vying for oil by the different countries, it’s 

going to have a tremendous economic impact. It’s almost inevitable 

that it will. 

And I was wondering if you would hazard any guesses or projections as to what effect this is going to have, say by 2020? If you 

carry this out, what effect is this going to have on the global economic impact? 

Mr. CARUSO. There is a certain range of uncertainty. Growth is 

highly dependent on the global economy. 

I was at a meeting just yesterday in which it was said that a 

large share of the Chinese projected growth is dependent on the 

U.S. and other recipients of Chinese export-led growth growing as 

well, so the engine of growth in a global energy market can be said 

to be China over the next 10 to 20 years. And that is highly dependent on the kind of GDP outlook that we’ve mentioned today, 

and that is highly dependent on countries like the United States 

and other importers of Chinese goods. 

So it’s clearly the interdependency, starting with macroeconomics 

and international trade and China’s ability to meet its WTO requirements; all are linked into the Outlook that was presented 

today. And to the extent that that kind of growth is not fulfilled, 

it’s a very different picture. 

The most important variable that could change the picture that 

I talked about today is the global economy, which we are assuming 

grows at 3 percent per year. That’s led by the $10 trillion economy 

here in the U.S. If, for some reason, even 1 percent lower than that 

can make 10 to 15 million barrels of oil a day of less demand in 
23

the year 2020. So I would say this picture is very much dependent 

on a lot of other things going right, including, as I mentioned, the 

expansion of international trade and the implications that has for 

global economic growth. 

Co-Chairman WESSEL. One of the questions that I have, looking 

at your discussion and that of some of the later participants today 

is seeming tension between the self-sufficiency goals that China 

has had in many areas versus what appears to be, from your testimony, market forces driving the investments in their energy situation. 

I guess there are many who believe that, and some of the data 

supports, a strong bilateral relationship that China has had with 

certain countries in its quest for self-sufficiency, but at the same 

time, we see with the pipelines, with investments in Kazakhstan 

and transportation goals, et cetera, that it appears that the price 

of oil may have come to a point where they have decided that the 

return on their investment may not be great enough. 

Can you comment on what kinds of investments China is making; where it is going to go long-term; is it still, in fact, proceeding 

on a self-sufficiency goal? And what would they need to try and 

make that happen? 

Mr. CARUSO. I think self-sufficiency for China will probably be 

limited to coal. As I said, that will still be quite important. Twothirds of their energy will be coal even 20 years from now unless 

there are some unusual movements. China will become, conservatively, at least two-thirds dependent on imported oil by 2025. 

I think they have made the decision that they can’t reach selfsufficiency in oil, and about two years ago, they came out with a 

long-term strategy on all energy but, in particular, on oil security. 

And part of that strategy was to develop a strategic petroleum reserve, much like we have in this country. And the other part was 

to become more involved in international multinational cooperation 

during oil emergencies. 

And in my previous job at the International Energy Agency, we 

also talked with China in terms of informal cooperation between 

China and the International Energy Agency during times of emergency, recognizing that they could never join, because the first requirement is becoming a member of OECD. But nevertheless, it reflected China’s recognition that the investments that would be 

needed to meet the kind of growth we are talking about here, going 

from 1.7 million barrels a day in imports this year to perhaps as 

high as 7 million barrels a day 20 years from now, just were not 

in the cards both from the point of view of the amount of money 

that would be needed and the management that just didn’t exist. 

I think they took a more pragmatic approach, to be prepared—

more or less moving toward a Japanese-style of dealing with dependency. ‘‘Yes, we are becoming more dependent, but we should 

at least try to reduce our vulnerability.’’ I think that is where 

China is at this point. 

Co-Chairman WESSEL. Is there a price point for oil that would 

skew the balance in any way as far as you know? Has EIA looked 

at that, in terms of at what point will they, in terms of their economic growth projections, be concerned enough that they may 

make more investments than they have? 
24

Mr. CARUSO. We haven’t looked at that specifically, but I think 

when they made these kinds of deliberations, looking at this issue, 

they published a huge energy strategy document in Chinese, and 

the IEA had that translated, and it was pretty impressive. And I 

think their recognition was that at today’s world oil pricing, $25 to 

$30 range, they had this movement towards high-level dependency, 

and how to live with that kind of insecurity would have to be dealt 

with in ways other than to try to invest outside of their own country. 

Co-Chairman WESSEL. Thank you. 

Commissioner D’Amato. 

Vice Chairman D’AMATO. Thank you very much, Mr. Chairman. 

Thank you for your testimony, Mr. Caruso. I have a question on 

the matter of cooperation with the IEA. You say that China cannot 

join because it’s not a member of OECD. What was and is the level 

of informal cooperation between the Chinese government and IEA? 

Do they have a liaison function? Is it robust cooperation? And is 

there any particular reason why the OECD can’t waive its requirement for membership, given the importance of China and the need 

to share energy resources in emergencies in the future? 

Mr. CARUSO. Yes. The cooperation between the IEA and China 

has been a struggle. 

Vice Chairman D’AMATO. Checkered? 

Mr. CARUSO. My job at IEA was to develop that cooperation. And 

they were very skeptical initially, which was started, in my case, 

about 1994. 

Vice Chairman D’AMATO. The Chinese were skeptical of you? 

Mr. CARUSO. Of the IEA and in dealing with energy security. The 

initial reaction was to circle the wagons and plant the Chinese flag 

as opposed to international cooperation. 

I think reality has set in over a period of the five years I was 

involved, and it moved from more of a tense relationship to one 

more collegial, where they actually came and presented their outlook to our committees. The IEA did a review of Chinese energy 

policy and published an energy policy recommendations document 

about a year ago. So it’s still quite informal. I wouldn’t want to 

overstate it, but it’s now more collegial. There is no specific liaison. 

They come to IEA meetings when invited, and IEA, about once a 

year, presents a workshop within China. They get invited to producer-consumer dialogues on an annual basis. 

The big hurdle for OECD membership is that countries should be 

of likeminded political systems. 

Starting with democracy. 

Vice Chairman D’AMATO. There’s a problem! 

Mr. CARUSO. That’s a big hurdle. 

Vice Chairman D’AMATO. Well, I would follow up by asking you 

this: has there been any effort, and do you think there should be 

an effort, for the IEA to do a more structured proposal for sharing 

arrangements in the event of emergencies with the Chinese? And 

what would be the problem with attempting to do something like 

that? 

Mr. CARUSO. My recommendation while I was a director of the 

IEA was that that should happen. It should be more structured. 
25

Chairman ROBINSON. And in that regard, I think we’re in sync 

on this. The joint release of stocks. 

Mr. CARUSO. That would definitely be the most important agreement that could be reached, if you actually got to the physical issue 

of the releasing of stocks, but even just sharing information and 

working in a way that was more in sync than in opposition during 

an emergency would be a huge difference. And I should say there 

is a formal mechanism under which this is happening, again, not 

sharing of stocks but cooperation through APEC, of which both the 

United States and China are members, and they meet regularly in 

the Energy Working Group, of which Assistant Secretary Bailey, in 

DOE’s case, is a member. 

Vice Chairman D’AMATO. That would be sharing within the 

APEC area, though, correct? 

Mr. CARUSO. Yes, they haven’t gotten as far as to any type of actual sharing agreement, but they are talking about the possibility 

of that down the road. APEC is a very young organization with still 

a long way to go, but that certainly is a goal that we have had in 

the U.S. 

Our view is that the more of the major consumers that are involved in either informal or formal agreements to cooperate during 

emergencies, the better off we will all be in the event of any disruptions of oil supplies. 

Co-Chairman WESSEL. Thank you. 

Other questions? 

Commissioner Reinsch. 

Commissioner REINSCH. Can you contrast the policies that China 

is pursuing now with what Japan has been doing for some time? 

Are they pursuing similar policies? Different? If so, in what way? 

Mr. CARUSO. Yes; I think Japan, having been 99 percent dependent on imports for their oil supply, has had to pursue this policy 

of dealing with dependency, but trying to reduce vulnerability, and 

they, early on, of course, having been OECD members and IEA 

members from the beginning, have relied on this emergency stockpile. 

It has taken China a long time to even get to the point where 

they even considered that, so that is a major difference. And Japan, 

being a far more robust economy, in response to the 1973 Arab oil 

embargo tried to buy its way out of the embargo by going out and 

trying to get as much oil in competition. And that, indeed, is what 

led to the formation of the IEA. 

So China, economically, isn’t in a position to do that, so they did 

look at the possibility of making these equity investments, as I 

mentioned, but I’m virtually certain that they decided that this was 

not a way that would ever get them to where they wanted to be 

in terms of self-sufficiency. 

Commissioner REINSCH. When you say ‘‘they,’’ are you referring 

to Japan or China? 

Mr. CARUSO. China. 

Commissioner REINSCH. Oh, okay. 

Mr. CARUSO. Both countries are headed in the same direction 

with respect to energy security, but of course, in very different political and stage of development. 
26

Commissioner REINSCH. Right; I was looking at it more historically. But, okay, thank you very much. That’s all. 

Co-Chairman WESSEL. Commissioner Ledeen. 

Co-Chairman LEDEEN. I have a request, and then, there’s a question from Larry Wortzel that I want to pass. 

My request is could you please provide us with the assumptions 

on which your various projections were made? Because if I heard 

you right, it seemed like the projections on the growth of Chinese 

demand for energy and so forth are actually driven by the performance of the industrialized economic world. And if that is true, then, 

it is quite different from a lot of the things that we’re being told, 

and it puts it in an entirely different context, which I think is useful. 

So could we have that? 

Mr. CARUSO. Certainly. 

Co-Chairman LEDEEN. Could we see that? And if you’ve done the 

kinds of parameters, the kinds of variables that you mention, if 

Western economic growth drops by X, what happens to China and 

so forth, all of that stuff would be enormously useful. 

And then, Commissioner Wortzel, who is incapacitated, alas, for 

the moment, asked that we ask you the following: China is highly 

dependent on Middle Eastern oil at present, 70 percent roughly. 

Japan and South Korea also are highly dependent on oil from the 

same region at about the same percentage of their total needs. 

Do you think this creates potential tensions among these three 

countries for resources? How would it affect Japan-China relations, 

in particular, if there were a shortage of oil available from the Middle East? 

Mr. CARUSO. I think the potential is there for creating those tensions. Right now, as I mentioned, it’s mainly being handled by commercial transactions, but discussing issues like this in multilateral 

fora like APEC and in a more informal way within the IEA is a 

way of perhaps defusing some tension. That’s my personal view. 

Co-Chairman WESSEL. Thank you for appearing this morning. 

We appreciate your time, and we will get ready for the next panel 

and look forward to talking to you in the future. 

Co-Chairman WESSEL. Certainly, thank you very much. 

[Recess from 11:05 a.m. until 11:20 a.m.]

PANEL II: ENERGY MARKET AND SUPPLY IMPLICATIONS OF 

CHINA’S ECONOMIC GROWTH 

Co-Chairman WESSEL. The next panel will focus on the economic 

and energy market implications of China’s current and future energy demands. We will hear from Amy Myers Jaffe, Dr. Kang Wu, 

and Dean Girdis. 

Ms. Jaffe is the Wallace Wilson Fellow for Energy Studies at the 

James A. Baker Institute for Public Policy and Associate Director 

of the Rice University Energy Program. She is the principal author 

and research director for eight energy studies published by the 

Baker Institute, which include topics such as Chinese energy policy 

and global oil geopolitical. 

Dr. Wu comes to us from the East-West Center in Hawaii, where 

he is the head of the China Energy Project. His work includes en-
27

ergy modeling and Asia-Pacific energy demand forecasting, and we 

appreciate your traveling to be with us today. 

Dean Girdis, Director of the Gas and Power Group of PFC Energy, has had extensive experience consulting on energy development and reform and energy security in China. And if we could 

start from my left to right with each of the witnesses taking approximately 10 minutes so that we have time for questions. 

Go ahead. 

STATEMENT OF AMY MYERS JAFFE

WALLACE WILSON FELLOW FOR ENERGY STUDIES

JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY

RICE UNIVERSITY 

Ms. JAFFE. Thank you very much. It’s really an honor and a 

pleasure to be here. The Baker Institute has done extensive work 

on China. We do have a major study that’s on our Website that has 

12 papers, and some of my remarks or pretty much all of my remarks reflect this program. 

We did our own models on China’s energy use by sector, so I’m 

not going to go over some of those statistics, because I think Dr. 

Caruso gave us a very good overview of the statistics, but some of 

our statistics vary somewhat or slightly, and depending on the 

area, from EIA’s own projections, so I welcome the Commission to 

go into the Baker Institute Website and see some of the work that’s 

done by sector and our views of the transportation sector, which we 

think is very important. 

I’m going to pick a few highlights, especially now having the benefit of the opening presentation to emphasize some points. According to the Baker Institute modeling, we believe that the transportation sector use of oil could triple by 2015 and that the growth in 

that sector in China will be 50 percent faster or, you know, as a 

sector than the other sectors in China like industrial, residential, 

so forth. 

Our projection for 2010 is for oil demand to reach 7 million barrels a day. Actually, it has grown so exponentially fast between the 

mid-nineties and currently that I’m not sure that we’re going to 

find that the projections are too pessimistic, or we’re not going to 

find that they’re too optimistic. We think we’re probably going to 

find that there are a lot of people in China who are watching television. 

Just to tell you an incredible statistic, 70 percent of people in 

rural areas in China have a television. Ninety-nine percent of people in urban areas in China have a television. The average Chinese 

four-year-old watches seven hours of television a day. And I tell 

that statistic because there is a tendency in the United States; 

even people who have barely any other electrical appliances have 

satellite television. And all of this television is punctuated with advertising. I don’t know what it is today, but when we had our seminar on this subject, it was a couple of years ago, say, two or three 

years ago, the favorite show in China was Baywatch. 

And I joked at the seminar that what do you see in Baywatch? 

You see people in Jeeps blow-drying their hair and, you know, 

using other electrical appliances. So there is sort of a growth of a 

consumerist society, especially in certain parts of China like southern China, and I think we have to keep that in mind when we 
28

think about energy use, though it is true that there is a clear relationship between how much GDP growth we have in China in the 

future and what’s going to happen with their energy demand, and 

depending on people’s views of whether growth will be at 5 percent, 

which is what they’ve done over the past decade, or whether that 

will slow down considerably will really influence whether these 

forecasts for things like 7 or 8 million barrels a day of oil demand 

are correct. 

Let me just make a statement just to take a minute to help the 

committee understand how these issues are viewed in China. The 

growth in U.S. net imports of oil, which mainly went to feed our 

automobile private use, the United States represented 30 percent 

of the increase in oil traded in the world between 1991 and 2000. 

So that’s oil traded in the world; that means oil that went from one 

country to another. 

The United States’ rise in imports represented 60 percent of the 

increase OPEC was able to make over that period. So if you were 

a hearing of people like yourself in China, you would be having 

hearings to talk about the fact that the United States doesn’t have 

an effective transportation sector policy and the impact that that 

has on increased demand for oil for OPEC, and the incredible impact that that has had on OPEC’s ability to charge and pick a price 

in the market is completely and directly related to this 60 percent 

increase in sales they were able to do because of U.S. imports, and 

that is a much bigger factor, at least in the last 10 years, than anything that has happened in China. 

So I just feel the need, since you also serve on committees related 

to energy policy, to point out that part of what we can do to help 

make China’s new growing economy not bring pressure on the 

international market is to get a grip on our own energy policy. 

Again, just to give you some perspectives beyond the transportation sector, according to the Baker Institute model, Chinese industrial sector use, which is running about 2 million barrels a day, 

we project that to rise to 4.9 million barrels a day by 2015. In 1992, 

China was emitting 55 percent of the American or U.S. level of CO2

emissions. We see the rise based on our own projection for use by 

sector that the per capita emissions in China could rise from 2.44 

metric tons to about 3.77. 

If you do a survey of the kinds of literature that you, the committee, have read to become prepared from these hearings, and let 

me say I am very impressed with the range of knowledge of all of 

the Commissioners, Chinese analysts write about concerns that the 

U.S. will block China’s oil supply, and they have—the literature 

centers on two key factors. One is the United States will blockade, 

perhaps militarily or perhaps through diplomacy, China’s access to 

oil if there was a war over Taiwan. And then, the second emphasis 

in the Chinese literature is concerns that the United States will 

have strong relationships with key oil producers, and during some 

kind of a conflict period with China, the United States will ask 

those producers to reduce availability of oil to China. 

And those, I think, are primarily the two driving perceptions or 

paranoia, depending on your position that drives Chinese policy. 

And therefore, as Members of the Committee have already alluded 

to, and it is an important problem, China has actually purposefully 
29

sought out countries that it feels the United States has a poor relationship with or possibly even has sanctioned to develop an oil relationship with. So we all know about the Chinese production in 

Sudan, which the Chinese got access to because Western and Canadian investors felt compelled by U.S. sanctions to pull out of that 

domain. 

We have similar overtures to Iran, and in the last few years, 

there was even word on the street that Chinese oil companies were 

visiting in Libya, talking about if sanctions were not lifted by the 

United States and American oil company properties could not be effectively developed by the companies that own them that the Libyans would take those fields away from the American companies, 

which are now frozen, and give them to someone like CNPC. 

You I think correctly mentioned the dangers of having China 

pursue a bilateral oil policy where they are dependent on certain 

countries, and those countries can make demands on them, or military or political strings come attached. We see with our own foreign 

policy, our high dependence on oil from the Middle East and other 

key regions does constrain our abilities to try to press certain allied 

countries to make concessions in the war on terror. There are certain things we can’t say to, say, a Russia or a Saudi Arabia or 

other countries, because we need their support in one area, and so, 

therefore, we cannot press them on other national security areas as 

hard as we might otherwise do. 

Let me elaborate just quickly: I absolutely agree with Administrator Caruso that strengthening the bond between the IEA emergency stockpiling system and China and other important oil users 

like India and Brazil is a major thing that U.S. diplomacy should 

seek to do. I think that—I agree with Administrator Caruso that 

the Chinese have been studying and studying this problem, and 

they are starting to understand that planting their flag in faraway 

countries is not helpful; that having a pipeline from Kazakhstan is 

maybe not as helpful as they had originally imagined; and that 

they are more open to thinking about multinational organizations 

than they were initially. So there is more opportunity today. 

But the most important thing to understand in terms of the global system in times of emergency is that if we make a 1 million barrel a day stock release from our SPR or the IEA system, right, and 

China were to become panicky at that same time, and they were 

to go out and buy up, in the panic, a million barrels a day of oil, 

which could happen easily, that they have nullified the entire exercise of our releasing stocks, right? And that is why it is most important that if we are going to have some kind of military campaign in the Middle East; if there is some kind of major accident 

for a major oil producer that the United States have a clear and 

structured institutional way to have a cooperative arrangement 

with China in how we are going to deal with emergencies. 

Co-Chairman WESSEL. If you could sum up. 

Ms. JAFFE. So, in summary, the United States should be engaged 

in the China energy area, both viewing China as a good market for 

energy-efficient technologies; that is both in the transportation sector and elsewhere; to help them develop markets for natural gas 

and as a partner in R&D for scientific R&D; in areas of emerging 

energy technologies and nanoscience, solar, electricity transmission. 
30

1Dr. Steven W. Lewis, Senior Researcher in Asian Politics and Economics, contributed to this 

written presentation. 

And I do want to say for the record that the Baker Institute considers this a very important issue. We took a group of Japanese energy policy officials with us to Beijing to hold a special session on 

emergency stockpiles and other energy policy cooperation policies. 

We just had a seminar on Russian energy and broached this competing subject of the pipeline route, again, with Chinese and Japanese participants and Russian participants. We had a seminar in 

Moscow with the same groups. 

So we consider this a very important issue. We congratulate the 

Commission on focusing on these important issues. 

[The statement follows:]

Prepared Statement of Amy Myers Jaffe 1

Wallace Wilson Fellow for Energy Studies

James A. Baker III Institute for Public Policy, Rice University

China and Long-Range Energy Security

China has achieved remarkable economic progress over the past ten years, leading 

to speculation that it may rival the U.S. as a superpower in the 21st century. Discussion of this rivalry has led to speculation that China may compete with the 

United States for important global resources. 

China’s energy sector is one of the key areas where dramatic change can be expected in the coming years. Cheap, readily available energy sources will be critical 

to China’s economic expansion, just as such resources played a major role in the industrial revolution and rapid economic development in the West. 

Already, China’s economic expansion is being accompanied by a strong increase 

in demand for energy. China’s total energy use has risen steadily from 313.3 million 

tons of oil equivalent in 1975 to 910.80 million tons of oil equivalent (mtoe) in 2001, 

according to official government statistics. Coal use has dropped from 76% of the 

country’s energy mix in 1990 to 67% currently, replaced mainly by higher oil consumption and hydroelectric power. While the bulk of total Chinese energy demand 

will continue to come from industrial activities for the foreseeable future, the transportation sector is beginning to represent an increasing share of total energy use. 

In fact, at a per capita GDP growth rate of 5%, the Baker Institute projects that 

energy demand in the transportation sector could triple by 2015, fueling a sharp increase in oil and petroleum product use. This means that transportation energy demand can be expected to grow 50% faster than demand for energy in the remaining 

sectors of the Chinese economy. 

Chinese oil demand has risen from 2.1 million barrels a day (b/d) in 1990 to over 

5 million b/d currently. The Baker Institute projects Chinese oil use will grow to 

around 7 million b/d by 2010. China’s domestic oil output is averaging around 3.4 

million barrels a day in 2003 and is likely to remain flat to slightly lower in the 

coming years. Therefore, China’s oil imports can be expected to grow significantly 

in the coming decade after nearly decades of complete self-sufficiency. This change 

has important implications for Asian energy security and oil geopolitics. 

There has been speculation that China’s rising oil use would be a major factor 

driving international oil prices to new higher levels in the coming decade and that 

China will become a key competitor to the United States for vital oil supplies from 

the Middle East and elsewhere. However, this view presupposes that a shortage of 

oil and natural gas will emerge, and experts generally do not support this premise. 

Short to Medium Term Oil Market Expectations: Supplies May Go Up, 

Prices Down 

Analysis of scenarios for international oil market supply and demand for 2010 and 

beyond do not bear out the thesis that China’s rising demand will necessarily force 

oil prices to new, significantly higher levels or leave the world depleted of this important fuel. Many respected analysts are forecasting that oil market conditions 

may become oversupplied in the coming years if demand growth is held in check 

over the remainder of the decade. This will require concrete policies in oil consuming countries to discourage sharp rises in oil consumption, but implementation 

of such policies in many countries is under implementation or debate. 
31

Under scenarios which posit a continuation of slow world economic growth, analysts suggest that oil demand may grow by no more than 4 b/d between 2002 and 

2005, or roughly 1.3 million b/d a year, with about 60% of that growth coming from 

China and elsewhere in Asia. Non-OPEC supply, including production rises from 

Russia and the Caspian Basin, is expected to total 3 million b/d over the same period. This development, should it occur, would only leave the Organization of Petroleum Exporting Countries (OPEC) with one million barrels a day in market share 

growth over the period to 2005. Since Iraq alone could take up to that volume, or 

even expected increases from Algeria and Nigeria, OPEC could have increased difficulty sustaining its current $25 oil price targets without shutting in substantial 

existing productive capacity. 

Some analysts believe that OPEC will want Saudi Arabia to cut its production to 

make room for increases by other OPEC members, but it remains to be seen how 

much the kingdom will be willing to sacrifice of market share to defend oil prices. 

Saudi Arabia has also made public statements that it will not look on passively if 

Russia continues to grab market share away from OPEC, and any Russian government will have to move cautiously to avoid stimulating a price war among major 

oil producers. This pressure will be increased by 2007 and beyond, if Iraq is able 

to make significant headway in achieving some large-scale expansion of its production capacity. 

Long Term Oil Resources: Are We Running Out of Oil? 

There has been considerable debate in recent years about the determinants of future world oil supply. Some experts point to the declining average size of modern 

oil discoveries and the rate of depletion in conventional oil fields and conclude that 

steady growth in oil use could overtake available conventional resources in the coming years. Current high oil prices and the precariously low level of spare oil-production capacity worldwide have intensified these concerns. Others have highlighted 

advances in oil exploration and drilling technology that are expanding potential 

frontier resources and greatly reducing the costs of exploiting them. This technology 

can be used in areas that are newly reopened to the international industry, such 

as the former Soviet Union, China, and the Persian Gulf, to provide potentially 

higher supplies from those regions. The current environment of rising oil prices and 

worries about near-term supply conditions has made the issue of resources even 

more timely, although there is a need to distinguish between immediate oil availability, which is determined mainly by past efforts and current resources, and 

longer-term supply, where future efforts and the potential resource base are the key 

determinants. 

Warnings that the world will soon exhaust the known base of hydrocarbon resources are not new. As far back as 1914, the U.S. Bureau of Mines forecast only 

a 10-year supply of oil left for the United States. In the aftermath of the 1970s oil 

crises, the Club of Rome concluded that the world would shortly run dry of oil. This 

extreme view, and others like it, failed to allow for the technological advances that 

have slashed the costs of finding and developing previously hard-to-tap reserves in 

deep ocean waters and improved the chances of new discoveries, especially in important terrain in Iraq, Libya and the former Soviet Union which were held back from 

benefiting from emerging technologies by politics. It also failed to recognize the falling commercial costs of exploiting unconventional resources such as oil shale, tar 

sands oil, oil sands-based synthetic crudes, and perhaps in the future, gas to liquids 

and methane hydrates. Similarly, technological advances, conservation policies, and 

consumer reactions to earlier price shocks have all contributed to shifting paces of 

demand growth, reducing the rate of depletion of the world’s resources. 

The World Petroleum Assessment released by the U.S. Geological Survey in 2000 

estimates that in areas exclusive of the U.S., a mean value of 649 billion barrels 

of oil could be added to reserves through new discoveries in the coming 30 years 

(1995–2025). This estimate is 20 percent higher than the estimate in their last assessment published in 1994. These findings represent a continuation of the longterm upward trend in ultimate reserve estimates, which may prove too pessimistic 

as new drilling in Russia proves up more resources than previously expected. The 

ratio of world-proven reserves to production currently stands at 42 years, substantially higher than it was in 1972. 

Total estimates for the world oil reserves outside the U.S. of 2.66 trillion barrels 

represent a 5 percent increase over previously assessed totals. The assessment also 

estimates that as of the end of 1995, the world had used 539 billion barrels, or 20 

percent, of its currently estimated total oil endowment. Of the remaining estimated 

oil endowment of about 2.1 trillion barrels, about 75 percent, which includes potential additions from reserve growth, has been found, and 25 percent remains undiscovered. But the report noted that 75 percent of undiscovered oil resources outside 
32

OPEC would be found offshore, lending credence to contentions that much of the 

‘‘easy’’ oil has already been found. The International Energy Agency (IEA) assessment published in 1998 had similar assessments, arguing that there are 2.3 trillion 

barrels in ultimate recoverable reserves (that is, available at current prices with 

current technology) and well over 4 trillion barrels if unconventional tar sands and 

oil shale are included into the tally. 

In summary, resource depletion is unlikely to be a factor in the future U.S.-China 

relationship. 

The United States and China and the Geopolitics of Oil 

However, the question is not just whether there will be enough oil under the 

ground but whether the political, social, and economic environment in oil-producing 

regions will facilitate or hinder the development of future oil production capacity. 

In studying both the short-term, strained condition of the oil market and the prospects for the future, it is clear that political issues will loom large, possibly playing 

a more important role than even geological factors in determining the pace of resource development for at least the next 10 years. 

One key political factor influencing the pace of resource development in the developing world is nationalistic or protectionist sentiment, which, in many countries, 

has created a political climate that promotes blocked access to oil resources by foreign investors. In recent years, political factors have far outweighed geological ones 

in limiting available supply to world oil markets. It is in managing these political 

factors that the United States and China have common interests that needs to be 

carefully nurtured through sound diplomacy and public policy. 

As China’s oil imports rise to levels above 3 million b/d, it will be increasingly 

difficult for China to meet its crude oil import requirements without concluding 

large, long-term contracts for the supply of oil. Over the past few years, China has 

demonstrated a willingness to deepen its oil trading relationships with Iran, Sudan, 

and Libya, taking advantage of U.S. sanctions policy and leading to fears that Beijing will form oil-for-arms, military-client relationships with nations under boycott 

by the United States. 

As China pursues bilateral oil diplomacy, political pressures will build for Beijing 

to back positions popular with particular oil producers in forums such as the United 

Nations. This could pose new challenges for the West on a variety of issues, in much 

the way that Russian and French political opposition to military strikes against Iraq 

hurt U.S. efforts to create U.N. support for a coalition of the willing. 

China has yet to consider seriously activities involving multilateral alliances on 

oil issues with other important oil consuming countries. The West is partially responsible for not making a sufficiently convincing case for an alliance. The U.S. has 

failed to push for a way for China to join the international emergency stockpiling 

system and is only now beginning to make significant efforts to transfer new, cleaner energy technologies to Chinese industry and to involve China in multinational 

energy research initiatives. For the U.S., energy cooperation could be key in building a cooperative relationship with China. Such cooperation could smooth the way 

for better coordination on weapons nonproliferation and environmental protection. 

In the almost three decades since the 1973 Arab oil embargo, countries such as 

the U.S., France and the U.K. have realized the limitations to bilateral supply arrangements, even in light of the cases where such bilateral relations extended to 

extensive arms shipments and other forms of military cooperation. The impact, by 

contrast, of the International Energy Agency emergency stocks program has been 

quite successful, not only in calming markets such as seen in the early days of the 

U.S. military campaign to remove Iraq from Kuwait in 1991, but also in serving as 

a deterrent to oil producer groups to exercise monopoly power in times of market 

crises or to impose politically-driven oil supply restrictions. The lesson of the IEA 

is that its members have been able to minimize the impact of supply disruptions 

from the Middle East by sharing resources in a coordinated fashion rather than by 

acting alone. The IEA serves other important critical functions as well, including 

promoting alternative fuels and developing market mechanisms to boost energy efficiency. 

The continued effectiveness of the IEA system, however, will depend on oil market 

developments, including Chinese and Asian demand trends. The member countries 

of the IEA now represent a smaller portion of the oil market than they did at the 

time of the IEA’s formation in 1977. As oil demand growth in Asia expands in the 

coming decade, new strains could come to the international system if new policies 

are not put in place. The omission of key consumer countries like China from the 

global emergency stockpiling system will increasingly put pressure on the effectiveness of limited, existing stocks in the Organization for Economic Cooperation and 

Development (OECD) countries. Moreover, tensions created by Asian ‘‘free-riding’’ or 
33

possible ‘‘hoarding’’ actions during a crisis could hinder the IEA’s ability to stabilize 

international oil markets in the future. 

The OECD countries comprising the IEA represented 42.3 million barrels a day 

(b/d) out of a total world oil use of 60.6 million b/d in 1977, or around 70% of world 

oil demand. The U.S. alone consumed 30% of the world’s oil used in 1977. Asia Pacific at that time was a less critical component to the world oil use situation at 10.1 

million b/d or roughly 16% of world oil demand. 

By 2001, the OECD share of world oil use had declined to 62% of total world demand while Asia Pacific use had grown to 28%, overtaking the U.S. share of 25%. 

Asian economic powers Japan, South Korea, Australia and New Zealand are OECD 

members and, as such, are part of the IEA system now. But other key Asian oil consumers such as China, India, Taiwan, Thailand, Philippines, Pakistan and others 

are not. As their share of world oil demand grows, this disconnect between Asia’s 

size and importance as a consumer region and its lack of energy policy coordination 

with other large oil consuming countries will create new problems and challenges 

for international oil markets and the international economic system. 

As oil import levels for key Asian countries rise over the next two decades, the 

behavior of oil players from these countries during times of market crisis will increasingly matter. If a significant percentage of countries continue to hold little or 

no strategic oil stocks despite their rising oil import levels, then any rush to markets with panic buying by these countries at the first signs of crisis will thwart the 

joint, coordinated and constructive policies of the industrial countries to the detriment of all concerned. In addition, even without panic buying, industrialized countries are likely to resent ‘‘free-riding’’ by other large consumer countries over time 

since the level of stocks needed to stabilize markets will expand as world demand 

rises. The best possible win-win scenario would be for new links between the IEA 

and other large consumer countries like China. 

Analysts of Asian energy security should make no mistake that China has concrete strategic interests in Asia’s sea-lanes linked to energy concerns among other 

issues, as well as a major commitment to its own military strength. But in light 

of the limitations on China’s own force projection capabilities, these interests are 

best served, at least for many years to come, through cooperation and strategic partnership. It is precisely the U.S. guarantee of equal access for all of Asia’s sea-lanes 

that allows China to fulfill its strategic energy requirements through free riding 

rather than military adventurism. A U.S. military asset drawdown in the Pacific, 

which might open space for security competition—for example, between China and 

Japan—to fill the vacuum—would be far more dangerous to Asian stability than the 

potential for a Chinese challenge to the status quo. 

Environmental Issues 

It is unlikely that China will be able to cope with rising dependence on oil resources in the short to medium term by leapfrogging to alternative technologies for 

the transportation sector. Environmental policies that forced industry to create 

cleaner engine systems for use the transportation industry in the U.S., Europe or 

Japan could eventually lead to commercial breakthroughs that could be applied to 

reduce pollution in developing countries such as China and India. Still even if a 

technological breakthrough or government policies could stimulate strong consumer 

demand, it would take many years before electric, fuel cell or hybrid vehicles would 

have significant impact on energy markets. Some pilot programs are being conducted to develop non-hydrocarbon-based energy technologies in certain industries 

including transportation sectors in China, and several cities in China have promoted 

natural gas vehicles as an alternative to gasoline fuel. Still, these programs are in 

their infancy and are unlikely to counterbalance the rise in gasoline-fueled vehicles 

in the short to medium term. 

While growth in Chinese energy use in the transportation sector will likely be 

highest, demand for energy in both the residential and commercial sectors, as well 

as the industrial sector, may nearly double by 2015. Rationalization of energy use 

and increased energy efficiency may come with market reforms, denting growth 

rates as related to GDP gains but the expansion in the Chinese economy is still likely to bring major increases. Energy use in the industrial and other sector could expand from 545 mtoe in 1995 to 1291 mtoe by 2015. Residential and commercial energy consumption could see increases to 282 mtoe, up from 137 mtoe. In terms of 

oil, residential and commercial oil use could climb from 128,000 b/d to 270,000 b/d 

by 2015. Oil use in the industrial sector could rise from just over two million b/d 

to between 3.4 million b/d to 4.9 million b/d, depending on economic growth rates. 

To the extent that the industrial, residential and commercial sectors are coal intensive, this will have considerable ramifications for the environment (coal emits 

34% more carbon per British Thermal Unit (BTU) than oil and 81% more carbon 
34

than natural gas). For example, by 1992, China was already emitting 55% of the 

U.S. level of carbon emissions from industrial processes. China’s per capita CO2

emissions could rise from 2.44 metric tons to 3.77 metric tons by 2010. Forecasts 

for the increase in per capita emissions in China, India, Indonesia and Brazil imply 

that these four countries could produce as much as 2.0 billion tons of carbon annually in 2010, according to the Baker Institute. 

Current international agreements on global warming will be substantially flawed 

unless they include major developing economies such as China, India, Indonesia and 

Brazil. Controls on the developed nations alone may be ineffective in reducing the 

accumulation of carbon dioxide in the atmosphere. The growing emissions from developing countries could dwarf proposed reductions for the industrialized world. 

The costs of Beijing trying to limit this rise in emissions in line with the Kyoto 

agreements are prohibitive. In the year 2020, Chinese attempts to limit emissions 

in line with available production technology would result in GDP levels 27 percent 

lower than if emissions are not constrained. The cumulative loss of GDP for the period 1999 to 2020 by evaluating carbon dioxide emission would be about 24 trillion. 

This is more than twice China’s expected GDP level in 2020. 

Given the other pressing social, economic and health challenges facing China, its 

leaders are unlikely to make control of greenhouse gases a major priority. In order 

for the developing countries like China to take effective action on global warming, 

they will have to be compensated until the net cost is acceptable. Given the relative 

unimportance of global greenhouse gas emissions when compared to China’s other 

more urgent pollution problems, as well as health, education and economic challenges, an acceptable cost to Beijing to participate in global warming accords is likely to be close to zero. Thus, the cost of any sacrifice that is demanded of developing 

countries is likely to fall on taxpayers of those countries whose politicians view the 

problem as a high priority. Since massive transfers in the billions or trillions of dollars would be required, this is not a practical solution to pursue. 

Emerging technologies in the field of transportation and power generation could 

play a positive role in reducing emissions in emerging economies where major infrastructure investments remain to be made. Cleaner, more efficient emerging technologies in the automotive and power sectors could eventually help fill the gap that 

the Kyoto agreement leaves in reducing emissions from key developing nations. At 

the margin, China may try to lessen environmental consequences of rising coal use 

by switching to other resources where possible. While progress has been made in 

recent years in the development of alternatives to fossil fuels for power generation, 

these alternatives are unlikely to have significant impact on energy markets until 

after 2020. 

China’s Natural Gas Sector 

Natural gas remains another viable alternative to expanding coal and oil use in 

China. Natural gas could rise from 2 percent of China’s current energy consumption 

to 8 percent by 2010 and 10 percent by the year 2020 if the Chinese government 

quickly gives priority to the natural gas sector. 

China has significant potential resources of natural gas. There are 54 large and 

medium gas fields found over the past few years mainly in the Ordos, Sichuan, the 

Tarim, the Juggar, the Qaidam areas as well as in the western South China Sea. 

Exploration and production (E&P) activities from 1991 through 1998 resulted in 

newly added proven reserves totaling 853 billion cubic meters (bcm). 

Natural gas demand in China has been restricted in the past. While liquefied petroleum gas (LPG) has been widely used in 600 cities, natural gas use has lagged 

other major economies. Major Chinese natural gas markets still remain most prominent around the Sichuan gas fields. Considering China’s current environmental situation and future economic goals, China’s natural gas use should be enhanced. High 

economic growth forecasted above will translate into at least 100 bcm of additional 

natural gas demand in 2010 and 150 bcm in 2020. But this level of natural gas use 

faces several obstacles including a possible internal supply deficit, massive infrastructure requirements and lack of expertise and institutional frameworks for commercialization of domestic natural gas markets. 

In addition, a nonconventional source, Coal-bed Methane (CBM) resource is estimated 25 trillion cubic meters. There are several pilot CBM areas with 300 bcm reserves and 50–100 bcm production. Further development can be expected in the 

next decade. 

The gap between demand and indigenous supply is projected to grow from 21–24 

bcm in the year 2000 to 46–73 bcm in 2010 and to 60–111 bcm by 2020. The potential gaps between Chinese natural gas supplies and its demand by the year 2010 

is roughly equal to the size of all annual liquefied natural gas (LNG) exports (23 

bcm) from Australia, UAE, Qatar, and Libya in 1997 or 20 percent exports by pipe-
35

line from the Russian Federation. The level is also close to combined LNG imports 

of Belgium, France, Italy, Spain and Turkey and larger than LNG imports of both 

South Korea and Taiwan. China’s potential gas import requirements by 2010 could 

reach or even surpass current LNG imports of Japan. China’s southern provinces 

alone are expected to see demand for gas-generated power reach 11–18 bcm by 2005 

and 20 to 35 bcm by 2010, according to a Baker Institute study. 

About 50-bcm of natural gas imports have been planned to 2010 from neighboring 

countries such as Russia, both by pipelines and LNG tankers. 

A prioritization of China’s natural gas segment could help enhance China’s energy 

security by diversifying available supplies to meet China rising energy requirements. It will also improve the living standard and air quality in most major cities. 

Reasonably, gas policy should be viewed as an imperative to securing Chinese sustainable development. 

China sees itself as both an emerging market and as a land bridge for regional 

gas shipments and it views its gas import strategy as a means to secure and maximize various regional linkages. China has been vying with Japan over competing 

gas pipeline routes from East Siberia, with China favoring a route from Angarsk 

to Daqing, connecting to the Chinese port of Dalian and Japan pushing for a more 

expensive route that would bypass Chinese territory and remain instead inside Russia, exiting at the Pacific port of Nakhodka. 

The Geopolitical Consequences of China’s Rising Energy Needs 

Over the past few decades, China has had the luxury of choosing a neutral role 

towards events in oil geopolitics. Oil prices inside China were fixed by the state central planners and had no relation to world price levels. Internal supplies fairly evenly matched domestic requirements. Its economy was sheltered from the volatile 

international oil scene and therefore its leaders could be indifferent to conflicts in 

the Middle East or elsewhere. Oil disruptions neither hurt nor helped China substantially. 

By contrast, the U.S. economy, as a major consumer and importer of oil, was vulnerable to sudden swings in international oil prices, dictating foreign policies that 

would promote stability in international oil markets. The U.S. navy defended Persian Gulf supplies while U.S. policymakers worked to remove political and economic 

barriers to oil development outside the volatile region. The Soviet Union was a 

major oil exporter and its economy benefited directly from rising oil prices. Its interests in oil markets were diametrically opposed to those of the U.S. Soviet oil interests so diverged from America’s that policy theorists in the 1980s suggested the U.S. 

would benefit from events that could drive oil prices lower to hurt the Soviet treasury. 

The implications of China’s shift to a world energy importer are significant. Over 

the next ten to twenty years, China will have to participate in international energy 

trade on a substantial and sustained basis, to form alliances for energy supply and 

transportation, and to make security and environmental choices about fulfilling its 

future burgeoning energy needs. These alliances, trade and policy options will be 

constrained by the unwieldy organization of China’s oil and gas industry and the 

aged and inefficient infrastructure that exists in China today. 

China’s rising oil import requirements and the physical constraints of its refining 

sector may mean China will become increasing dependent on the same energy 

sources as the U.S., Japan, and other industrialized economies. This could tie its 

strategic interests more closely with Western interests in the Middle East. A rising 

reliance on Persian Gulf oil and gas imports imply that China will suffer the same 

negative consequences as the U.S., Japan and Europe if military equipment it or 

others pass to regimes such as those in Iraq or Iran is used to interdict the free 

flow of oil from the Middle East or elsewhere. Continued political instability in Afghanistan or Central Asia will have similarly dire consequences for China’s chances 

of tapping Caspian energy supplies. 

However, it remains to be seen if China’s energy interests will be enough to alter 

China’s military’s perceptions of its own more general strategic interests, particularly on the issue of weapons nonproliferation. China may continue to perceive a 

benefit in diverting U.S. strategic engagement away from Asia. China’s leaders may 

view larger strategic interests in Asia—beyond the energy sector—as better served 

by diverting U.S. diplomatic attention and military assets away from the Asian theatre to places like the Middle East. This latter interpretation of Chinese interests 

will depend greatly on Beijing’s perceptions of U.S. intentions—both in the short 

and long term—and their potential risk to China. 

To some extent, China’s economy could be shielded from the negative consequences of a temporary cut-off in oil supplies as a result of a major disruption 
36

by its heavy use of coal in vital industries. But it would still have to implement uncomfortable—and potentially destabilizing—major consumer sacrifices. 

The Chinese leadership’s freedom of movement on asking for major consumer sacrifices is likely to diminish over time as China’s middle classes gain a rising role 

in the economy. As media outlets expand inside China, awareness is growing regarding disparities within Chinese society and between PRC citizens and people living in Hong Kong, Taiwan, the United States, and other rich societies. The proliferation of television and other media forms is already ushering in vast social 

change and rapidly rising expectations of a more consumerist society. 

Nearly 100% of homes in urban China and two-thirds of homes in the countryside 

own television sets. Advertising is targeted at middle class Chinese who might desire lavish vacations, air-conditioned homes, and private cars—all of which drive up 

the demand for energy almost exponentially. 

The Chinese central government has fought back against this bombardment of 

foreign images by delivering competing messages of socialist values, but ultimately, 

Beijing faces a near impossible challenge to monitor and control the symbols being 

circulated at the local level throughout China. The net result could easily be a society increasingly unwilling to forego consumer goods and unlikely to conserve energy. 

This fact will make the imposition of curbs on energy use more costly politically and 

give the Chinese leadership pause to take adventurous military actions that could 

result in a cut-off in energy imports. 

China does not yet have the military muscle to challenge successfully the U.S. 

and its regional allies in the Asian seas. China lacks the military capability and the 

basing facilities to close Asian sea-lanes for any extended period of time—should the 

U.S. Navy intervene to reopen them. Given its limited military budgets and current 

capabilities, China’s military is 40 to 50 years away from the type of comprehensive, 

across-the-board technological modernization of its naval and air forces that could 

challenge American power in the sea lanes. 

The U.S. presently has a window of opportunity to pursue cooperative energy policies that help China feel more secure about its energy security, thereby reducing 

the stimulus to conflict. Initiatives that assist China in developing cleaner energy 

sources can also enhance Western environmental goals.

Co-Chairman WESSEL. Thank you. 

Dr. Wu. 

STATEMENT OF KANG WU, Ph.D.

FELLOW AND HEAD OF CHINA ENERGY PROJECT, EAST-WEST CENTER 

Dr. WU. Mr. Chairman, Co-Chairs of the hearing, Members of 

the Commission, I am very pleased to be invited and have the opportunity to testify on this very important topic on China’s energy 

needs and strategies. 

I have a written statement, which provides some of the details 

about our views about China’s long-term energy and economic developments. I am going to organize my presentation today around 

some of the important issues, which are related, but also go beyond 

my written statement. 

The first important issue is China’s current energy consumption 

and the structure of the consumption and how it changed in the 

past 10 to 20 years. China is currently the second-largest primary 

energy commercial consumer in the world, but on a per capita 

basis, China’s per capita primary energy consumption is far below 

the U.S., and also, China is a distant second-largest primary energy commercial consumer, far behind the United States. 

Coal dominates China’s energy consumption, and the secondlargest source is oil, which is very important to China. China’s 

growing dependence on imported oil has become a big concern to 

the Chinese government and also a topic of this hearing. 

Currently, natural gas has a very minor share in energy consumption, but it will be growing very fast, and nuclear power is 

pretty much a late starter in China’s energy consumption. It is also 
37

expanding relatively fast. And China has a traditional emphasis on 

hydroelectricity, and this will continue to be emphasized in the future. 

Comparing China’s structure of primary energy consumption 

today with 20 years ago, for the 20 years of time, the share of coal 

declined, and the share of natural gas is unchanged, and the share 

of oil, hydroelectricity and nuclear power increased. By 2020, our 

forecasts show that with the growing overall primary energy consumption, the share of coal will continue to decline, and the share 

of oil is very much stable, or slightly higher, but the share of natural gas will drastically increase, and the share of hydroelectricity 

and nuclear power will also increase. 

So the growth of China’s primary energy consumption and structure changed in the past 20 years, pretty much driven by several 

factors. Number one is economic growth. Number two is the demand for high-quality energy products in the residential sector. 

And the third factor is the rapid transportation and petrochemical 

sector developments. And the fourth factor is the strong demand 

for electric power. And finally, I need to mention that it was also 

the need to conserve energy, because the use of energy was so inefficient at the beginning. 

Many of the same factors, plus new ones, will continue to drive 

the future change of China’s primary energy consumption and 

structural change. By new factors, I mean the need for more market-based efficient use of energy and the energy security issue, 

which is new, and then, how to balance between China’s economic 

and energy developments with the ecological and environmental 

developments. Those are the new factors affecting the future energy consumption in China. 

The second important issue is how China will meet its future energy demand. I will mention just a few, and then, we can discuss 

more. China’s primary approach is still to primarily rely on domestic energy, domestic supply, to meet the basic needs of the future 

energy consumption. China also wants to emphasize the importance of energy conservation and energy efficiency improvement, 

because those are the only ways, only effective ways, by which 

China can be able to maintain the high economic growth with a 

reasonable amount of additional energy use rather than one-by-one 

growth. 

China also wants to address the issue of energy security and particularly oil security. So these approaches—there are many other 

approaches I can mention later. These approaches and goals are 

sometimes conflicting. However, that’s the reality it is in China, 

and the government is trying to strike a balance among these conflicting approaches. 

For individual fuels which you heard from this morning, China 

will perhaps be able to manage not to be a net importer of coal for 

many years to come, not, perhaps, by 2020, so coal will be pretty 

much in good shape in terms of purely energy demand and supply 

balance. As for oil, imported oil, is likely to account for—I’ll just 

give you a ball park figure as one of our views—roughly about 60 

percent of China’s oil consumption by 2020, oil consumption. 

And China’s emphasis on natural gas is first as a way to diversify away from coal and perhaps away from oil, but the emphasis 
38

itself also creates a huge demand and also the need to import. So 

it is also an added element of energy security. Our view is that by 

2020, China is perhaps more or less dependent on imported gas for 

about 40 percent of the gas consumption. 

The third important issue is China’s impact on the world and on 

the U.S. and on U.S.-China relations. I’ll just make a very simple 

observation here. China’s likely impact on the world is primarily in 

the field of oil. By 2020, China’s oil imports may reach 5 or 6 million barrels a day or higher. It depends on the different forecasts. 

China will become the world’s second-largest oil importer after the 

United States. The U.S. and China may compete for the same 

source of oil supply. And, as mentioned again by Amy, the way 

China addresses its energy security, including the energy diplomacy and overseas investment in Africa and the Middle East may 

run counter to the U.S. foreign policies. 

In the Asia-Pacific region, one will see that a bunch of giant oil 

importers will emerge: China, India, Japan, Korea, plus others. 

After saying all of this, I have to emphasize that China’s impact 

on the world by 2020 in the area of oil, is still manageable, not otherwise. After all, China’s projected imports will still be far behind 

the U.S. imports. The oil market has long been globalized, so China’s projected imports are still small compared to the projected 

total volume of trade by 2020. 

In the gas field, China’s ambition to import more LNG or perhaps pipeline gas coincides with the rapid rise of natural gas demand in the U.S. So the two countries may compete for the same 

source of LNG supply in the Asia-Pacific region and in the Middle 

East. However, one has to realize that today’s market, the LNG 

market, is a buyer’s market. There are plenty of projects and potential projects there. There are plenty of gas supplies. And after 

all, importing LNG is not very cheap. 

The fourth issue that I want to touch upon is the impact of energy price volatility on China’s own economic growth. Overall, the 

impact of energy prices on China’s economy will be growing, but 

again, in our view, it is manageable. The reason we say that is the 

share of oil, in our view, will be going up slightly only, so they are 

quite stable at the 25 to 27 percent. In comparison, other major 

Asian economies, usually have 40 to 50 percent dependence on oil. 

So China’s dependence is lower than many Asian countries. 

The coal price is relatively stable, either domestically or internationally. Coal still supplies two-thirds of China’s energy consumption, so that provides a base for the stable energy price. And 

China’s increased use of natural gas will introduce a new element 

to price volatility, because price is based partially on oil, although 

China has managed, in the past year, to reduce their price linkage 

with oil in the LNG deals with Indonesia and Australia. 

And in the electricity market, as China reforms its electricity sector, the electricity price is likely to go up, too, in the country. 

So on an overall basis, energy will become more costly for China’s manufacturing sector. However, the abundance of China’s relatively cheap labor will perhaps keep China’s relative competitiveness of the manufacturing sector for many years to come. 
39

The last issue I am going to go over is how the U.S. may influence China’s policy, maybe in a more favorable way, over, you 

know, all of the possible areas of competition. 

The U.S. Government can influence China’s energy policy in 

severa ways. First, the U.S. can encourage China to move toward 

more environmentally-friendly energy consumption, including helping the Beijing municipal government to promote a green Olympic 

Games, which is what the U.S. Government is doing. First and 

foremost, the U.S. can provide assistance to help China to implement clean coal technologies. An effective clean coal technology program implemented in China will have tremendous impact on China’s overall quality of energy use, as you can imagine, with the 

high share of coal use. 

Secondly, The U.S. can participate in China’s coal-bed methane 

development exploration and production. China has vast resources 

of coal-bed methane, and the U.S. has enormous experience in developing coal-bed methane. Thirdly, the U.S. can participate and 

encourage China’s natural gas development. Fourthly, the U.S. also 

should thoroughly review its nuclear power cooperative policy with 

China and assess if it is in the best interests of the U.S. to help 

China to expand the peaceful use of nuclear power, which is being 

emphasized to address the energy security in China today. In that 

area, there are tremendous commercial opportunities. 

Finally, the issue of energy security: the U.S. needs to study the 

issue in a more comprehensive and perhaps more positive way. A 

minimum security for China with open transparent policies means 

China can focus more on other areas, like cleaning up the environment and continuing their structural change toward a more environmentally-friendly energy mix. A high sense of insecurity in 

China will likely drive the country to adopt more conservative, 

closed-door energy policies which could mean more coal use as a 

way to address their energy security away from oil and gas. Those 

are the areas that I think that should be reviewed. 

Mr. Chairman and Members of the Commission, that is the end 

of my presentation, and thank you again for giving me the opportunity to speak here. 

[The statement follows:]

Prepared Statement of Kang Wu, Ph.D.

Fellow and Head of China Energy Project, East-West Center

Outlook for Energy and Economic Developments in China

1. Introduction 

China has a huge energy sector and a large energy market. The world’s most populous country ranks second in total primary commercial energy consumption after 

the U.S. and third in primary commercial energy production after the U.S. and Russia. 

The Chinese economy has expanded substantially since the late 1970s. While the 

economy is facing many problems, it is expected to continue to grow strongly. The 

relatively rapid economic growth in China generates the need for massive amounts 

of additional energy in the coming decades, creating challenges—among them, security challenges—for both China and the rest of the world. 

The main objective of this statement is to briefly discuss China’s energy situation 

in the context of long-term energy and economic developments in the country. Topics 

covered include discussions of the changing structure of primary commercial energy 

consumption in China in the past two decades, the future energy economic developments, China’s rising energy import dependence at present and in the future, and 

an examination of China’s quest for energy security. 
40

2. Changing Structure of China’s Primary Commercial Energy Consumption 

In 2002, China’s primary commercial energy consumption reached 18.8 million 

barrels of oil equivalent per day (boe/d), while the consumption was 45.9 million boe/

d for the U.S., 12.8 million boe/d for Russia, and 10.2 million boe/d for Japan. On 

a per-capita basis, however, China’s primary commercial energy consumption is 

about half of the world average. In 2002, China’s per capita primary commercial energy consumption was only 9% of that of the U.S. Even if China’s vast non-commercial primary energy is added, the per capita energy consumption in the country is 

still a little over one tenth of the U.S.’s per capita energy use. 

China’s primary commercial energy consumption increased at an average annual 

rate of 4.0% during the 1980–2002 period, which was far below the official GDP 

growth of 9.5% per annum during the same period, leading to a hot debate whether 

or not the low GDP elasticity of China’s energy consumption during the past two 

decades was justifiable. Improvement of energy efficiency (from a state of very inefficient use of energy at the beginning), introduction of energy conservation measures, structural changes of the economy, and increase of total productivity of the 

country are all valid explanations of the relatively low growth of energy consumption in China. However, others suggest that it is quite possible that the official real 

GDP growth during the underlined period was overrated. We also question the validity of the super high GDP growth during the past decades but have approached 

the issue largely from the point where the measurement of conventional GDP itself 

has many flaws, particularly for a large developing country like China, as well as 

India. 

Coal dominates China’s primary commercial energy consumption. Oil is the second-largest source and it is very important to the economy. China’s growing dependence on imported oil since the early 1990s has increasingly been a concern to the 

Chinese government. Natural gas currently has a minor share in total primary commercial energy consumption in China, but its importance is growing. Nuclear power 

was a late starter in China’s energy development, but its expansion has been rapid 

since the 1990s. Hydropower has traditionally been given a priority status, and thus 

construction of hydropower plants has proceeded in a relatively rapid fashion over 

the past decades. 

In 2002, coal accounted for 68.4% of China’s total primary commercial energy consumption, down from 75.1% in 1980 and 79.3% in 1990. The coal consumption in 

2002 is estimated at 1.31 billion metric tons (tonnes), up from 610 million tonnes 

in 1980 and 1.1 billion tonnes in 1990, but down from 1.45 billion tonnes in 1996. 

Back in the 1950s and early 1960s, the share of coal in total primary commercial 

energy consumption was over 90%. 

Oil demand growth has been strong in China since the early 1990s. Total petroleum product consumption amounted to 4.8 million barrels per day (b/d) in 2002, 

up from 1.6 million b/d in 1980 and 2.2 million b/d in 1990, and accounting for 

25.7% of the total primary commercial energy consumption. 

In 2002, natural gas accounted for 3.0% of China’s total primary commercial energy consumption. This share is still very low compared with the gas share in total 

primary commercial energy consumption for the rest of the Asia-Pacific region (15%) 

and in the rest of the world (26%). Despite its minor role in China’s overall primary 

commercial energy consumption, natural gas consumption has been growing fast 

since the mid 1990s. 

China’s electric power generating capacity and electric power generation are the 

second largest in the world after the U.S., although China’s per-capita electricity 

consumption remains low. The country’s gross power generation reached 1,602 

terawatt hours (TWh) in 2002, up from 301 TWh in 1980 and 621 TWh in 1990. 

About 84% of China’s electricity is generated by fossil energy, mainly coal. Hydropower is the main non-fossil energy power, followed in distance by nuclear power. 

By the end of 2002, China had over 80 gigawatts (GW) of installed hydroelectric 

power generating capacity, accounting for about 24% of the country’s total installed 

power generation capacity. The actual generation of electric power by hydropower 

plants accounted for around 15% of the national total in 2002. 

China started the development of nuclear power in 1982. The country’s first nuclear power plant, at Qinshan in Zhejiang Province started commercial production 

in 1993. Commercial production started for the two nuclear power units at Daya 

Bay, Guangdong Province, in 1994. In 2002, four more generators began commercial 

operations. Altogether China has an installed nuclear power capacity of 6.1 GW as 

of October 2003. Together, hydroelectricity and nuclear power accounted for 3.0% of 

the total primary commercial energy consumption in China. 

Clearly, China’s rising primary commercial energy consumption and the structural changes since 1980 have been driven by a number of factors. The first is high 

economic growth. Despite the doubt about its accuracy, China is still perhaps the 
41

world’s fastest growing economy for over two decades since the late 1970s. The second factor is the growing demand for high quality energy products in the residential 

sector, which has led to the rapid growth of liquefied petroleum gas (LPG) and to 

a lesser extent natural gas use in China and the decline of coal’s share in energy 

consumption in urban cities. The third factor is the rapid growth of transportation 

services and petrochemical sector capacities, which has substantially hiked the demand for petroleum products and drastically changed the structure of oil consumption, away from heavy distillates to lighter and cleaner products. Finally, China’s 

demand for electricity has been strong. While China had to continuously rely on coal 

to satisfy the bulk of its electricity generation needs, the development of hydropower 

and nuclear power have also been stimulated during the past two decades. 

3. Future Economic and Energy Outlook 

Many of the same factors that drove China’s energy consumption in the past, plus 

new ones, will continue to shape the future demand for energy, in terms of both 

total requirements and structural changes. The new factors include calls for more 

efficient use of energy, the increasing concern of China’s energy security, and the 

balance between China’s energy consumption and the environment and ecological 

systems. 

For China’s energy as a whole, though economic development is hardly the only 

determinant for the future, the long-term economic growth does form the basis for 

the long-term rise of energy consumption in the country. Using the same definition 

currently employed by the Chinese government, the average annual growth of the 

real conventional GDP may reach the following by 2020 under the base-case scenario: 7.5% for the 2002–2005 period, 7.0% for the 2005–2010 period, 6.5% for the 

2010–2015 period, and 5.9% for the 2015–2020 period. On average, the projected 

growth rate is 6.6% per annum between 2002 and 2020. China’s population will 

grow steadily during the period, albeit at much lower rates seen in the 1980s and 

1990s. 

Between 1980 and 2002, coal consumption in China increased at an average annual rate of 3.5% a year. Looking toward the next fifteen years and beyond, coal 

consumption in China will continue to grow, but its share in total primary commercial energy consumption is expected to decline to 59.2% in 2015 and 57.5% by 2020 

under our base-case scenario. 

For oil, the total petroleum product consumption is expected to increase to 7.6 

million b/d in 2015 and 8.8 million b/d by 2020 under our base-case scenario. As 

such, the share of oil in China’s total primary commercial energy consumption is 

expected to remain relatively steady at around 25.8% for 2015 and 25.4% for 2020. 

Natural gas is expected to lead China’s growth in energy consumption in terms 

of percentage growth. With efforts to develop its own resources and bring in imports 

in the form of liquefied natural gas (LNG) and by pipeline, China’s natural gas consumption growth is expected to accelerate, raising its share in total primary commercial energy consumption from 3.0% in 2002 to 8.5% in 2015 and 10.0% in 2020. 

Regarding hydroelectricity, the Chinese government’s target is to increase or at 

least maintain hydropower’s share in the country’s total installed power generating 

capacity. Our base-case scenario shows that the share of hydroelectricity in China’s 

total primary commercial energy consumption is expected to increase from 2.3% in 

2002 to 3.7% in 2015 and 3.9% by 2020. 

For nuclear power, firm plans will bring China’s total installed capacity to 8.8 GW 

by the end of 2005. The government is set to make a new round of plans to build 

additional nuclear power plants beyond 2005. The current nuclear power generating 

capacity in China is expected to be tripled by 2015 and quadrupled by 2020. As 

such, the share of nuclear power in China’s primary commercial energy consumption 

is expected to increase notably, from 0.7% in 2002 to 2.9% in 2015 and 3.2% by 2020. 

4. The Rising Energy Import Dependence 

China has long been a net coal exporter, but growing amounts of coal are also 

imported to meet the booming demand in South China. In 2002, China exported 84 

million tonnes of raw coal. The country also imported about 11 million tonnes of coal 

in 2002, up sharply from a little over 2 million tonnes in 2001. Over the next ten 

to fifteen years, China’s coal exports are expected to continue but are likely to decline in volume. By 2020, we expect China to become a net coal importer. 

Currently, China is not a natural gas importer; all of the country’s natural gas 

consumption comes from domestic production. However, two LNG projects have been 

approved, one in Guangdong Province and one in Fujian Province. Completion of the 

Guangdong LNG project is expected for 2006 and the Fujian LNG is set for a year 

later. Beyond 2007, more LNG imports are forthcoming, coupled with possible pipeline gas imports from Russia and Central Asia. 
42

The overall projections for China’s natural gas imports under our base-case scenario are the following: for 2015, China is expected to import 14 million tonnes per 

year (t/y) of LNG, which is equivalent to 1.8 billion cubic feet per day (bcf/d) of gas, 

and 1.9 bcf/d of natural gas by pipeline from Russia. By 2020, it is possible that 

China will import 22 million t/y of LNG (2.9 bcf/d of gas) and 3.9 bcf/d of natural 

gas by pipelines from Russia and Central Asia. Altogether, imported natural gas, 

either LNG or pipelined gas, is expected to account for nearly 30% of China’s natural gas consumption in 2015 and close to 40% by 2020. 

At present, rising oil imports is the only reason that China is a net energy importer today. In the future, natural gas will add to China’s growing energy import 

dependence while the gap between oil demand and supply widens continuously. 

China is still the largest oil producer in the Asia-Pacific region. Its oil production 

reached 3.4 million b/d in 2002. The majority of China’s crude oil is produced onshore, but offshore production has been increasing rapidly. Over the next ten to fifteen years, China’s upstream oil industry faces a precarious situation, as production 

from a number of large onshore oil fields are stagnating or declining or facing slow 

growth. The hope for incremental production is likely to come from the West, offshore, and other marginal fields in the South. On an overall basis, China’s crude 

production is projected to grow slowly, reaching around 3.8 million b/d by 2020. 

China’s oil trade patterns have changed dramatically over the past two decades. 

The country’s crude and product exports peaked in the mid 1980s but have since 

declined. In the meantime, imports of crude and to a lesser extent, products, have 

increased rapidly. China has become a net overall oil importer since 1993. In 2002, 

China’s gross oil imports exceeded 2 million b/d while the net imports reached nearly 1.7 million b/d. 

As domestic production continues to lag behind demand, China’s net oil import 

requirements are expected to surge to 4.1 million b/d in 2015 and 5.3 million b/d 

by 2020. At 5.3 million b/d, China’s projected oil imports by 2020 is roughly about 

half of U.S.’s net oil imports at present. As a result of these imports, the role of 

the Middle East, which is already important, will be rising significantly. 

5. Elements of China’s Energy Security Policy 

Because of the continuous rise in oil imports and price volatility in the global oil 

markets, energy security has become a big issue since the late 1990s. In China’s 

10th five-year plan, which is currently under execution and covers the 2001–2005 

period, energy security is mentioned for the first time and ensuring energy supply 

security is considered by the government as a precondition for implementing the 

overall energy strategy. The government continues to make it a priority for relying 

on domestic energy supply and stresses that coal still be the major fuel for China 

over the next five years. The government also calls for increasing links with international energy markets, establishing strategic petroleum reserves, diversifying 

sources of energy imports, developing alternative fuels to oil, and adopting more energy conservation technologies. 

On an overall basis, China’s energy security policy is still being formed. The main 

elements of the policy are the following: (1) Diversify the sources of energy imports, 

increasing the share of oil and gas imports from Russia and Central Asia; (2) Enhance overseas investments by state oil companies; (3) Broaden ways of trade to 

avoid transactions risk; (4) Increase the investment in oil and gas infrastructure 

and open more channels to imports; (5) Establish government-controlled strategic 

petroleum reserves; (6) Adjust energy consumption and production structures and 

reduce dependence on oil through coal gasification, liquefaction, and development of 

nuclear power; and (7) Actively participate in the formation of a regional community 

and establish a regional energy security system. 

6. Concluding Remarks 

China’s primary commercial energy consumption is dominated by coal but the importance for natural gas is rising rapidly while the share of oil is steady. China is 

currently a net energy importer, and the import dependence, represented by rising 

oil imports, has been growing. 

Over the next fifteen years and beyond, China will continue to rely on coal to support its basic energy needs but coal’s share is expected to decline. The rapidly increasing oil and gas demand, coupled with flat domestic oil production growth and 

limitations on gas production, will lead to rising oil and gas imports and therefore 

pose serious challenges to China with regard to its energy security. How China 

copes with the rising energy imports and formulates its energy security policy will 

have profound impacts on the overall energy and economic developments in the 

country as well as Asia and the world as a whole. 

Author’s note: references and sources of information are available upon request.
43

Key Social, Economic, and Energy Indicators of China, Selected Years, 

1980–2002

1980 1990 1995 1998 1999 2000 2001 2002

Yearend Population (bn) 9.87 11.43 12.11 12.48 12.59 12.67 12.76 12.85

Real GDP 

(constant 2002 US$ bn) 167 407 716 921 986 1,065 1,145 1,237

Real GDP Growth 

(%, official) 7.8 3.8 10.5 7.8 7.1 8.0 7.5 8.0

Per Capita GDP 

(constant 2002 US$) 169.6 355.8 591.5 737.8 783.3 840.4 897.2 962.8

Inflation Rate (%) 1 n.a. 3.1 17.1 ¥0.8 ¥1.4 0.4 0.7 ¥0.8

Urban Unemployment Rate 

(%) 2 4.9 2.5 2.9 3.1 3.1 3.1 3.6 4.0

Foreign Trade Total 

Exports (US$ bn) 18.1 62.1 148.8 183.8 194.9 249.2 266.2 325.6

Imports (US$ bn) 20.0 53.4 132.1 140.2 165.8 225.1 243.6 295.2

Total (US$ bn) 38.1 115.4 280.9 323.9 360.7 474.3 509.8 620.8

Net Exports (US$ bn) ¥1.9 8.7 16.7 43.6 29.1 24.1 22.6 30.4

Direct Foreign Investment 

Contractual (US$ bn) n.a. 6.6 91.3 52.1 41.2 62.4 69.2 82.8

Actual Use (US$ bn) n.a. 3.5 37.5 45.5 40.4 40.7 46.9 52.7

Foreign Exchange Reserves 

(US$ bn, end of the year) 1.3 11.1 73.6 145.0 154.7 165.6 212.2 286.4

Primary Commercial Energy

Production (mmboe/d) 8.56 13.85 17.07 16.31 14.33 14.01 15.24 18.10

Consumption (mmboe/d) 7.96 13.05 17.37 17.37 17.42 17.67 18.14 18.76

Coal Share (%) 75.1 79.3 77.7 73.1 71.1 69.1 68.9 68.4

Oil Share (%) 20.3 16.9 18.2 22.3 24.2 25.7 25.6 25.7

Natural Gas Share (%) 3.3 2.2 1.9 2.2 2.3 2.6 2.7 3.0

Hydroelectricity Share 

(%) 1.3 1.7 1.9 2.0 1.9 2.2 2.3 2.3

Nuclear Power Share 

(%) 0.0 0.0 0.4 0.4 0.4 0.5 0.5 0.7

Oil 

Crude Production (mmb/d) 2.12 2.77 3.00 3.21 3.21 3.24 3.30 3.41

Crude Oil Imports 

(mmb/d) 0.01 0.06 0.34 0.54 0.73 1.40 1.21 1.39

Oil Product Consumption 

(mmb/d) 1.61 2.20 3.16 3.87 4.22 4.54 4.65 4.82

Oil Product Imports 

(mmb/d) 0.01 0.09 0.36 0.62 0.62 0.52 0.59 0.64

Total Oil Imports (mmb/d) 0.02 0.15 0.71 1.16 1.35 1.92 1.80 2.03

bn = billion. n.a. = not available. 

mmboe/d = million barrels of oil equivalent per day. mmb/d = million barrels per day. 

Notes: 1. Defined as annual percentage change of consumer price index. 

2. Officially registered. If job-losing state workers are included, recent actual rates were much larger. 

Sources: Compiled by the author based on official Chinese data and author’s own analysis. 

Co-Chairman WESSEL. Thank you. I look forward to the questions. 

Mr. Girdis. 

STATEMENT OF DEAN P. GIRDIS, DIRECTOR, PFC ENERGY 

Mr. GIRDIS. Good morning. Thank you, Members of the Commission. I work with PFC Energy. We are a global energy strategy 

firm. We work with governments, international oil companies and 

national oil companies. Since 1997, I have worked on China, principally with the World Bank. I have worked on hydro, coal, gas and 

power; and restructuring issues; and most recently, we worked on 

a paper directly for the National Development Reform Commission 

of China on energy security, and that was focused on oil and gas. 

There are three issues I want to talk to you today about. First 

are issues related specifically to oil and gas demand; second, the 

resulting impact on China’s energy security; and responses by the 

government. 
44

I would say that energy and energy security in China, from the 

Chinese government perspective, is essential from in terms of economic development, employment, and as a result, for social and political stability. Energy security ties back directly for them to political stability. 

And this is particularly true for oil and gas. Oil is vital for transport growth and gas to meet growing demand for energy in residential urban areas along the coast and for clean power generation. 

Specifically, there are three issues in energy security that China is 

looking to address. One is the increased use of coal, and that’s 

clean coal, coal-bed methane and other technologies; efficiency 

measures throughout energy forms and sectors; and looking at oil 

and gas security and what they can do to import both. 

There are basically a couple of points I want to emphasize in this 

regard. The first is the growing gap of supply. In China, we all 

know that; everyone spoke about that, China is obviously pursuing 

domestic development, but the combination of unattractive exploration terms, particularly in the west and Tarim Basin and, as 

well, just bad geology, is forcing China to look overseas. So there 

is not much they can do domestically for improving access to resources. 

Regarding demand growth, I don’t think I have to get into that, 

but we see them importing about 4 million barrels a day by 2010. 

In terms of where they will be importing it from, this is very important, and obviously, we see that the three focal points will be 

the Caspian, Russia and the Middle East. 

In terms of gas, there are sufficient supplies available in Asia at 

this time for LNG. You will see large-scale pipelines from Russia 

coming into northern China as well on the gas side. 

In terms of the availability, we see that there are sufficient supplies of both oil and gas available in the world markets in the near 

term, up to 2020. I think we do not see a lot of impact in terms 

of prices moving forward or little impact on oil and gas demand on 

the U.S. situation. 

There’s an interesting question: you could ask why is there a 

growing sense of insecurity by the Chinese government in terms of 

oil and gas? I think there are two principal reasons. One is their 

increased reliance on Middle East oil. They basically are not comfortable with this situation because it places them within the scope 

of U.S. influence. They feel that the U.S. could exert pressure on 

this part of the world and can obviously curtail shipments to 

China; and also, they see this indirectly as ability for the U.S. to 

stymie China’s economic and political ambitions in the world. 

When I ask my Chinese friends what do you want to be? What 

is your view of China? They say we just want to be like the U.S. 

We want to be an economic power. We want to be the next U.S. 

So that is generally the position you see amongst government officials, and it is less to do with ideology; more to do with just being 

the best. 

The second is, obviously, the Middle East is an unstable part of 

the world, and they worry about that. And as well, other sources 

such as the Caspian, there are limitations both technologically due 

to pipelines and politics. 
45

One avenue the government has pursued to improve its security 

is to use the national oil companies, SinoPEC, CNPC, and CNOOC, 

to secure access. And you see that they’ve done that, made investments overseas. The one comment I can make about that is there 

really has been no strategy on the part of the three companies. 

There has not been a well-thought-out strategy as to where should 

we invest, and what should we invest in? In fact, they have overpaid for a lot of the assets they have acquired. They are starting 

to change, though. 

The fourth point is I think you’ll see China trying to secure access through bilateral relations to a greater extent. And to do so, 

they’re going to use a couple of leverages. The first, they’ll use the 

political market leverage that China has, its clout politically and 

the market opportunity presents. You have seen that. It has done 

that with Australia in terms of getting access to the Northwest 

Shelf gas and getting upstream access, which is access to the reserves itself via the CNOOC, which is a Chinese state oil and gas 

company. 

The use of the military: China has used their military in disputes 

with the Spratley Islands, with the Philippines, to secure access 

and to stake its claim to the oil and gas that’s potentially in that 

part of the world. They have also tied investment to military exports, and in terms of access to oil and gas properties, they have 

even tried to reduce the import bill by supplying arms, bartering 

with arms to a number of countries, and these are generally marginal countries; you consider Iraq in the past, Iran, Sudan, and Angola. 

And last, you’ll see political support for marginalized countries. 

And an interesting situation happened in 2002. Premier Zhou 

Jiaming went on a tour of all of these countries. He went to Algeria. He went to Sudan, Libya, and the other countries mentioned. 

And immediately after that visit, the state energy companies visited all of those countries. So they really tie political and economic 

development together. 

In terms of where they will focus their activities, you’ll see three 

areas: the Middle East, because they have to look at the Middle 

East; it’s the only place where the oil is available, and particularly, 

they’ll look at Iraq, or they would like to look at Iraq. They don’t 

have access now, but are interested in Iran and Saudi Arabia. In 

terms of Russia, they are trying to get better access to Russia, and 

Putin favors it. But the situation favors Russia in that they’re already exporting arms to China, and they’d like to export energy as 

well. 

Part of the problem is the Russian companies do not want to 

grant access to Chinese companies, which the Chinese companies 

want, to upstream positions. And even now, you see there have 

been problems in terms of securing access to oil and building 

Daqing pipeline, due to competition with Japan for those resources. 

On the gas side, there are likely to be strong agreements there, 

just because it’s logical given the location of gas in the Far East 

and the demand in China. 

In terms of what I think the Chinese government will do to improve energy security, there are a number of issues they will look 

to. One, they will look at a comprehensive energy security policy, 
46

which is looking at improving access and just formulating a more 

comprehensive approach. Right now, there is none within the government. They will look to reduce oil demand or manage it better, 

particularly in the transport sector. There are no well-structured 

transport policies in the government. 

Third, they will look to leverage the bilateral relations, and this 

has been marginally successful to date. They’ll look to identifying 

key Middle East suppliers. In this regard, what they see is they see 

post-9/11 and Iraq war, they see that the Middle East is being 

marginalized by the U.S. This is their position. And you see a lot 

of the countries that are traditionally exporters to the U.S. are 

somewhat fearful of their position to sell to the U.S. They’ll look 

into new markets. And China, to them, is an attractive market. It 

has a high-demand growth. They’re willing to pay market prices, 

and so, as a result, they’re focusing on this part of the world in addition to the fact that the most supplies are available there. 

They’ll try to again build stronger ties with Russia. Right now, 

they’re not that successful at that. And they’ll probably continue to 

work with international organizations in terms of improving reform 

and restructuring of the industry and then, hopefully introducing 

transparency. 

In conclusion, I would say that China is very focused on securing 

oil and gas reserves. And they really believe this because it is an 

essential component to economic development and to employment, 

and employment is important, particularly with the SOE, the state 

enterprises having to lay off thousands of people who are unemployed. They see that economic growth is important to put those 

people in jobs, keep them happy, keep the situation stable socially 

as well as politically. They want to maintain social order. 

I think the U.S. can play a greater role in cooperation with the 

Chinese, particularly on the technical assistance side. The thing 

about the Chinese is if you—I’m not suggesting this is U.S. policy, 

but if you try to strong-arm the Chinese, they are very adversarial 

in that regard. You have to be more nuanced working with the Chinese, and I think any attempt on the part of anyone to stymie their 

efforts to provide energy security to the country, which they see essential to economic growth, they will be put in a defensive position, 

and they will want to defend themselves to ensure that their economy is not at risk. 

Well, thank you. 

[The statement follows:]

Prepared Statement of Dean P. Girdis, Director, PFC Energy

Energy Market Developments in China and

Implications on Energy Security and Policy

Good afternoon. Distinguished Members of this Commission, it is a pleasure to 

come before you today to address such a timely and critical issue. My name is Dean 

Girdis and I am a Director with PFC Energy. PFC Energy is a strategic advisory 

firm in global energy, based in Washington, DC. We work with international and 

state-owned companies in the global petroleum industry on various aspects of their 

international oil and gas investments and market strategies.

Energy Market Development in China

The main objectives of this testimony are to:

• Discuss key issues related specifically to the growing oil and gas demand in 

China, 

• Assess the resulting impact on China’s energy security and 
47

• Analyze the potential responses by the Chinese government in terms of policy 

and strategy.

China’s energy markets continue to transform through the mechanisms of government sector reform and restructuring, expanding investment by domestic and foreign energy companies, and the resulting transition to competitive markets. The 

Chinese government continues to push through reform and industry restructuring 

measures in order to encourage the necessary investment needed to meet energy demand growth. Concurrent with these initiatives is the focus on improving energy security. Energy, and hence energy security, is seen by the Chinese government as an essential input to the economy and a requirement to sustain 

economic growth, to generate employment and thus to provide for social 

and political stability.

This is particularly true for oil and gas: oil is vital to support the growth of the 

transportation sector and gas will serve to meet growing residential energy demand 

and to displace the more polluting coal and oil plants in urban areas in coastal provinces. China recognizes that to improve energy security it: (1) must increase the use 

of coal, particularly through the application of improved technology, (2) introduce efficiency measures through the country and sectors, and (3) import more oil and gas 

from a variety of sources to meet demand growth and improve supply diversity. The 

focus of this testimony is oil and gas demand growth, as this is the most 

critical in terms of geopolitical impact of China’s energy demand growth 

and on the U.S.-Sino relations.

Within this context, there are several issues that are intertwined and dominating 

China’s energy markets and that are in turn impacting government policy including:

• China’s growing oil and gas supply import gap, • Availability of oil and gas supply, • Geopolitical and economic dimensions of energy security in China, and • Policy options to manage China’s energy insecurity.

Security of Supply—China’s Growing Oil and Gas Supply Gap

With China’s robust economy forecast to grow 8% per annum to 2010, energy demand will continue to rise, if not increase above forecasts, leading 

to a growing reliance on imported oil and gas. Even with lower economic 

growth or increased domestic reserves of oil and gas, domestic production will not 

be able to meet demand growth. Increased utilization of alternative energy sources, 

such as China’s vast coal reserves or hydropower, will be insufficient to meet energy 

demand growth. This is due to the structure of energy demand growth—increased 

demand for transport fuels for automobiles and natural gas for power and heat 

needs and to improve environmental quality in cities. China’s status as a net importer of crude oil and natural gas will only grow. 

Reflecting the decline in the ratio of energy to real GDP in China, the 

elasticity of energy demand in China has consistently been much lower 

than the energy elasticity in other markets—regardless of stage of development. By way of comparison the usual rule of thumb in forecasting energy demand 

in emerging markets is about ‘‘1’’ or a bit higher, implying that a 1% increase in 

real GDP will generate at least a 1% increase in primary energy demand. The energy elasticity of the Republic of Korea and other East and South East Asian emerging markets has consistently been about this level. The rule of thumb for industrial 

countries is about 0.3 to about 0.5 implying that a 1% increase in real GDP will 

generate about a third to one half percent increase in energy demand. 

The sharp decline in the ratio of energy to GDP in China and the low elasticity of energy demand are important because if continued they would 

imply that China’s economy can continue to grow quite rapidly while not 

requiring the same order of magnitude increase in energy that would be expected were the economy to grow as rapidly in any other country—regardless of the 

state of economic development. On the other hand if these trends are temporary, 

the likely increase in China’s energy requirements could pose some serious challenges for China and the world. 

However, despite a comparatively lower elasticity, China continues to focus on the 

development of domestic oil and gas resources throughout the country. Increased oil 

and gas exploration and development activity is moving west and is a primary target of government and foreign operators, including Shell and ExxonMobil, in an effort to fill the major West-East gas pipeline. However, a combination of unattractive exploration terms and China’s thus far unimpressive geology is unlikely to produce substantial additions to oil reserves though additional 

finds of gas are more likely. At the same time, currently producing oil fields have 

been on the decline for over a decade. As a result of these facts the domestic supply 

of oil and gas will be insufficient to meet demand forecasts. 
48

There will be an increasing reliance on imported oil and gas moving forward. Oil and petroleum product imports first began in the mid-1990s and 

the supply gap will grow as the demand for transportation fuels grows. According to recent analysis, imports are expected to rise from 1.7 mb/d in 2001 to 

4.2 mb/d in 2010 and 9.8 mb/d in 2030. 

The country of origin of imported crude is an important consideration. 

Although China has signed a recent agreement with Russia, and the Caspian has significant supplies, most crude will need to be imported from the 

Middle East. By increasing its reliance on the Persian Gulf, China will experience 

a similar dependency that the U.S. and Japan experience. China in part has acknowledged this situation through its pre Gulf War II commitment to invest in 

Iraq’s oil industry once sanctions were lifted and its ongoing diplomatic efforts in 

Iran for joint exploration and production activities. An important factor impacting 

the origin of imported crude is the limitation of China’s refining industry to process 

low quality sour crudes from Iran, Iraq, Saudi Arabia, and Kuwait. Some refinery 

upgrades are now underway. 

In terms of gas, a similar picture is emerging. Ongoing production from the 

Sichuan and Shaanxi Basins will increase to meet growing regional demand in 

Sichuan and Beijing. New production is likely from Tarim and Ordos’s basin. However, gas demand will outpace domestic supply leading to rising imports of 

piped gas from Russia and LNG from Asia and possibly the Middle East.

China will continue to experience a growing reliance on Middle East 

sources of crude oil, as Japan experienced in the 1970s and 1980s. It may 

be difficult for China in the near term to break this relationship as most 

available crude supplies are from the Middle East. Almost concurrently, China 

has sought to strengthen its ties to the Middle East, through discussions/investments with both Iran and Iraq, and to diversify them, via building relationships in 

other regions of the world. It is unlikely China will be able to reduce this dependency on foreign oil. And it is this fact that raises fears in Beijing that China 

will compete with the U.S. for international energy (oil) supplies—thus, indirectly tying China’s economic growth to U.S. geopolitical positioning and 

the recent pro-active use of the U.S. military. Regarding gas, China will be less 

dependent on the Middle East as most supplies will come from Russia and Asia Pacific. 

As a result of this growing dependence on imported energy, the security of oil 

and gas supplies for China becomes important for several reasons including:

• Increasing supply deficit of oil and gas has implications on government economic policies, structure of the industrial sector, foreign exchange requirements 

and overall economic growth; 

• Gas is a critical component of the Chinese government’s clean energy strategy 

to improve living standards in Chinese cities through displacement of coal; 

• Oil is needed to meet burgeoning transport fuel demand, which is in turn tied 

to transport policies, higher standards of living, and thus economic growth; and 

• Power demand growth forecasts cannot be met without gas for mid and peaking 

units, particularly in urban areas under environmental stress.

Sufficient Oil and Gas Supplies are Available in World Markets

In terms of oil, the five year supply outlook is reassuring to oil consumers, as it 

is clear there will be plenty of new production in the market from OPEC and NonOPEC sources. Russia should be able to continue to raise exports by 300,000 b/d—

500,000 b/d each year while deepwater production growth accelerates. Some notable 

supply areas will enter decline in this period, most notably the North Sea, while 

numerous mature areas will continue to decline, such as eastern onshore China, the 

U.S. onshore, and conventional Canadian onshore. In these mature areas, price volatility can have a significant impact on the rate of decline. As prices fall, companies 

have less money to invest, and scale back first in lower return mature areas. Without continuous drilling, mature areas decline quickly, and while production may stabilize after prices recover, output rarely recovers to previous levels, as seen in the 

United States in 1998 and 1999. Despite the expected oil demand growth in 

China and other parts of the world production will grow sufficiently to 

meet demand.

For LNG, global demand has grown significantly in the past two decades. Base 

load markets in the Asia-Pacific—Japan, Korea and Taiwan—have been the main 

driver of global LNG demand growth, with Japan leading the way as the largest, 

and most dependent, LNG buyer. LNG consumption grew from 35 bcmpa to 150 

bcmpa in the last 2 decades. Much of this growth was driven by Japan as well as 

the emergence of Korea as a major LNG consumer provided an important step in 
49

the region’s demand for LNG. Going forward, LNG penetration in China and India 

will be key factors in regional LNG demand growth. However, there would appear 

to be ample potential gas resources to service LNG demand in the region over the 

next 10–15 years. Expansions from existing projects complemented by plans 

for new Greenfield LNG developments should ensure these markets are 

well supplied.

Demand growth for oil and gas in China will not have a major impact on 

prices as sufficient gas and oil is available in world markets. Saudi Arabia 

has sufficient spare capacity to meet demand growth and other countries are aggressively developing oil export projects. As noted above sufficient gas is available as 

well. The oil and gas demand growth in China will have little impact on the 

U.S. economy. Concurrent, the Chinese government has taken a proactive stance 

at improving the environmental quality through encouraging efficient use of oil and 

gas resources as well.

Growing Sense of Energy Supply Insecurity by Political Establishment

China’s political establishment has a growing sense of supply insecurity driven by 

the reality of its growing oil imports and need for additional gas resources. Despite 

some coordinated and impressive efforts to improve infrastructure and to identify 

new sources of oil and gas, the Chinese government has not formulated a 

long-term comprehensive strategy to address energy security. If China cannot successfully address both the long-term and short-term issues associated with 

energy security it will be unable to meet the challenge of rising energy demand. 

It is becoming increasingly evident worldwide that political relationships 

with exporting countries are key to securing upstream access to oil and gas 

reserves and second, for securing oil and gas export projects. This is particularly true within the current environment in Asia Pacific where there is increasing 

competition amongst Japan, South Korea and China over access to oil and gas reserves both within and outside of the region. Access to the oil and gas reserves of 

Russia is a key focal point of this competition. 

The increased reliance on imported oil is of concern to the Chinese government for two principal reasons. First, given that the Middle East will 

be the most likely source of crude, this places China within the scope of 

U.S. influence in the Middle East. China does not feel comfortable with the ability of the USA to exert pressure in this part of the world. This is because China 

views the USA as a potential barrier to China’s goals of achieving greater economic 

and political power. Second and more importantly, the Middle East is a relatively unstable region of the world. Beyond the Middle East sufficient alternative sources of crude are not readily available. And those areas with potential, 

such as the Caspian, are not an easy solution technically, commercially or politically. 

Regarding natural gas, China has some yet undefined potential in Western China. 

As well, given the lower fungibility of gas, China has better access to both imported 

piped gas and LNG from within the Asia Pacific region. Russia has extensive gas 

reserves that are most easily monetized by exporting to China. Chinese officials also 

appear relatively comfortable working with Russia via bilateral agreements and by 

accessing LNG sources within the Asia Pacific region. 

The impact of rising or high prices for both oil and gas is not a major 

issue in China as energy is one element of industrial production. This past 

year has seen high oil prices in world markets and Chinese markets with negligible 

impact on energy consuming industries in the country. Natural gas currently produced in China is sold at prices comparable to markets in Europe and future gas 

from the West-East Pipeline and imported LNG will be sold at western prices. 

Moreover, in coastal provinces of China, where most export industries are 

located, current power, gas or oil prices are comparable to those in the U.S. 

or Europe.

Role of the Chinese National Oil Companies (NOCs)

Ongoing reform and partial privatization of the state oil companies was a muchneeded first step in improving the ability of these companies to operate under commercial principles. A second benefit from improved commercial operations is that 

Chinese NOCs will be able, in part, to serve as vehicles to improve China’s 

energy security. The Chinese government is doing so by supporting and promoting 

investment in overseas oil and gas assets by the state energy companies—Sinopec, 

CNPC/PetroChina, and CNOOC. Such support is created through both high-level political delegations to countries with significant energy resources and indirectly 

through capital infusions. 

For some time, the Chinese NOCs, with government support, have pursued 

investment overseas in a number of countries. By examining this mix of pre 
50

and post NOC investment activities it is clear that the government, and by extension, the Chinese NOCs, did not and have not formulated a clear investment 

strategy. However it is important to note that the three Chinese NOCs are increasingly pursuing strictly commercial investment strategies that may not fully take 

into consideration broader objectives of energy security for China.

China’s Leverage of its Bilateral Relations and Geopolitical Dynamics

The Chinese government generally takes a proactive approach to pursuing and 

building bilateral relations—this applies to the energy sector as well. Consideration 

of geopolitics and their impact on such activities is often a key consideration. However, in some instants China has failed to fully integrate nuances of geopolitics, particularly in regard to its activities in the Middle East, Russia and the Caspian. 

There are several issues that the Chinese government have taken into consideration 

when pursuing bilateral relationships and include:

China’s ability to leverage its political and market strength

China has international political clout, given its size and its role as permanent 

member of the UN Security Council. However, the greatest leverage China has 

is tied to the interrelationship of its political clout with its commercially 

attractive energy market. Chinese officials are never tired of saying ‘‘China is a 

market with a billion consumers.’’ Although this may be an overstatement, China 

has used the argument that it is the most attractive developing country market 

given its size, growing economy, increasing market transparency, recent membership to WTO, and positive balance of payments to attract foreign investment. In 

terms of the energy sector, no developing market compares particularly when consideration is given for the growing energy import gap and the current cost of 

energy in coastal provinces—equivalent in many instances to that of the 

markets in Europe and the USA.

Role and use of Chinese military

China has used its military to address territorial disputes, such as the Spratly 

Islands dispute in the South China Sea, and as a means of barter for energy imports. China has traditionally limited the use of its military in direct territorial conflicts, though it has flexed its muscle with Taiwan. China has demonstrated however that it will use its military in territorial disputes to protect its rights of access 

to undeveloped oil and gas acreage. Second, China has pursued a strategy of tying 

foreign investment to military exports in a number of countries. For example, once 

it has secured access to foreign oil and gas properties it has at times used arm 

sales and cross investment to reduce China’s energy import bill with Iraq, 

Iran, Sudan, Angola, and Nigeria. There is scope to apply such a strategy 

to the Middle East or possibly Asia as imports rise from these regions.

Political support for marginalized countries

China pursued support of politically marginalized countries, such as Iran, Iraq, 

Libya, Sudan and Angola, for economic interests—specifically in these cases for access to their domestic oil and gas resources. Interestingly, a state visit by Premier 

Zhou Jiaming in 2002 included all the countries noted above. This visit was immediately followed by a visit from several Chinese NOCs. The pursuit of such a strategy is quite logical as the targeted countries welcome access to Chinese capital (via 

Chinese NOCs) for investment in their respective oil and gas sectors. In particular, 

China has been strategically building its relationships and involvement with Iran 

over the past few years. Less directly, it has supported Sudan and Angola during 

their internal conflicts.

Accessing Global Energy Resources

China is seeking to diversify it’s oil and gas supply sources as a means of reducing 

the potential impact of supply disruption. The main concern in this regard is in 

terms of oil—given most available supply is not within East Asia and China’s sphere 

of influence. In terms of gas, China more readily access reserves located in the Far 

East including Indonesia, Malaysia and Australia, for example.

Middle East

There is no more important region for accessing oil and gas reserves than the 

Middle East (defined as those countries in West Asia). The oil resource endowment 

of this region is unparalleled. The geographical location is ideal, being located between two major oil and gas consuming areas. Moreover, the ability of some of the 

countries in the region to maintain excess production capacity allows them to play 

a unique role in balancing global supply with demand. The gas reserves—and the 

transport competitiveness—of the Middle East are much less pronounced than is the 

case with oil, the region nonetheless plays an important role as supplier to the industrialized world. 
51

In the long run, China will not be able to avoid increasing its dependence 

on Middle East oil due to supply availability. As a result the Chinese government and the Chinese NOCs have focused activities in the recent past on Iraq (preGulf War II), Iran and most recently Saudi Arabia. The only means of mitigating 

this dependence will be by controlling the growth in Chinese oil demand. In terms 

of gas, China will be able to look to the Middle East as one of a number of diversified sources, and to use competitive pressures in the global gas business, especially 

in LNG, to drive a hard bargain between Middle Eastern and Asian suppliers. These 

gas purchases could also be leveraged to gain Middle East access for China’s other 

industries and products.

Russia

The Putin Administration favors closer trade links to China in general, and enhanced energy sales in particular. The economic basis for this policy is self-evident; the trade overwhelmingly favors Russia, for which China is already 

an important market for weapons sales. Oil and gas exports would tilt the balance even more in Russia’s favor, while drawing in substantial Chinese investments 

at the same time. 

Strategic and security considerations also count in favor of closer ties, although 

here the picture is more mixed. The Russian government certainly shares Beijing’s reservations about the extent of American power, and has sometimes 

worked with the Chinese government in attempts to restrain the U.S., for example 

through the UN Security Council. At the same time, however, neither country is 

willing to antagonize Washington by creating anything like a formal alliance to oppose American interests. This is probably more true of Russia, whose relations with 

the U.S. are actually quite good. Moreover, the Russian government and Russians 

in general worry about the ‘demographic threat’ China represents to its own declining population, particularly in the lightly inhabited Russian far east. This consideration cuts both ways, however, as the development of a vigorous energy trade with 

China could provide a vital economic boost for east Siberia. 

Russian oil firms have vigorously defended their home turf, rebuffing 

most attempts by Chinese companies to acquire upstream assets. The most 

striking recent case of this behavior was the privatization of Slavneft in late 2002. 

Petrochina expressed a strong interest in bidding but was essentially forced to withdraw, with Slavneft eventually going at auction to Sibneft for a price well below the 

government’s target. 

Similar complications have dogged China’s efforts to reach agreement 

with Russian partners on pipeline construction and long-term supply contracts. The history of plans for an Angarsk—Daqing pipeline shows the complexity 

of the bargaining this has involved. Russian President Vladimir Putin appeared to 

give his government’s consent to the deal during an official visit to Beijing in December 2002, but within days the state-owned pipeline monopoly Transneft had announced plans for its own pipeline to the Russian Pacific port of Nakhodka. Even 

though China substantially secured approval for Daqing most recently Japan has 

lobbied hard and secured the makings of an agreement that could negate the 

planned pipeline to Daqing.

Kazakhstan

Kazakhstan offers similar opportunities for China to arrange stable and secure 

supplies of oil and gas, but the geographic obstacles present a greater challenge 

than they do with Russia. However most of Kazakhstan’s oil and gas reserves are 

located in the northwest of the country, 6,000 kilometers from the nearest centers 

of population and industry in China. Yet the completion of the domestic West-East 

gas pipeline would reduce the distance by half. 

If such a line is ever built, it will likely be because China saw a need for it on 

strategic and security grounds. In the meantime, China is seeking greater participation in Kazakhstan’s upstream sector, and would certainly expect this as a quid pro 

quo in any deal for a pipeline and long-term supply contract. China’s experience in 

this regard has been mixed so far. CNPC has recently raised its stake in 

Aktobemunaygas to 100%, but Sinopec and CNOOC were frustrated in their attempt to buy British Gas’s interest in the Kashagan consortium. In the latter case 

it was reportedly the foreign partners of the consortium who blocked the bid, but 

the government of Kazakhstan itself is thought to have mixed feelings about a larger Chinese presence in the upstream sector.

Establishing a Strategy to Reduce Energy Insecurity

A comprehensive energy strategy that addresses both demand and supply issues 

is required to effectively manage the rising energy insecurity in China. In order to 

accomplish this, clearly defined objectives must be established, implemented and co-
52

ordinated by the Chinese government. These objectives can only be realized through 

development of a comprehensive energy security strategy, with accompanying policies. 

There are several options and strategies that the Chinese government could pursue:

• Reduce energy demand growth through efficiency and DSM investments 

• Increase domestic oil and gas output 

• Diversify energy sources, CBM 

• Pursue source diversification by investing in other regions of the world 

• Reduce impact of supply disruptions and price volatility through creation of 

strategic petroleum reserve.

Chinese Government Responses to Improving Energy Security

There are a number of options that the Chinese government will likely examine 

and implement to improve its energy security including:

Establish an Integrated and Comprehensive Government Energy Security 

Policy

China will need assess and formulate its energy strategy and policy objectives 

with consideration for both reducing and managing domestic demand for oil and gas 

while concurrently improving its access to international oil and gas assets. A range 

of domestic policies will be required to address demand management whereas international relationships and bilateral agreements are required for gaining access.

Reduce oil demand

Design an energy policy that reduces oil dependence in general to a minimum. 

Structurally, oil usage, especially a transport fuel, will grow. Therefore, China 

should foster transport technologies, such as the use of hybrids, higher mpg requirements, taxation of particular cars and trucks that meet these requirements among 

others, and fuel taxes that flatten the crude oil demand curve despite the structure 

pressures.

Leverage bilateral relationships

China is pursuing this strategy with only a moderate degree of success to date. 

The most success it has achieved to date is working with the Russian government—

however, private energy companies in Russia, particularly oil companies, have resisted China’s actions. It is also important to note that the Chinese government may 

need to change the manner in which it attempts to leverage its position.

Identify key Middle East suppliers

Since the terrorist activities in the USA of 2001, the power brokers of Washington 

have politically marginalized the Middle East. As a result these countries believe 

their long-term position of secure energy supplier to the USA may be partially jeopardized—and of greatest concern is the potential loss of political leverage. In response, the USA has pursued a process of building closer ties to Russia and has positioned itself in West Africa in an attempt to reduce crude oil import dependency 

on the Middle East. The Middle East needs new, or alternative, markets for its energy resources and China presents an attractive export market. There is a high degree of complementary—China needs oil and some countries in the Middle East, 

more than others, need markets and capital. This argument is particularly true for 

a country such as Saudi Arabia and Iran.

Build stronger ties with Russia

Russia and China complement one another. Managing political and economic linkages are almost impossible to separate from an energy security perspective. This is 

particularly true for China and Russia where there is a strong case for interdependency between the two countries—Russia needs China’s hard currency to meet government budgetary requirements and China needs Russia’s oil and gas to meet demand growth. As well, each is seeking stronger ties with each other to counterbalance growing U.S. political and military projection worldwide.

Work with international financial institutions

The role of international organizations in improving energy security via reform of 

energy markets has been important and will continue. The World Bank, in particular, has played a critical role in guiding power sector reform and restructuring 

and in encouraging transparency in the oil and gas sectors. There has been significant multilateral lending in energy sector though increasingly the level of cooperation is focused on improving sector operations and efficiency and on introducing better energy policies.
53

Conclusions

China recognizes the growing importance of secure oil and gas supplies 

for maintaining economic growth, generating employment and securing social and political stability. This position is central to China’s actions and policies 

in terms of its bilateral relationships, geopolitical positioning and in the activities 

of its NOCs. The U.S. can play a greater role in the Chinese energy sector and possibly by influencing policies through increased cooperation at both the government 

and commercial level. However, despite external pressure, the Chinese government will pursue policies and strategies that will meet energy demand 

growth in China and they will guard against any attempts that are seen as 

endangering their ability to accomplish this goal.

Source: China Energy Outlook, IEA/SDPC (2002) and PFC Energy Analysis

Source: PFC Energy Analysis
54
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56
57
58

Discussion, Questions and Answers 

Co-Chairman WESSEL. Thank you. I appreciate it. 

Commissioner Robinson. 

Chairman ROBINSON. Thank you, Mr. Co-Chairman. 

Ms. Jaffe, I was intrigued by something you said with regard to 

Libya, namely, some seven or eight U.S. companies have concessions on ice in Libya, pending the lifting of sanctions, I had not 

heard that the Chinese were making, shall we say, a bid for those 

concessions, but it doesn’t at all surprise me. 

I’m wondering if you’re following that issue with respect to the 

Administration’s potential inclination to lift sanctions on Libya to 

help remedy that kind of pressure? Regrettably, Libya has ongoing 

weapon of mass destruction and ballistic missile programs that are 

of concern. 

I mean, I have a personal view as to whether it’s appropriate to 

lift sanctions on Libya, which you can probably ascertain here, but 

I’m just wondering if you’re seeing, in effect, some pressures building concerning the fact that those U.S. concessions could be lost if 

Qadaffi woke up in a sour mood and that they could actually be 

moved to China National Petroleum Company or another of the 

Chinese oil entities? 

Ms. JAFFE. Well, I think that those concessions have probably always been at risk, because there are, you know, German and 

Italian and other European firms that already are active in Libya. 

I don’t want to speak for the Administration. I’m sure you have 

many opportunities to have people here in front of the Commission 

that are with the Administration. I guess my opinion as an analyst 

is that President Bush had the opportunity with Libya, you know, 

offering to pay compensation to the families and trying to offer 

some kind of apology language that maybe could meet a compromise and that the President has been very adamant in his public statement and public posture coming out into the White House 

lawn with the families of Pan Am 104; showing that they are the 

priority, and I think the Administration has been very responsive 

to DOD’s concerns over the weapons programs in Libya and trying 

to get some commitment. 

So I think that’s the reason we haven’t seen the President coming up to the plate to talk about the Libyan sanctions policy. I 

think the Administration has been very cautious, and I do think, 

as a person who spends a tremendous amount of my job time dealing with the American media, that too much emphasis has been 

placed on the Administration’s so-called ties to industry in the 

sense that the Administration has the power to lift sanctions on 

Libya. Libya did offer tremendous concessions in the area of international terrorism. They did provide cooperation on issues sharing 

intelligence on Al Qaeda and that the President had an opening to 

raise the debate in this country about those sanctions, and yet, he 

didn’t take it because these other issues that you mentioned, in my 

opinion, are more important to the Administration than just these 

smaller issues of the oil concessions that are at stake. 

Chairman ROBINSON. That’s positive news, and I agree with you. 

Thank you, Mr. Co-Chairman. 

Co-Chairman WESSEL. Commissioner D’Amato. 

Vice Chairman D’AMATO. Thank you, Mr. Chairman. 
59

I have a question that any one of you or all three of you could 

address, and that is the extent to which you have done any work 

in evaluating Chinese programs dedicate resources toward building 

clean coal technologies, both refining, mining and, in particular, 

power plants. The reason, of course, is that projections for greenhouse gas emissions are such that if the Chinese are not going to 

do anything in any substantial way here, I think you can probably 

pretty much forget about global warming issues. 

When the Senate took up the global warming question, one of the 

things that it used as a condition for U.S. accession to Kyoto was 

the participation by China as a party to that agreement. I think 

rightly so, because if you look at their emissions, of course, by 

2020, 2025, their emissions are going to exceed the combined emissions of all of the West. So if they’re not going to step up to the 

plate here in the near future on that, at least as far as greenhouse 

gases are concerned, there is not much hope for an international 

regime that is going to really get our hands around this. 

So for that reason, and given the fact that they have a very, very 

inefficient coal sector, transmission sector, energy power producing 

sector, the question is are the Chinese prepared to dedicate the 

kind of resources, are they doing so, and in cooperation with the 

United States, is there an opportunity here to do something really 

meaningful? 

Mr. GIRDIS. If I could comment, I worked on a clean coal technology for six months on a paper with the World Bank. We were 

working on technology assistance. And the commitment is mixed. 

For example, in Shanghai, it’s illegal to build new power plants 

that are not clean coal technology, which is fluidized gas 

desulphurization equipment, which is the U.S. standard for new 

coal plants, or natural gas plants. 

So in urban areas that can pay, there is a commitment, and they 

have restricted new coal plants even with our technology. The problem is in the interior of the country is the ability and willingness 

to pay for those investments. 

Now, they were interested in improving their own technology in 

this regard. They would favor introducing technology which they 

could manufacture themselves and not purchase overseas because 

of the costs associated with it, and that was one of the focal points 

of interest on the part of the Chinese, it is something which we 

could adapt new technology which we could then build and install 

in our plants. 

But the main limiting factor in terms of wide scale adoption is 

the fact that it’s very expensive, and there are a lot of coal plants 

in China, and it’s going to be based on the ability and willingness 

to pay, and that is going to be limited to more of the coastal provinces that have power rates and energy rates which are comparable 

to the U.S. They pay more in Shanghai for power than we do here. 

But out in Chongging, they don’t. 

So there’s an issue there, and as well, there are other things that 

they could do, such as coal washing at the mine mouth, and the 

large mines can do that. The small mines technically have been 

closed, but a lot of them are still operating, and it’s very dirty coal, 

and they don’t wash that coal. They have taken initiatives. The 

question is can they financially cover that? And I think there is a 
60

resistance just due to the economic costs, financial costs, for widescale adoption. 

Dr. WU. Can I add? 

Vice Chairman D’AMATO. Yes, please. 

Dr. WU. I just want to add quickly that I pretty much agree with 

those views, and they are very typical of the Chinese economy as 

a dual economy. You can see that you have very fast growing sectors and a regions in the coastal area versus the vast inland area. 

Now, so-called clean coal technologies, the definition varies in 

China. Here, the one we talked about is very advanced and applied 

perhaps, only to large cities. But in China, washing coal is a big 

deal. It takes a long way for China to washing all of their coal, 

which is a very primitive way of being clean, not even called clean 

technology here. 

Shanghai is mentioned by by Dr. Girdis—China is developing the 

west-east pipeline. The eastern portion of the pipeline has been 

completed already, and the western portion will be completed by 

the end of next year to encourage the gas-fired power plants. They 

are raising the standards for the coal-fired power plants to make 

the gas-fired plants economical since the government doesn’t want 

to subsidize the whole west-east pipeline forever. 

As such, they are taking measures, in that sense, to gradually increase the emission standards in the developed areas, in the coastal region and in south China. And those are the areas that it is 

highly hopeful that U.S. technologies and clean coal technologies 

can find opportunities. 

But again, I agree that China really wants to adapt the technology so that they can apply it massively rather than simply purchase. So the U.S., other than trying to sell clean coal technology 

to China, really needs to provide some kind of financial support 

and other measures to help China build up their own capability. 

And in other areas of China, the government really should do 

something. They do have their own step-by-step plan to reduce acid 

rain and SO2 emissions, but it does not quite coincide with CO2 reduction of the global warming. 

As Mr. Caruso mentioned, global warming is still secondary. 

They have more danger of land, air and water pollution that they 

have to deal with. So those are the longer targets, like CO2 reduction. 

Mr. GIRDIS. If I could add one little point, they are cognizant of 

the problem. I mean, you talk to my Chinese associates when I 

visit there, and when I was going to Beijing in 1997, the air pollution was terrible, you couldn’t see more than 100 meters. And people I would be working with would be out with respiratory illnesses 

all the time, and they know that is a problem. They know it is a 

cost to society, and that has been well documented by even Chinese 

environmental economists. 

The problem is, you know, can we pay for it? And it just depends 

upon what urban area. Now, in Beijing, they restricted complete 

use of 40,000 teahouses that used coal a couple of years back and 

converted them to LPG, in part because the Olympics is coming up. 

But again, the other areas, it is going to be difficult to pay for. 

Co-Chairman WESSEL. Commissioner Dreyer. 
61

Commissioner DREYER. Yes, I was interested in Dr. Wu’s statement that even as China is a major coal importer, it is also an important coal exporter and that the reason this has to be done is because of the gaps in the infrastructure which make it so difficult 

to transport the coal from, say, Shaanxi down to the southeast 

where it is needed. 

Given the inferior nature, in terms of pollution-causing elements, 

of the PRC’s coal, whom is it being sold to, and over what transport 

link does it go? And then, I have a follow-on question when you are 

done with that. 

Dr. WU. Yes, I think 2002 was the year that China did see the 

rise, rapid rise in coal imports, but typically, China is not quite 

classified, you know, a larger importer of coal. 

Commissioner DREYER. Exporter. Whom does it export to? 

Dr. WU. Okay; the export of coal, the Chinese coal quality really 

varies, and as usual, it is certainly not up to the standard of Australian coal or Indonesian coal. They do try to sell the best of their 

coal to the international market, not, you know, that worst quality. 

The buyers of Chinese coal certainly is Japan, number one, and 

Korea, too. Just like Japan, they import everything. 

Mr. GIRDIS. Indonesia did as well, yes. 

Dr. WU. Yes, Indonesia was exporting, anyway, and India. 

Commissioner DREYER. I’m sorry; I thought that Indonesia was 

exporting coal. 

Mr. GIRDIS. I think they also—they took a shipment a couple of 

years back from China. 

Dr. WU. It’s possible, but yes, Indonesia typically is exporting, 

like even to Hawaii, you know. We have a power plant there that 

is running very high-quality Indonesian coal. And even India is 

buying a limited amount of coal from China to run their power 

plants, which is very interesting, too. 

So it is all over the place. China exports roughly about 80, 85 

million tons, I can verify the number, last year, and they still strive 

to export a similar amount this year and continue the export for 

a number of years to come. 

Commissioner DREYER. Now, I am interested in the fact that this 

infrastructure is unable to bring the coal from Shaanxi to, let’s say, 

Guangdong, but somehow, this infrastructure is able to export coal 

to Japan and South Korea and India and Indonesia. How do we put 

that together? 

Dr. WU. It is a similar infrastructure that, yes, they ship the coal 

from Shanxi, Inner Mongolia, to the port city in Shandong in Bohai 

Bay, and there, they either are shipped to Guangdong or are 

shipped to Japan. So you can see that in relative terms, Japan is 

even closer to this source of exports. 

And again, you know, overall, China has a surplus in coal. They 

were trying to satisfy both the needs of the south and also export. 

But also exactly because of infrastructure and geographical issues, 

the users in south China, like Guangdong, they would rather import from neighboring Indonesia or Australia. It is easier for them 

to do so, and the quality is much better. That’s why you see 11 million tons of imports last year and almost 85 million tons of exports 

also last year. That’s a result of this dislocation and the large geographical area in the country. 
62

Commissioner DREYER. Now, the pollution problem. You have 

stated what many of us have noticed, and that is that the cities 

that can pay to clean up are more interested in cleaner environments and are more willing to do something about it. Yet, China 

does have a central government, and for those of us who are a little 

bit skeptical of statements like, ‘‘Well, the U.S. could help China 

clean up the environment, and all you need to do is allocate more 

money,’’ and so on. If your are a skeptic about this, you can say 

why is it that the Chinese central government says to the United 

States, ‘‘if you want a cleaner environment in China, you’ve got to 

pay for it,’’ but then you see them investing money in some very 

questionable projects like sending people into space and building 

up their military. And this translates into a certain skepticism in 

Congress about why is the U.S. expected to pay if the PRC is going 

to spend money on these questionable projects? 

There is also the Three Gorges project, which is also very controversial environmentally. Would any of you care to comment on 

that? I don’t mean to put Dr. Wu on the carpet on this one, because 

I think you all had something to say about the issue. 

Mr. GIRDIS. I could give you a little feedback. We know they have 

a central government. What I noticed, which is quite interesting, 

we were meeting with senior government officials at Jiangsu Province, Zhejiang, Shanghai, which are on the coast, and they’re autonomous, to a large extent. They will listen to the central government; at times, they will take action on their own part, and they 

won’t listen. 

And most recently, you look at Beijing; the Municipal Government has been refusing to develop the gas resources, because 

they’re fighting over the price that the central government says 

they need to pay, and they say, no, we won’t pay it. Then, they say 

forget it, we won’t do it. 

So despite the fact that there is a central government, the provincial authorities and the municipalities have a lot of influence 

and a lot of control, and often, they will try to ignore Beijing. And 

that is particularly true in the coastal areas, Shanghai and what 

not. They have always been very autonomous, and you support 

that. But that is what I have noticed in that regard. 

So the control isn’t as great as you think. And I think that is 

what is fearful of the Chinese central government that they don’t 

have as much control as they would like. 

Commissioner DREYER. Well, I think I’ll tell you what I think, 

and I think what I think, and I think it very strongly. If the central 

government really cares enough about an issue, it can make the 

provinces behave and the cities behave, it will. But so far, it hasn’t 

evinced that will. And that is what concerns me. 

Mr. GIRDIS. That could be true, yes. 

Ms. JAFFE. Can I make a comment? Being a pragmatist, the 

United States has taken certain policies in the space area that 

have meant that if you are a major country, you have to take certain policies in the space area, because it’s not a science effort anymore. 

And the Chinese have real security interests, right? They have 

a long border with very unstable regions, and they have to make 

investments to consider their own national security. And so, maybe 
63

their national security is a higher priority than environmental 

issues, and maybe here in the United States, too, post-September 

11, when we look at budgets, we consider issues of national security more important than environmental issues. 

So I would interpret what the Chinese are saying in a slightly 

different way. What I would interpret them saying is we have to 

set priorities for our spending, and global warming is not our immediate priority, because we have to concern ourselves with even 

local pollution, right? They haven’t caught up with us in terms of 

regulation for local pollution in cities and so forth. 

So I think what the Chinese government is saying is that when 

we look at our priorities, we can’t have the luxury of the same priorities as the United States. And so, if you would like us to raise 

our priorities, let’s discuss it. And indeed, you asked the question 

about coal. One of the reasons why there are coal exports to Japan 

is because Japan provided the financing for the railroads to move 

that coal to Japan, right? And we do see the Japanese spending a 

tremendous amount of money going into China and investing in 

things like clean coal technology and natural gas-powered vehicles. 

And Japan has a policy where they have a very proactive government intervention in the car industry to provide scientific research 

for better technology cars, and I think part of their vision is that 

they will be exporting those cars to China, and that will actually 

not only profit Japanese companies in the long-term, but it will 

also help with the global warming issues. And I think that the 

United States, by positioning itself in environmental technologies 

and R&D, in energy and environmental technologies with an eye 

to exporting those technologies to China can have a win-win. 

Mr. GIRDIS. If I could add, I agree with what Amy said. They 

have to intervene and reduce the pollution associated with coal. 

But the scale is tremendous. They can’t do everything. They just 

can’t finance it. They have to worry about unemployed people from 

SOEs, and they’re accepting that some people are going to get sick, 

and some are not, and we have to manage the situation. 

Commissioner DREYER. Yes, but of course, that is a health care 

cost as well. 

Mr. GIRDIS. It is. 

Commissioner DREYER. If people are sick, they are not very productive, and the government incurs certain costs for that. 

Mr. GIRDIS. Yes. 

Co-Chairman WESSEL. Commissioner Becker. 

Commissioner BECKER. Thank you very much. 

I have a question in a little bit of a different direction. Ms. Jaffe, 

I was intrigued by your explanation of the television and the impact that this is having on families and how China is just a burgeoning economic flower, so to speak. And I agree. I’ve made two 

trips to China, and they were quite a few years apart. And I was 

there last year, and it was startling to me to see the differences 

and the change. 

But my question leans more to some of the comments you had 

in your written presentation about oil supplies. I grew up at a time 

when a great fear was that we were running out of oil in the world; 

that it is a finite commodity and that plastics and everything else 

was going to go down the drain. I am talking about post-World War 
64

II periods. And somewhere along the line, that sort of ended. And 

I think it sort of ended when, after the Mideast oil crisis, the pricing went up significantly; then, there was more supply. 

But I would like to ask you the question: are we running out of 

oil? And if China continues on the growth pattern that they are on, 

and if India does, and if the United States doesn’t get a grip on 

things, like you were talking about, when will we run out of oil? 

When will it cease to be a pricing and availability commodity and 

become one of more strategic and necessary for survival? 

Ms. JAFFE. Well, I am very glad that you asked me that question, 

because that is really a critical question in considering this issue. 

If you take the range of opinion, you know, and running out, I 

think, is maybe not the right terminology, because we don’t ever 

actually run out of something. We switch to something else. 

Commissioner BECKER. We run out of gas. I mean, I’ve done that. 

So we don’t run out of oil. 

Ms. JAFFE. So people talk about the peaking of oil resources 

somewhere between 2030, if you’re a pessimist, and 2050 if you’re 

an optimist. But even those projections misunderstand—they’re 

talking about conventional oil, like what, you know, your friends 

and my friends from Texas drill and pull out of the actual ground 

onshore, right? 

You have to remember that at a certain number, $15 a barrel, 

actually, we can take natural gas and change it into gasoline. We 

have the technology to do that. And because they had such a terrible bout there in South Africa with their politics, they developed 

incredible technologies, and I forget the number, but maybe it’s $20 

a barrel or the panel could correct me, to move coal into oil, right? 

And we now know, as you all know from your work, that we can 

take coal and convert it now to natural gas and burn it for electricity. So we are really never going to get to a stage where we ran 

out of fossil fuels, and we couldn’t convert them into transportation 

fuel. I mean, that’s not going to happen. So the question is really, 

you know, are we going to have a transition to something else, 

whether that would be hydrogen or whether we’re going to use—

I mean, it’s possible today in Canada; every bus in the country is 

natural gas-powered, right? They have fuel cell buses. 

So the question is, really, at what stage will we have a shift, 

right? And what I try to focus people is not what’s under the 

ground, because the technology for drilling under the ground, going 

deeper and deeper offshore, you know, we’re going to be able to 

produce oil now, for example, in Greenland in an economical way. 

Tar sands in Canada; it used to cost $32 or $33 a barrel to produce 

the tar sands of Canada. Shell claims they do it today for $8 a barrel, right? And there’s more tar sands in Canada than there is oil 

in Saudi Arabia. I think it’s three times as much. 

So we’re really—it’s not a resource question. In my opinion, it’s 

a geopolitical question. PFC has this fabulous chart that shows a 

pie chart of where oil companies can go today to explore for oil. 

And if you imagine a piece of pie that you and I would want for 

dessert today at lunch—smaller than that portion of this pie chart 

is the areas where the international oil industry is allowed free access, you know, to explore and unfettered for oil. So it’s a very 

small portion of what’s available. 
65

So really, when you think about U.S. efforts, right, you know, the 

question is, are we positioning ourselves in science? Are we positioning ourselves in industry to catch the wave when either we 

have such a political barrier to using oil because of crisis in a place 

like the Middle East or elsewhere that we need to move to new 

technologies, and the economic stimulus is going to be there; will 

we be positioned, or will Japan be positioned better, or will China 

be positioned better, or will Europe be positioned better, because 

how many resources are we allocating towards R&D? 

Commissioner BECKER. But at some point, it’s going to start running out, forcing these changes, or if you don’t make the changes, 

then——

Ms. JAFFE. My opinion is that the global warming issue and environmental issues will force the change way before geology will force 

that change. 

Commissioner BECKER. So what would you estimate the world 

supply right now? How many years? 

Ms. JAFFE. 100 years, 200 years if you add turning coal into oil. 

Commissioner BECKER. No, just oil. 

Ms. JAFFE. Just oil, conventional oil? Or all oil? 

Commissioner BECKER. Oil oil. 

Ms. JAFFE. All oil, 50 years. 

Commissioner BECKER. Fifty years? 

Ms. JAFFE. Yes. 

Commissioner BECKER. Would the other two panelists agree with 

that? 

Mr. GIRDIS. I think Amy is right on the mark there. I mean, you 

know, everyone has been calling the coming end of the oil reserves 

for years, and if technology develops that allows you to extract 

more oil from the ground from conventional sources, and the tar 

sands is a tremendous resource which would be economic. And I 

think you will see new technologies becoming more to displace traditional fuel sources. 

If you look at wind power, for example, the cost curve has come 

down by a factor of almost 10 in 20 years. It’s almost competitive 

with base law power generation. So you’ll see technology advances 

come along that would meet that—I think will meet that demand 

in the future. 

Commissioner BECKER. Could I ask one more question? 

Co-Chairman WESSEL. Quickly, yes. 

Commissioner BECKER. Just a very quick question. You had 

made reference to the fact that China was paying market prices for 

the oil it is getting. 

Mr. GIRDIS. And we did a detailed study, demand study, of power 

in four provinces equivalent to the UK and France together, and 

this was in 1998–99. And the power prices, the LPG prices, were 

equivalent to U.S. base prices and European base prices. You 

know, and I think the power prices for the consumers were close 

to what I’m paying now. 

Commissioner BECKER. So this effort of, in effect, China owning 

the barrel is geared—they’re not—is geared just for access, then, 

and there’s no problem with them—there doesn’t appear to be any 

problem with them in paying market prices for the oil that they 
66

get? They’re not trying to cut some deal, get their hooks into a 

country like Iran? 

Mr. GIRDIS. No, Iran is smart enough not to do that. No one is 

going to do that, you know. And if you look at even the gas, the 

domestic gas, the price they set for gas going to power stations 

from the west-east pipeline is upwards of $3.80 mmbtu, which is 

pretty close to—U.S. prices are pretty high right now, but it’s higher than European prices. 

Commissioner BECKER. Thank you. 

Co-Chairman WESSEL. With that, we are going to close this 

panel. Our transcriber needs to move locations. 

We will resume our hearing at 1:30 this afternoon. 

[Whereupon, at 12:24 p.m., the hearing recessed for the luncheon 

speaker.]

LUNCHEON SESSION

Chairman ROBINSON. As you finish your lunch, I’d like to first 

welcome our very distinguished luncheon speaker who needs no introduction, the Honorable James R. Schlesinger, Chairman, board 

of Trustees, the Mitre Corporation. And, that said, I’d like to turn 

over the program here to our Co-Chairman of today’s hearing, Michael Ledeen, who will nevertheless refresh some memories concerning his immensely distinguished career. 

And with that, Commissioner Ledeen. 

Co-Chairman LEDEEN. Thank you. I knew if I lived long enough, 

I would eventually get to introduce Jim Schlesinger at some event. 

Jim Schlesinger has been just about everything you can be and has 

done it all exceedingly well. He’s written some of the most important things on the relationship between economics and geopolitics. 

I think one of his first books when he came out of Harvard was, 

in fact, on that very subject. And he has been Secretary of Defense, 

Secretary of Energy, Director of Central Intelligence, advisor to 

presidents. He’s now Chairman of Mitre Corporation, which is a 

very high-powered organization and still sits, I think, at the place 

where we met originally, at CSIS, the Center for Strategic and 

International Studies. 

And, Mr. Secretary, we really badly need illumination and enlightenment after a very gray morning, and we’re all very much 

looking forward to your words on how to look at the relationship 

between China’s appetite for energy and what kind of excitement 

China may cause the rest of the world as a result of that.

STATEMENT OF JAMES R. SCHLESINGER

CHAIRMAN, BOARD OF TRUSTEES, THE MITRE CORPORATION

Mr. SCHLESINGER. Thank you, Commissioner Ledeen. 

I am not sure how much enlightenment I will provide. I will start 

with the observation that China is a different country from the 

China that I visited at Mao’s invitation in 1976. Then it was in the 

midst of the Cultural Revolution. Then you had Red Guards sitting 

in the classes of physics professors—to see that physics was not 

taught in contravention of Marxist doctrine. 

It is 25 years now since Deng Xiao Peng started his revolution, 

and China has been transformed. The point that I want to make, 

though, is that Mao is dead, and Mao’s belief was autarky. We see 

in China today the inverse of autarky, a growing dependency on 
67

foreign markets, on foreign sources of supply and foreign sources 

of technology and foreign sources of capital as well. China is just 

about to forge past the United Kingdom in terms of direct foreign 

investment. 

So it is a remarkably changed country, and autarky is no longer 

the policy of China in regard to energy any more than it is elsewhere. 

I mention 1976, that visit that I took at that time, because Marshal Yeh, who, a few months later, incarcerated the Gang of Four 

and was treated as an icon within China, had been informed or 

misled into believing that the Soviet Union was dependent upon 

the Middle East, upon the Arab Middle East for its petroleum and 

that since the People’s Republic relations with the Arab states were 

splendid that this meant that the Soviet Union could not be very 

aggressive, despite the array of divisions and tanks along the Chinese border. 

I pointed out to him that Russia was not dependent upon the 

Middle East. Indeed, Russia was a principal exporter of oil, and 

consternation came through the room, and Marshal Yeh looked 

around at his subordinates in fury. The point to draw away from 

that is that in 1976 and today, the leading figures in the People’s 

Republic of China are quite aware of the potential vulnerability associated with energy matters. 

Now, I point out that China has been transformed. Change has 

been dramatic. The evolution is substantial, has been going in the 

right direction. But change has frequently come to China, and 

change could occur in a less-benign way, from our standpoint. 

You have sent me a list of questions, so I will respond to these 

questions serially. The first question that you sent to me was what 

policy objectives shaped China’s energy decisions, and what strategies is China likely to use in the future? 

First point that I should make is that these issues regarding energy must be viewed in the larger context of Chinese policy; that 

energy issues are not the paramount issue for China any more 

than energy issues are the paramount issue for the United States. 

The paramount issue for the Chinese at this time is substantial 

economic growth. It is the source of legitimacy for the Communist 

Party of China at the same time that Marxism or communist ideology has lost any hold that it ever may have had on the Chinese 

public, so that economic growth is an essential element for the retention of power. 

What are the policy objectives with regard to energy? In a sense, 

they are the same as everybody else’s policy objectives that are dependent upon imported oil. The Chinese are interested in an economic supply of oil and the opportunity to play around in areas 

that we have decided not to operate in, such as Iran. If they can 

get contracts or positions within Iran, they are going to do so. And 

that becomes more economic from their standpoint if the United 

States stays out. Same thing with Libya. 

The question that you put to me said, in effect, are they going 

to go into these places? Do they favor these places? I think the answer to that is no, but they are quite prepared to exploit the opportunities in these places. You raise the question how does this all 

fit with regard to the U.S. war on terrorism, and the answer is—
68

it depends on how you define the war on terrorism. The Chinese, 

quite obviously, regard us as an ally with regard to Al Qaeda. They 

look upon us hopefully with regard to the Muslim problems that 

they are having in Xinjiang, but they do not identify with the U.S. 

war on terrorism to the extent that it might involve Iran or Libya. 

These are governments that we don’t like, which have harbored 

or encouraged terrorism in the past. They do not go that far. The 

Chinese really deal with what they regard as clear and present 

dangers, to quote Oliver Wendell Holmes, and the clear and 

present danger for them is Al Qaeda support of what is going on 

in Xinjiang on the part of the Uygurs. 

And it must be remembered that the Chinese—this is in regard 

to your question Chinese oil diplomacy—that the Chinese are much 

more interested in their own policy objectives than they are in our 

policy objectives. That is just the reality of this world. As a consequence, they are not going to forego what they regard as opportunities simply to keep the Americans happy. 

The third subject that you put to me is the question of geopolitics, how does China’s rapidly-growing needs for energy impact 

geopolitics with regard to East Asian regional relationships, SinoRussian cooperation, conflict in the South China Sea, China’s role 

in the United Nations and China’s outreach for oil in the Western 

Hemisphere. Answer once again is we must remember that the 

Chinese look more favorably on their objectives and their interests 

than they look on ours. That is one of the realities that we can 

count on. 

They are interested with regard to energy in the same kinds of 

things that we are interested in. They are interested in limiting 

their dependence on foreign sources of supply. They are interested 

in developing domestic sources of energy, including oil and coal, 

and they have turned to nuclear power to a degree that we might 

think is unnecessary because it limits the dependency on foreign 

sources of supply and, incidentally, permits them to burn less coal 

that they’re concerned about. 

And finally, on hydropower, despite the continued blandishments 

of the previous Administration with respect to the development of 

the Three Gorges hydro project, which will produce 20,000 megawatts of power, they have forged ahead with that. Our Administration or at least the previous Administration may not like that. Environmentalists may dislike it intensely. Economists may regard it 

as a malinvestment of their resources, but they have forged ahead. 

One reason is that they want to develop their domestic resources, 

and hydro is one that is not going to be dependent on imported 

LNG, so on. 

They are interested in their view of the world, their interests, 

and how does this impact geopolitics? Today, the geopolitics of oil 

are less connected with the threat of cutoff of supply by the producers than they are with regard to the pipeline distribution. One 

of the questions that you put to me is how does this affect SinoRussian cooperation? They are going to inevitably be very close. 

That pipeline that the Japanese are hoping will go to the Pacific 

is likely to go into Daching; and the Russians will be delivering to 

them, I would guess, in the years ahead, a million barrels of oil a 
69

day, maybe 2 million barrels of oil a day, out of a production that 

will probably level off at about 9 million barrels a day. 

The Chinese look upon Russian oil as a godsend, because it does 

not have to go through the Straits of Malacca. The Chinese, understandably, will be worried about their lines of communication, their 

logistics, which go through the Malaccan Straits, and that will be 

a continuing source of concern to them, and they will seek to limit 

their dependency on Middle Eastern sources of supply, but it will 

also mean that they will strive hard to maintain satisfactory relations with the governments in Southeast Asia, most particularly, in 

this case, Indonesia. They do not have to worry about maintaining 

good relations with Singapore, at least under the present dispensation. 

The interesting thing about Chinese geopolitics is that the tone 

has changed. It’s much more sophisticated than it was. If you look 

back two and a half years since a Chinese pilot almost knocked 

that Navy CP–3. I think that the political leadership saw that they 

had been hornswoggled by the military, and they didn’t much like 

that, and that they have since become much more sophisticated. 

As a general proposition, as you look out into the future, I think 

that the likely influence of the military on geopolitics, on the sophistication of Chinese diplomacy is likely to diminish, partly because of a changing generation; partly because of the continuing 

emphasis upon economic development, which grows increasingly 

dependent upon the outside world and globalization, and partly because the events of 9/11 have led to a diminished emphasis in the 

political establishment on the American threat and, therefore, 

those who are pointing to the American threat will have less influence than they did in the past. 

That was a pretty stupid action on the part of the military 30 

months ago. There was no reason for that, and I suspect that they 

have been—I suspect; I do not know; no one has passed me any information from Beijing on the subject, but I suspect that the military were told that this kind of adventurism just is not very helpful 

to China. 

The Chinese have settled their quarrels with the Vietnamese in 

such a way that there will be joint development of the Gulf of Tonkin. In the past, one finds it hard to think of prior Chinese governments actually resolving problems, at least in the short run. I 

think that they recognize that the hostile tone that they had not 

only toward the United States but towards their neighbors was 

doing them absolutely no good, and as a consequence, they have 

changed the tone. 

As I indicated earlier, China has changed, but it can change again. 

Finally, you raised the question what about their behavior in the 

United Nations? It’s kind of interesting that they have a different 

tone in the UN as opposed to France, Germany and Russia. They 

stayed out of the line of fire with regard to the Iraq situation. They 

very carefully did that. The Russians, I believe, made a strategic 

blunder not in that they didn’t support the United States but that 

they lined up so openly with the French and the Germans. The 

Chinese were opposed to our going in, but they were quietly opposed. There was none of the noise that accompanied the Russian 

decision, let alone the German and French decision. 
70

So I think you’re dealing in geopolitics with a much more sophisticated foreign policy on the part of China than has existed in entire period since the Tiananmen Square episode, and most dramatically, moreso than existed during Mao Tse Tung’s dominance. 

The fourth question you put to me is does China’s fuller integration into the world energy market change the dynamics of SinoU.S. relations? Somewhat. Will the U.S. and China be in competition for sources of energy supplies? You bet. They will be looking 

for the opportunity to carve out sources for themselves of oil. They 

are going to be our competitors with regard to the supply of oil, and 

if you have been reading the newspapers lately, the ups and downs 

of Chinese imports and import policies affect the oil market and 

the price of oil. 

They have been driving the market, to a large extent. Their imports are now up to something on the order of 2 million barrels a 

day, and if the projections that were given to you earlier today are 

correct, they will be importing 6.5 or 7 million barrels a day by 

2020, and that makes them a major factor in the oil market, which 

they were not in the more distant past. In the past, they basically 

sold a little oil to Japan. It was high-paraffin oil, and there was 

very little market for it elsewhere other than in Japan. But today, 

they are a major factor in driving the market. Chinese economic 

growth has helped sustain the oil market during this period, and 

we have got to expect that they, no less than the Germans, the 

French, the Japanese and others, add to the demands in the oil 

market and are consequently competitors of ours for oil supply. 

Finally, your fifth question: what policy options should the 

United States explore to influence these dynamics and China’s energy policy in a manner more favorable to U.S. national security 

interests? Once again, I go back to what I said in response to the 

first question, which is these issues must be regarded in a wider 

context. We have more important fish to fry than Chinese energy 

policy. To name a most obvious one, cooperation with the Chinese 

on the question of North Korean nuclear capabilities is, for us, 

much more important and far more immediate than anything that 

we are likely to do with regard to the energy markets. 

We have more important fish to fry; they know that we have 

more important fish to fry. There is relatively little we can do with 

regard to sources of supply other than to outbid them. You will 

have noticed that when British Gas recently decided to sell its 

stake in the Kashagan find in the Caspian Sea that China stepped 

forward to bid on it. That bid was about to be accepted—except for 

the fact that the other owners of Kashagan had the first right of 

refusal, and they stepped in and headed off the Chinese from the 

acquisition in Kashagan, which is the only super-giant that has 

been discovered in these last 40 years. 

And that, of course, is influential. But the way that you influence 

such things is to outbid China or, in this particular case, have a 

contract that gives you the right of first refusal. We are not going 

to significantly affect the oil market in a way that is damaging to 

China. If we stand aside, if we impose sanctions on countries like 

Iraq or Iran or Libya, that creates an opening for the Chinese to 

move in. So we have to decide what is the more important thing 

from our own standpoint, which is whether we want to compete 
71

with them with respect to sources of supply or whether we are prepared, for other reasons, to forego such sources and see them establish a position in the Irans or the Iraqs of this world. 

They have been attempting to establish a position in Central 

Asia. That is not going to be easy. They wanted to build a pipeline, 

but that is going to be a very costly affair, and so far as I can see, 

nobody has stepped up with the capital to build that pipeline. 

Again, let me close by saying that this is a vastly different country; that it is a country now largely dependent on foreign investment, upon foreign markets, and for the immediate future, it has 

a partial coincidence of interest with the United States with respect to North Korea, obviously, and with respect to the more ferocious aspect of the terrorism problem. And so long as they feel 

themselves to be dependent upon those international relations, 

they will be constrained in the degree to which they are prepared 

to upset those relationships. 

And so, since I assume that for the next 15 or 20 years, their primary interest will be economic growth, I think that we ought to be 

focused on the interests with the Chinese that we share in common. 

I will close by observing that we cannot expect China or even any 

smaller country to do what we want. We have got to pick out those 

things that are most important to us and emphasize those things 

in our diplomatic relations. To the extent that we talk about 

human rights in Tibet or what is going on with respect to the treatment of dissidents and so forth, we are investing a significant part 

of our own political capital in dealing with China and that that political capital is not available for those issues on which we are likely to be more effective and which are ultimately more important to 

us, particularly with respect to the spread of nuclear weapons and 

the war on terrorism. 

I think that we can elicit considerable cooperation from the Chinese if we focus on those things. If we spread ourselves all over the 

map, we are going to be less influential. 

Co-Chairman LEDEEN. Mr. Secretary, thank you very much. The 

luncheon is now at a close, and this road show will now travel back 

to room 124, where Mr. Woolsey is waiting for us, and we have to 

start in about 45 seconds. 

[Whereupon, at 1:32 p.m., the luncheon session was concluded.]

AFTERNOON SESSION, 1:35 P.M., THURSDAY, OCTOBER 30, 2003

PANEL III: CHINA’S ENERGY DIPLOMACY AND ITS 

GEOPOLITICAL IMPLICATIONS I 

Co-Chairman LEDEEN. It’s a singular personal pleasure as well 

as an honor for the Commission to welcome Jim Woolsey here 

today. Jim Woolsey has one of those careers that make us all envious. He has gone from ballroom dancing instructor to Director of 

Central Intelligence, has been a leading Washington attorney, and 

more recently a celebrated advisor, author, speaker and so forth, 

and we’re really delighted that you came here today, and we’re 

very much looking forward to your remarks on Chinese energy and 

geopolitics. 

I should tell you that we’ve just finished a lunch with Secretary 

Schlesinger. He had a lot of interesting things to say. This morning 
72

we are as full of data on Chinese energy as you can possibly imagine, so please do not drum us with more data but illuminate us 

with provocative thoughts. Thank you. 

STATEMENT OF R. JAMES WOOLSEY

VICE PRESIDENT, BOOZ ALLEN & HAMILTON 

Mr. WOOLSEY. Thank you, Mr. Chairman. I will do my best on 

the latter because data is slim for me. Since this is not a subject 

I study continuously. I’ve read in it, and anything I really know by 

way of data would be certainly derivative of the people you’ve already had speak to you. 

In my judgment, China will move toward an increased position 

of power and influence in Asia pretty much regardless of the energy situation. I think the self-image of the Chinese leaders and 

their pride in Chinese history and the direction of the country is 

one which will lead them to build their military forces to exploit 

technology. They will do this both for national prestige, as in the 

recent man in space shot—an extraordinary achievement for them, 

I think—and to build up the military capability to, e.g., keep American aircraft carriers at a distance if there should be a crisis with 

Taiwan in the future: to be able to exert influence in Asia. 

I think that there could be some direct and immediate relationship between aggressiveness in the South China Sea and possible 

deposits of oil, and there could be some willingness either to cooperate with or to influence the directions of regimes in Central 

Asia based on the oil from that region. 

This will be heavily complicated, of course, by the fact that their 

own treatment of the Uyghur and the Hui and other citizens of 

Western Xinjiang, so-called Chinese Turkistan, has been in many 

cases brutal. But they also do have to some extent a real problem 

of terrorism there, and therefore, they will find their interests 

somewhat at odds with some of the governments in authority in 

Central Asia. 

I think the major effect of Chinese energy needs is likely to be 

simply that of a growing economy. I’m not sure how much one can 

trust their economic statistics, but today it looks as if the economy 

is growing well. And if that growth moves into North China and 

Central China as the large publicly-owned, government-owned facilities there, the economic dinosaurs are disestablished, the economic growth could take off even more. And that means consumption of fuel of all kinds, including particularly what I think should 

concern us: oil. 

Chinese demand added to Indian demand, given the populations 

of those two countries, could put a substantial upward inclination 

on the price of oil in the near and mid-term. Yes, there are countervailing possibilities: Iraqi production, increased Russian production, and the possibility that the economic and environmental costs 

of exploiting the heavy oil of Canada have been already reduced 

enough that it becomes a realistic alternative. These latter factors 

could move oil supplies up as well. But the demand that can be created by India and China—as, e.g., the average Chinese moves first 

from a bicycle to a motorcycle, and then from a motorcycle to one 

of those Buicks that General Motors is building over there—will potentially move oil demand in the world to very substantial heights. 
73

To me, that is the heart of the matter and that entails substantial risks for us, because the estimates of world oil reserves—you’ll 

excuse me I hope for a little bit of data here—vary generally between a trillion and two trillion barrels, depending on what probabilities you assign and how optimistic or pessimistic you are. 

That’s one to two trillion barrels of conventional oil, not counting 

the heavy oil in Canada and Venezuela and elsewhere. As those reserves are looked at in light of the geological realities of the oil 

fields, some things become pretty clear. 

King Hubbard, the distinguished geologist of the 1950s, predicted 

some twenty years in advance within a year, I believe, the date at 

which the oil fields of the lower 48 States of the United States 

would peak in their production. That is a very important point for 

any oil field because under Hubbard’s theory, now borne out, production costs tend to begin to escalate rather sharply when the 

field hits its midpoint. According to the numbers I saw when I last 

looked into this matter a while back, the fields on the average in 

the world outside the Persian Gulf either have already peaked or 

should peak within the next very few years. 

The Persian Gulf fields will thereby increasingly be the low cost 

source of oil. Therefore those who own those fields would have even 

more capability of raising or lowering the price of oil at their discretion. 

Whether the world’s oil fields peak, net, sometimes around 2010 

or 2020 is largely a matter of whether one believes the one trillion 

barrel estimate or the two trillion barrel estimate. But in any case 

we are a relatively few short years from, first, an increased potential 

dominance of the oil market by the Middle East and, second, an increase overall in the cost of exploiting oil reserves. This may occur 

simultaneously with a substantial upward movement in oil demand 

from the increasingly large middle classes of India and China. 

The Middle East outside Israel and Turkey consists of governments that are either pathological predators or vulnerable autocracies. This is not a good mix. When Saddam conquered Kuwait in 

1990 and stopped at the Saudi border, he was about 100 miles 

away from controlling over half of the world’s known reserves. 

So we can’t, any of us, predict what’s going to happen in any of 

these countries of the Middle East, whether we’re going to have a 

bin Laden government in Saudi Arabia, or a terrorist attack on the 

Saudi refineries of the sort that dramatically opens Bob Baer’s new 

book, Sleeping with the Devil, or a calm and reasonable evolution 

of Saudi Arabia in the direction of Bahrain together with friendly 

relations and increased exploration and pumping of reliable oil reserves. Any of those I suppose is possible. 

But the history of the Middle East would suggest that we should 

be very, very careful to hedge against the dangerous side of any of 

those scenarios. And with that, Mr. Chairman, I’ll cease my opening remarks.

Discussion, Questions and Answers

Co-Chairman LEDEEN. Thank you. 

Commissioner Robinson. 

Chairman ROBINSON. It strikes me that there is general agreement that China is quite keen to go where others dare not go in 

terms of seeking concessions and contracts, particularly if you look 
74

at the Iran and, increasingly, Libya. It was interesting that we 

heard from Ms. Jaffe of Rice University this morning that China 

has taken an interest in the concessions that, as I put it then, are 

on ice for seven or eight U.S. oil companies in Libya that are pending the lifting of sanctions. Libya may also be looking at the possibility of turning those concessions over to China National Petroleum or one of the other Chinese oil majors. 

Do you basically agree with the proposition that China’s interested in securing physical supplies? I mean, they’re not suspicious 

of the spot market. They aren’t just out there, shopping with brokers but are much more interested in equity investments or offering whatever it takes besides money to get a leg up and secure important positions in Sudan, Libya, or Iran. Given the fact that they 

are nervous about their energy future, it could be a driver for the 

proliferation-related challenges that we’re already facing. 

Does that strike you as a possibility? 

Mr. WOOLSEY. Yes, I think definitely so. Certainly the relationship between China and Pakistan, although Pakistan is not a 

source of oil, is an example of how—although China would be reluctant to develop close relations with any Islamist state, should there 

be some in the future in Central Asia—it would not have any problem working closely with a Libya or a Sudan or probably an Iran. 

In a non-oil area it works with Pakistan, to both sell its goods, 

military and otherwise. In the oil area it works to establish physical or equity control of oil resources. 

This is still a communist government, a totalitarian government. 

It’s a complicated one, and it’s one that may be going through some 

types of economic evolution. We don’t know yet what the new generation of Hu Jintao and his colleagues holds for us. I don’t anyway. 

But I think it is still very much a society that likes physical control and is willing to deal with regimes like Iran, Sudan, Libya for 

a multitude of reasons as long as these aren’t regimes that directly 

and immediately threaten, let’s say, aid to the Uyghur and Hui 

within its own borders. 

Co-Chairman LEDEEN. Commissioner D’Amato. 

Vice Chairman D’AMATO. Thank you, Mr. Chairman. Greetings, 

Mr. Woolsey. You know I was looking for some good news in your 

testimony, and I think I may have missed it, but in the scenario 

where China’s voracious energy appetite impinges on our interests 

in the Middle East and actually the vulnerability of the Chinese 

government to blackmail from producing states here, the question 

is what kind of leverage do we have to move the ball in directions 

away from trading oil for whatever technologies, weapons, and so 

on some producing states like Iran, Sudan, and Libya, whatever, 

want, or a future radical Saudi, a much more difficult proposition? 

Where is our leverage? 

Some people suggest that we hold hostage some things, that we 

trade apples for oranges, hold hostage access to our equities markets on the part of those Chinese-owned companies that are actually conducting the exploration, the deals and so on in those countries, that we withhold the largess of our equities markets in return for good behavior, so to speak, in this area. Or we withhold 

some access to other parts of our markets. 
75

You know, in the currency area, there are Members up here who 

have introduced legislation to withhold access to our consumer 

markets. They suggest we put tariffs on incoming Chinese goods to 

induce good behavior currency accounts. One could also link this 

performance to carrots in the investment area. The question is how 

do you induce the Chinese in this highly competitive environment 

to do the right kinds of things? 

Mr. WOOLSEY. Well, I do believe there is room for leverage with 

equity markets for countries that deal with terrorist regimes and 

terrorist sponsoring regimes. This is a tactical matter that can 

change with time: for example, with Sudan now there are a number of issues in play. It may be something that it would be wise 

to do today but not wise to do six months from now. I think it’s 

important to have leverage of that sort that one can turn on and off. 

But for the long-term leverage, I may say, Mr. D’Amato, you’ve 

given me an opportunity to ride one of my oldest hobbyhorses—an 

issue that I’ve been deeply interested in now for nearly a quarter 

of a century: alternative fuels. A number of things that were, I 

think, highly questionable and extremely expensive back in the 

1970s, such as the Fischer-Tropsch process—the old German process of gasification of coal and putting it through paraffin and turning it into diesel—have been worked on in various countries over 

the years and there is news, technological news, in several of these 

areas. Let me just touch on three. 

First is Fischer-Tropsch. China, like the United States, is a 

Saudi Arabia of coal. The South Africans, during the period of their 

being embargoed for apartheid focused on the fact that they had a 

lot of coal and no oil, and they continued to work on the old German process. Whereas Fischer-Tropsch probably wouldn’t have 

made much sense in the 1970’s unless oil stayed up around 50 or 

60 or $70 a barrel, today at oil prices down into the high 20s and 

maybe around $30 a barrel, Fischer-Tropsch begins to make sense. 

And some companies are beginning to produce diesel this way but 

not even using coal itself, but rather the slag around strip mines. 

The general theme here from my point of view is focusing on 

technologies that can transform waste into transportation fuel that 

can be used within the existing infrastructure. Such technologies 

can also contribute to environmental and global warming gas limitation objectives rather than flying in the face of them. For example, the gasification of coal permits the sequestering of CO2. It’s 

still expensive, but the technology is reasonably proven. 

So one doesn’t have to look 20 years into the future, I think, to 

see a day in which—perhaps cooperatively worked on with American companies—Chinese coal could be gasified and liquefied and 

could not only help power those Chinese Buicks with diesel fuel, 

but could also lead us to worry less about global warming emissions from China. For electricity generation, using coal gasification 

and combined cycle generation, one has a darned good alternative 

to natural gas at today’s natural gas prices. And if you can sequester the carbon, it’s as environmentally friendly as renewables, really. 

Secondly, you have what my old friend Mike Ledeen was teasing 

me about a little bit just before the session, what he calls ‘‘my 

bugs.’’ These are genetically modified biocatalysts engineered to 

break down cellulose and permit it to be fermented into transpor-
76

tation fuel as ethanol. Let me say here three times: I’m not talking 

about corn; I’m not talking about corn; I’m not talking about corn. 

I’m talking about cellulosic waste, agricultural waste, like rice 

straw, which Chinese farmers have to pull up out of the fields and 

burn because it has silicon in it and can’t be left there. Burning 

rice straw smells terrible. It’s an awful pollution problem. 

So when you have, as I think is essentially technologically available now, a process that Senator Lugar and I wrote an article in 

Foreign Affairs about over four years ago now—genetically modified biocatalysts—that can make it possible to make ethanol out of 

waste products, then one thereby potentially turns Chinese rice 

farmers into producers of feedstock for transportation fuel: the rice 

straw they have to get rid of. 

Thirdly, there are new processes that turn waste of all sorts of 

different kinds—animal wastes as well as agricultural—into fuel 

gas, diesel, and usable carbon with really essentially no secondary 

waste streams. I’d call the Commission’s attention to an article in 

the April issue of Discover magazine called ‘‘Anything into Oil.’’ It 

deals with a process called thermal de-polymerization that ought to 

be demonstrated commercially within the next few months in a big 

ConAgra plant, a turkey processing plant, in Missouri. 

These three technologies are not yet fully operational in a commercial sense, but I would say they are well past research and development. They are at the point where they need enough of a market, stimulated by production tax credits or some other incentive, 

to get them up a step so that they are more affordable. But it is 

a very different situation than in the 1970s when a lot of people 

were waving their arms about getting away from oil and using 

other fuels. 

I would think that this would be one friendly thing we could do 

with China in addition to having the stick. It would be a carrot for 

the Chinese for us to work with them on commercializing these 

waste-to-transportation-fuels technologies for fuels that can be used 

in the existing infrastructure. The reason I keep saying that is I’m 

not talking about the hydrogen economy, I’m not talking about fuel 

cells. 

I’m not talking about something that’s 15 or 20 years out. I’m not 

talking about completely redoing the infrastructure. I’m talking 

about fuels, produced from wastes, that can go into existing types 

of diesel and gasoline engines and are relatively easily shipped, as 

easily shipped and moved around as fuels that we use currently. 

So I would try to use both stick and carrot with the Chinese or 

at least be prepared to use the stick, but I’d investigate some carrots as well. 

Vice Chairman D’AMATO. Thank you. 

Co-Chairman LEDEEN. Commissioner Wessel. 

Co-Chairman WESSEL. Excuse me. I’d like to get your thoughts 

on the increasing relations that China is now having in our own 

hemisphere with Brazil and other nations cooperating on energy 

and nuclear, et cetera, and whether those relationships, now that 

they’re moving beyond Central Asia and the Mideast, whether 

those are of cause for concern for us? 

Mr. WOOLSEY. It’s not a subject I’ve studied very carefully, Commissioner. I think that as long as it doesn’t promote proliferation 
77

of nuclear or any other really dangerous technology, and as long as 

it doesn’t lead to Chinese control of something that is strategically 

important to the United States, I think we should to some extent 

welcome Chinese commercial development and involvement with 

the world overseas. 

I think the less insular they are and the more commercial they 

are, the more likely they are to build up a middle class that could 

at some point have an impact on the political future of China in 

a positive direction. 

But I think we need to always keep an eye on this. They are potentially a very worthy adversary of the United States and they 

could conceivably continue to be a dictatorship for a long time. I 

think one has to keep an eye particularly on any relationships that 

might produce proliferation or the capacity to deny the United 

States something that it needs, like say the Panama Canal, which 

is not as strategic as it once was, but it’s still somewhat strategic. 

I think all of those, anything that gives the Chinese a whip hand 

over us or promotes proliferation, we ought to keep under a very 

close watch. 

Co-Chairman LEDEEN. Commissioner Mulloy. 

Commissioner MULLOY. Mr. Woolsey, my understanding is that 

the International Energy Agency, a Paris-based international organization that was set up by Secretary Kissinger after the OPEC oil 

embargo, that that’s affiliated with the OECD. So I think that’s 

democratic countries. Do you think that it would be in our interest 

to try to find some special arrangement where China could participate in the IEA so that in times of oil shortages, it’s not out there 

on its own bidding prices up, where there’s some kind of sharing 

mechanisms and other things in place for the other IEA countries? 

Mr. WOOLSEY. You’ve moved somewhat beyond my area of expertise, Commissioner. On first impression here, and this is not a subject I’ve even read on, I think if one has an organization of democratic countries and a nation that’s still clearly a communist dictatorship, as China is, if it is operating cooperatively, for a time there 

may be some utility in some sort of adjunct or associate relationship. 

I’m Chairman of the Board of Freedom House—and we have 

been working hard on promoting a Democracy Caucus at the 

United Nations, for example, so one doesn’t get in situations such 

as we did a short time back with people voting in regional blocs 

regardless of the nature of government. This resulted in the United 

States getting kicked off the Human Rights Commission and 

Qaddafi being made the Chairman of it. These international organizations, when they fold dictatorships in with democracies, even 

flawed democracies, sometimes produce these sorts of very perverse 

effects. 

So what I’d like to see happen is in any of these international 

organizations that are already essentially organizations of democracies or new ones like caucuses that might be set up, is the dictatorships kept apart but not necessarily at arm’s length. As long as 

they are willing to play nicely with other children, I think they 

might be invited into some kind of associate or adjunct relationship, but not full. 

But this is with respect particularly to the IAEA; I haven’t made 

any special study of China’s relationship. 
78

Commissioner MULLOY. It’s the IEA. 

Mr. WOOLSEY. The International Energy Agency, IEA. 

Commissioner MULLOY. Correct. 

Mr. WOOLSEY. IEA, yes. The last thing I looked into with regard 

to them was a couple of years ago. They were doing, I think, forecasting actually better than our own Energy Department on oil 

availability, but I haven’t looked into anything about them since 

then. 

Commissioner MULLOY. Let me ask you one other thing. I was 

on the Banking Committee staff when the Iran Sanctions Act went 

through and then it went to the floor. It was amended to become 

the Iran-Libya Sanctions Act. Do you think it would be in our interest to take that act off the books or let it expire? 

Mr. WOOLSEY. I don’t trust the governments of either Libya or 

Iran any further than I can throw them. I think that it is useful 

to maintain sanction-like weapons available, and I always like for 

those to be flexibly available in the hands of a president. I’ve 

served as many of you have here as staff on the Hill. I was General 

Counsel to Senate Armed Services Committee, and I’ve seen this 

both from the executive and legislative side. I know there’s always 

kind of an instinct up here to have things either be on or off and 

in the control of the Congress, but I generally prefer that a president have flexibility on such matters. So I would not altogether get 

rid of the capacity to sanction either of those countries, but I think 

executive branch flexibility is a good idea. 

Commissioner MULLOY. Thank you. 

Co-Chairman LEDEEN. Commissioner Bartholomew. 

Commissioner BARTHOLOMEW. Thank you very much, Mr. Chairman. Thank you, Mr. Woolsey, for appearing before us and thank 

you also for the service that you’ve provided to our nation over the 

years. It’s a good model. We’ve heard from a number of people 

today leaving, I think, in some sense the implication that part of 

China’s proliferation activities to some of these rogue states is—

well, it’s not an implication; it’s actually been said that it is in exchange or return for favorable pricing or access to energy supplies. 

I guess the implication is that somehow China is doing the proliferation only because of this access to energy supplies. It would 

seem to me that there are a number of other reasons why they 

might want to proliferate to some of these countries, if only to provide a counterbalance to the United States. I was just wondering 

if you could just give us your thoughts on how much is energy supplies related to China’s proliferation activities? 

Mr. WOOLSEY. This is not an area which I have specialized 

knowledge, but I have a rather deep conviction that both the energy and the arms trade industries of both China and Russia are 

highly corrupt. I also think that, since industry in both places is 

no longer quite so centrally directed as was once the case, there is 

a strong possibility in some cases that so-called ‘‘princelings’’ or 

other influential individuals are making substantial amounts of 

money by agreeing to have some PLA entity export such-and-such 

to a country in the Middle East. Such exports may meet with favor 

because it is also a country the Chinese are trying to get close to 

for energy purposes. But I think this is a really tangled web in 

China. China is at a point where it does have substantial economic 
79

growth and modernization of portions of its economy, but it won’t 

really be able to get rid of corruption until it takes many more substantial steps toward the rule of law and toward some type of 

democratic structure. What we have now is a system that is sufficiently corrupt that it is very difficult to tell in a number of circumstances where a decision by a firm to export something is a 

step that’s really sanctioned up the line by Hu Jintao or those directly responsible to him or to Jiang Zemin, or whether it is something that somebody’s son-in-law is making a lot of money on and 

just decided to do it. 

Commissioner BARTHOLOMEW. Thank you. 

Co-Chairman LEDEEN. Commissioner Reinsch. 

Commissioner REINSCH. Thank you, Mr. Chairman. That was a 

very useful question, and I want to follow it up in a slightly different way. My sense of what some of the previous panelists said 

was that we may be caught in kind of a chicken and egg situation. 

You may disagree, and I’d like your first comment to be whether 

or not you agree. 

But the suggestion seemed to be that the, on the one hand, the 

Chinese are concerned about being subject to U.S. leverage by 

being dependent on sources of supply that we can influence or have 

control over, and that in turn drives them to go to places like Libya 

and Iran and countries with whom we’re at odds in order to avoid 

that problem. 

We, in turn, seeing that action are suspicious of their motivations and are suspicious of the deals that they’re cutting which 

may or may not involve proliferation in arms, et cetera, and that 

in turn makes the situation worse than it already was. 

I guess my questions are is that, sort of a loop that you agree 

with, and if we’re caught in that loop, how do we get out of it? 

Mr. WOOLSEY. I think probably that loop does exist, but my judgment would be that the Chinese are concerned about our leverage 

mainly because they’re a dictatorship, and that what we really 

need to do is to use what leverage we have economically with them 

to try to help move them in a direction of democracy and the rule 

of law. This will be a huge undertaking. It will take a long time. 

But my view is that it’s really only with other governments that 

have those features that we can more or less, long-term, have a 

reasonable relationship. 

After all, the world has gone from in 1945 from 20 democracies 

to 121 today, 89 of them electoral democracies with the rule of law, 

another 32 electoral like Russia and Indonesia, but having serious 

problems with the rule of law. That’s an amazing increase, up to 

62 percent of the world’s governments. This is not hopeless. There 

are a number of countries which have gone this way, Mongolia, 

Mali, others, that a lot of people would have said, hey, this is crazy, 

these are not societies that had the Renaissance and the Reformation and the Enlightenment, how can they be democracies? But democracy is a huge movement in the world now and has been for 

some years. 

I think that we will not legitimately be able to trust China until 

we see this evolution, probably over decades, take a definitely positive direction. Therefore they may well be concerned at our leverage over them and be turning to Iran and Libya, but the reason 
80

we will have to continue to exercise that leverage, I think, is because of the dictatorial nature of the Chinese state. 

If it begins to change, we might begin to change with respect to 

the degree to which we use leverage. 

Commissioner REINSCH. Well, this wanders a bit afield, but let 

me pursue that for a minute, if I may. It seems to me that the 

United States, at least in the post-war era, has had quite often constructive relationships with dictatorships, as long as they were our 

dictators. 

Mr. WOOLSEY. Oh, yes. 

Commissioner REINSCH. Is the problem here the form of government, Mr. Woolsey, or is the problem that they’re not one of our 

dictators? 

Mr. WOOLSEY. Well, the most outstanding example of that was 

that for three years and eight months, from late 1941 to mid-1945, 

we were allied with, at that point, history’s greatest murderer, Joseph Stalin, because we had a more immediate problem. 

And Franklin Roosevelt said of at least one Latin American dictator, he’s an SOB, but he’s our SOB. We had our SOBs during the 

Cold War. We made common cause with Chiang Kai-shek and various South Korean dictatorships and with Salazar and Franco and 

Pinochet, but if you look at those countries today, South Korea, 

Taiwan, Spain, Portugal, Chile, they’re all functioning democracies. 

And that’s not accidental. 

We and our friends and allies didn’t forget about them just because we needed to work with them during the Cold War in order 

to cause maximum difficulty for the Soviets. It’s just statecraft. I 

think countries have done that for a long time, but it doesn’t mean 

that when you have an opportunity to help move them toward democracy and the rule of law, you back off of it. 

It’s not a satisfactory situation to have China be a dictatorship 

today. We worked with the Chinese closely on intelligence matters. 

I did it myself even in the post-Cold War period because we had 

some things we needed to cooperate on vis-a-vis Russia. When it 

was the Soviet Union, we had even more reason to work with the 

Chinese. 

So we’ve done this over the years, but I don’t think that undercuts the basic long-term strategic direction of what I think has 

been our policy and that of most of our allies, to try to move these 

governments in a positive direction. You know, when you sup with 

the devil, you use a long spoon, and I would use at least a fairly 

long spoon with the Chinese today. 

Co-Chairman LEDEEN. All right. Just for the record, Franco, we 

were prepared to remove Franco at the end of the Second World 

War. He was saved by a British Labor government, if you look at 

the documents. So sometimes it gets more complicated. 

Mr. WOOLSEY. Yes, indeed. 

Co-Chairman LEDEEN. We have a few more questions if you can 

give us another five or ten minutes. Commissioner Dreyer. 

Commissioner DREYER. Yes, I was just curious as to your statement that the U.S. had economic leverage. What in particular did 

you have in mind, because so often people say we don’t have any 

leverage, so it’s useful to try to chide China on this, that, or the 
81

other thing? Are you thinking of perhaps Wal-Mart, K-Mart or 

something more officially governmental, or what? 

Mr. WOOLSEY. Well, with our consumer society and general commitment to free trade, we, of course, have a lot less than we might. 

I do think that over the long run, free trade is sufficiently important that it’s one of the reasons why I’ve rather been attracted to 

this notion of focusing on specific foreign institutions and their access to capital markets. 

I know Mr. Robinson has been involved in that issue for a long 

time. Restricting some of those firms’ access to capital markets 

seems to me to potentially be using rifles rather than shotguns, 

and indeed rifles that don’t kick all that much. The problem with 

firing the shotgun of interfering with free trade as a sanction is 

that it also hurts your own consumers, but if we use sanctions on 

individual Chinese entities for dealing with rogue regimes and so 

forth, it seems to me denying them the use of our capital markets 

is a reasonable tactic to seriously consider. 

Commissioner DREYER. The problem, of course, and then I’ll let 

the next questioner begin, with sanctioning individual entities, is 

that the personnel and the names of these institutions tend to be 

kind of slippery. You may sanction a person or entity and then find 

they are continuing to work under other names. 

Mr. WOOLSEY. Yes, indeed. Oh, I know. I understand that. It’s 

at best ‘‘a long, hard slog,’’ I guess, as the Secretary of Defense 

would say. 

Commissioner DREYER. Thank you. 

Co-Chairman LEDEEN. Commissioner D’Amato, you had one more? 

Vice Chairman D’AMATO. Yes. Mr. Woolsey, it struck me that 

we’re talking a lot about the oil market as the area of competition 

and where we have to make some accommodations and perhaps expect leverage. But there is, also, the question of pipelines, pipelines 

for gas and oil out of Southwest Asia into China. Is it your feeling 

that this pipeline alternative or these pipelines are not really a 

very viable alternative in that (a) they are expensive; (b) through 

vulnerable areas; and (c) coming from areas that there might be 

competition as well? 

Some people think that that may relieve the pressure on the situation. What’s your general feeling? 

Mr. WOOLSEY. It’s not a subject I’ve studied. The world of pipelines is an extraordinarily intricate one geopolitically, and I’ve not 

gotten into this issue in any substance. I would just state the general principle that I don’t think we have any particular interest in 

trying to limit China’s access to oil. It will just produce friction. 

It would be best to woo them away from it with things like working on alternative fuels, and if individual companies or the Chinese 

government are willing to risk putting pipelines through Chinese 

Turkistan and along the Silk Road, with the chaos and the fighting 

and the ethnic rivalries and all the rest that are present in that 

part of the world, I would think that investors would demand rather large risk premium for such investments. But it doesn’t seem to 

me that it’s necessarily our business to get into trying to deny it 

or stop it in any way. 
82

Vice Chairman D’AMATO. My question was whether you thought 

it was a viable alternative? My impression is it’s at the high-risk 

level. 

Mr. WOOLSEY. I would think very definitely the high risk level. 

In late 1993, I was in Kashi, Kashgar, walking around the souk 

with my own security, and with Chinese security. The Uyghurs 

were watching us and I’ve never seen such intense looks of hatred 

from such a large number of people, so I contrived to get the Chinese who were present and some of my own people talking, and 

slipped away and walked around by myself for half an hour or so. 

As I walked alone among the Uyghurs, there were all sorts of 

smiles, and people coming up, wanting to practice their English. 

The Han are not loved in Xinjiang, western Xinjiang, and I would 

think it would be a very risk-loving Chinese government that 

would want to put a lot of its reliance on getting oil through pipelines in that region. 

Vice Chairman D’AMATO. Thank you. 

Co-Chairman LEDEEN. Can I just say how welcome are your remarks about democratization, the linkage, the important linkage 

between political systems and geopolitical conflict, and just to point 

out, because I know you agree with it, that there are two different 

ways to do it. One is to work to democratize China, and the other 

is to work to democratize the countries with which it is having 

some of these disturbing relationships. 

And probably it would turn out to be comparatively easier to 

work on democratization of countries like Iran and Libya than it 

is to try to budge China, which is a much bigger mouthful and a 

much tougher nut to crack. 

Mr. WOOLSEY. It is going to be a matter of working angles on all 

of these. I essentially agree. I think in Iran, for example, if a lightning strike would take the dozen leading mullahs who control the 

government, the rule of the clerics, I think the Iranian people 

would be ready to change a lot about their government rather quickly. 

I don’t think that’s the case yet in China, and let me just add 

one point to that, Mr. Chairman. Amartya Sen, the Master of Trinity College, Cambridge and Nobel Prize winning economist, who I 

think normally is at Harvard and is about to go back there, has 

written a superb book and had a superb essay in the New Republic

magazine on October 6 about democratization. His point in both is 

that democracy is not just balloting. It requires the exercise of the 

‘‘exercise of public reason,’’ a phrase he borrows from the philosopher, John Rawls. Sen says that the reason that the Asian Tigers—

South Korea, Taiwan, et cetera—became successful and prosperous 

was not because they were dictatorships, but rather because they 

had ameliorating cultural propensities: various ways of making decisions by public debate and compromise. He stresses that it is societies that have exhibited that exercise of reason in many different 

ways around the world that have also come to adopt democracy in 

the sense of balloting. 

I think that the thrust of all this is that sometimes economic reform goes first, as it did with the Asian Tigers, but it needs a kind 

of fertile ground to be in. Sometimes balloting will go first. Sometimes the rule of law will go first. These three aspects of freedom 

are related to one another, but not in any lock-step way. 
83

If you look at those 121 democracies I described earlier, most of 

them have free economies to one degree or another and most, a 

substantial majority, have the rule of law, but not everyone has all 

three, and it’s not any one of those steps that always goes first. 

We work on different things at different paces, and it is, I think, 

plausible that in a country like China, economics may go first. In 

some of these other countries of, for example, Iran, historic respect 

for the rule of law may precede either economic development in a 

modern sense or balloting. 

We need to stay flexible about the way these things occur, but 

that there is a link, a long-term link, between the three and having 

countries move in those directions is, to me, really the heart of 

what we ought to be about in our foreign policy and international 

economic policy. 

Co-Chairman LEDEEN. Thank you. We’ll close this session. It’s 

been great. 

Mr. WOOLSEY. Thank you. 

Co-Chairman LEDEEN. It’s been great to have you. Thanks for 

coming. 

[Recess from 2:25 p.m. to 2:35 p.m.] 

PANEL IV: CHINA’S ENERGY DIPLOMACY AND ITS 

GEOPOLITICAL IMPLICATIONS II 

Co-Chairman LEDEEN. Okay, gentlemen, thank you for joining 

us. This is our final session for today, so we don’t have particularly 

a deadline to reach so that we can take time for all questions. I’m 

most grateful for your appearance here, Messrs. Calder, Morse and 

Ebel. 

My instinct is to retrace my own life and constantly move from 

left to right. So with your permission, I will start with Mr. Ebel, 

move to Mr. Morse and conclude with Dr. Calder if that’s all right. 

And if Constantine appears, we’ll add him in. Okay. Mr. Ebel, please. 

STATEMENT OF ROBERT E. EBEL, CHAIRMAN, ENERGY PROGRAM

CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES 

Mr. EBEL. Thank you, Mr. Chairman, and I’m pleased to be able 

to contribute to your hearings on China’s energy needs and strategies. In today’s context, national security and energy security are 

so closely intertwined that it is inconceivable to consider them as 

separate issues. 

First, what do we mean by national security? I would suggest 

that the best answer, at least in my judgment, was provided a 

number of years ago by the eminent American diplomat, George 

Kennan, who offered perhaps the least complicated definition: ‘‘National security means the continued ability of this country to pursue its internal life without serious interference.’’

But what is meant by energy security? For the American consumer, the answer is simple. He has only two concerns: price and 

availability. Little else matters, and I would suggest that these 

concerns hold for most consumers everywhere, including China. 

Importing governments, however, have a different view and seek 

energy security or security of supply through diversity of supply 

and as well diversity among the kinds of fuels that they consume. 
84

China’s current and future energy needs have already been defined by preceding speakers. To meet these needs, China must compete in a world market where supplies are not always available in 

the amounts desired, nor at prices acceptable to the consuming 

population. 

At present, all the oil imported by China arrives by tanker. 

There are no pipeline deliveries. That adds to China’s vulnerability, 

in that pipelines, although themselves are subject to sabotage and 

thievery, are comparatively easier to protect than sea lanes. 

Vulnerability is not limited to volumes imported. Rather, true 

vulnerability may be found in the prices paid for imported oil and 

moreover in the volatility of these prices. Will the Chinese economy 

be strong enough to absorb the impact of such volatility? 

When the United States looks north, we see Canada, our leading 

source of imported oil, and also the supplier of one-sixth of all the 

natural gas we consume. When China looks north, it sees Russia, 

rich in oil and natural gas, but found in fields far distant, in western Siberia and in the Arctic. 

Eastern Siberia is far more attractive as a source of oil and gas 

for China in that it is much closer to the points of consumption in 

that country. That region has a recognized natural resource potential, but this potential hasn’t been realized in the absence of both 

a domestic and an export market. 

Now, the prospect of development based on exports to China and 

elsewhere has emerged. Exporting nations seek security for their 

oil sales through market diversity. That is the driver behind a proposal by Yukos, Russia’s largest oil company, to export oil to China 

via pipeline originating at Angarsk, in eastern Siberia. 

But diversity of markets is not the only driver nor is it the most 

important driver. Rather, Yukos and the Russian oil sector as a 

whole need new export markets if production and oil-derived income are to expand. China, the Far East and Southeast Asia are 

the growth oil markets for the future. 

Thus, the justification for new pipelines to move Russian oil eastward. At present, all Russian oil and gas exports move westward. 

Without these new export markets and absent the justification to 

develop new production bases in eastern Siberia, the prospect for 

growth in Russian oil production is taken away. Thus, Russia has 

just as much at stake in its negotiations with China and with 

Japan, with its future oil growth very much dependent on the outcome of these negotiations. 

Having said that, a political and economic conflict has arisen for 

Russia: a pipeline to China or a pipeline to Nakhodka? A pipeline 

to Nakhodka is viewed by Russian officials as providing the base 

for economic development of eastern Siberia and the Russia Far 

East. 

However, the oil reserve base in eastern Siberia is far too small 

at present to justify construction to Nakhodka, whereas Yukos has 

given assurances that it can provide 600,000 barrels per day by 

pipeline to China without any constraints. 

Both China and Japan are pressing Russia for a decision to the 

question: which pipeline is going to be built first? How can Russia 

play both of these proposals seeking the maximum political and 
85

economic gain but without alienating either the Chinese or the 

Japanese? 

Now, of course, the issue is further complicated by the arrest of 

Yukos President Mikhail Khodorkovsky. There is a larger question 

in all of this: that is, would pipelines linking Russia with China 

serve our national interests? 

At first glance, the answer would appear to be yes, it would. Reducing Chinese dependence on Persian Gulf oil, today the largest 

source of its oil imports, has to be seen in our national interests 

and in the interests of the world oil market as a whole. 

But, of course, there’s a tradeoff, as tradeoffs accompany any and 

all decisions we make, whether as an individual or as a nation, and 

these tradeoffs carry their own risks and costs. These pipelines 

when built will bring about a closer political and economic integration of Russia and China. Moreover, pipelines carrying natural gas 

from Russian East Siberia might not only supply just the Chinese 

market but possibly could be extended beyond China to both Koreas, providing reliable fuel supplies that would support development and ease strains on their respective economies. 

Yet, this prospective economic integration could eventually evolve 

into a regional political bloc, excluding the United States, and 

would in part solidify Russia’s future place in the region. Once 

again, would this tradeoff meet our national interests or it would 

complicate them? 

The International Energy Agency has forecast world oil demand 

approaching 119 million barrels per day by the year 2020. Can we, 

should we safely assume that oil supply will match demand or that 

competition for available supplies might heighten? Under these 

conditions, how might China fare? 

Having been an oil importer now for a number of years and sensitive to the workings of the marketplace, would China conduct 

itself responsibly or would it employ political leverage to secure 

needed supplies? 

If China is not particularly successful in reducing its dependence 

on the Persian Gulf through investments in other oil exporting 

countries—and that seems to be its current program—or through 

pipeline linkages to Russia, and should Persian Gulf supply be interrupted for whatever the reason, could we expect China to react 

in concert with other importers or might it seek separate arrangements to cover their losses? 

Mr. Chairman, I realize I’ve raised far more questions than I 

have answers for, but that reflects the difficulty of meaningful assessments of China’s future conduct in the world of oil. These questions are easy to come by because we can draw upon past experiences in dealing with the world oil market and interruptions in 

supply. We know where the pitfalls are—sometimes having learned 

the hard way—but China is a relatively new boy on the block and 

has yet to face the realities of protecting an economy that is steadily increasing its dependence on an adequate, timely and secure 

supply of oil. 

Yet China today is a major participant in the global trading system, and there is reason to believe that it will take a more active, 

more responsible role in keeping with its energy vulnerability. 
86

Thank you, Mr. Chairman. I’ll look forward to any questions you 

might have. 

[The statement follows:]

Prepared Statement of Robert E. Ebel, Chairman, Energy Program

Center for Strategic and International Studies 

Mr. Chairman, I am Robert Ebel and I chair the Energy Program at the Center 

for Strategic and International Studies. I am pleased to be able to contribute to this 

hearing on China’s energy needs and strategies. 

In today’s context, national security and energy security are so closely intertwined 

that it is inconceivable to consider them as separate issues. First, what do we mean 

by national security? I would suggest that the best answer, at least in my judgment, 

was provided a number of years ago by the eminent American diplomat, George 

Kennan, who offered perhaps the least complicated definition: ‘‘(national security 

means) the continued ability of this country to pursue its internal life without serious interference.’’

What is meant by energy security? For the American consumer, the answer is 

simple. He has only two concerns: price and availability. Little else matters, and I 

would suggest that these concerns hold for most consumers everywhere. 

Importing governments have a different view and seek energy security or security 

of supply through diversity of supply and as well diversity among the kinds of fuels 

we consume. 

China’s current and future energy needs have already been defined by the preceding speakers. Clearly, China must have access to adequate and timely supplies 

of crude oil and natural gas if it is to successfully sustain economic growth. To do 

so, it must compete in a world market where supplies are not always available in 

the amounts desired nor at prices acceptable to the consuming population. 

China, like all importing nations, seeks diversity among suppliers and diversity 

amongst fuels consumed, with emphasis today on oil and natural gas, although domestically produced coal is still by far the dominant fuel. 

At present all the oil imported by China arrives by tanker, there are no pipeline 

deliveries. That adds to China’s vulnerability, in that pipelines, although themselves 

are subject to sabotage and thievery, are comparatively easier to protect than sea 

lanes. 

Vulnerability is not limited to volumes imported. Rather, true vulnerability may 

be found in the prices paid for imported oil and moreover in the volatility of these 

prices. Will the Chinese economy be strong enough to absorb the impact of such volatility? 

When the United States looks north, we see Canada, our leading source of imported oil and also the supplier of one-sixth of all the natural gas we consume. 

When China looks north, it sees Russia, rich in oil and natural gas but found in 

fields far distant, in western Siberia and the Arctic. 

Eastern Siberia is far more attractive as a source of oil and gas for China, in that 

it is much closer to points of consumption in China. This region has a recognized 

natural resource potential but this potential has not been realized in the absence 

of both a domestic and an export market. Now, the prospect of development, based 

on exports to China and elsewhere, has emerged. 

Just as importing nations seek security of supply through diversity of supply, exporting nations seek security for their oil sales through market diversity. That is 

a driver behind a proposal by Yukos, Russia’s largest oil company, to export oil to 

China via a pipeline originating at Angarsk, in eastern Siberia. 

But diversity of markets is not the only driver, nor is it the most important one. 

Rather, Yukos and the Russian oil sector as a whole need new export markets if 

production and oil-derived income are to expand. China, the Far East and Southeast 

Asia are the growth oil markets of the future. Thus the justification for new pipelines to move Russian oil eastward. At present, all Russian oil—and gas—exports 

move westward. 

Moreover, without these new export markets and absent the justification to develop new oil production bases in eastern Siberia, the prospect for growth in Russian oil production is taken away. 

An internal study undertaken by the Russian oil company Yukos foresaw Russian 

oil production peaking by the year 2010, holding at some 10 million barrels per day 

out to the year 2015, and then slowly declining. However, because the leading oil 

producing regions of the country were expected to peak as well in 2010, then begin 

to decline, where would the growth needed to offset this decline come from? 
87

The growth needed to offset production declines is projected to be provided by the 

Russian shelf, largely Sakhalin Island, and by eastern Siberia. Absent new supplies 

from these two regions, especially from eastern Siberia, Russian oil production by 

the year 2020 was projected to be about 1.5 million barrels per day less than what 

it is today. 

Thus, Russia has much at stake in its negotiations with China and with Japan, 

with future oil sector growth very much dependent on the outcome of these negotiations. 

Having said that, a political and economic conflict has arisen for Russia. Russia 

is also considering construction of an oil export pipeline to the Pacific Ocean port 

of Nakhodka, to serve the needs of Japan, with a branch line to China. Importantly, 

a pipeline to Nakhodka is viewed by Russian officials as providing the base for economic development of eastern Siberia and the Russian Far East. However, the oil 

reserve base in eastern Siberia is far too small at present to justify construction to 

Nakhodka, whereas Yukos has given assurances that it can provide 600,000 barrels 

per day by pipeline to China without any constraints. 

Both China and Japan are pressing Russia for a decision to the question: which 

pipeline is going to be built first? How can Russia play both of these proposals, seeking the maximum political and economic gain, without alienating either the Chinese 

or the Japanese? Now, the issue is further clouded by the arrest of Yukos President 

Khodorkovsky. 

There is a larger question in all this. That is, would pipelines linking Russia with 

China serve our national interests? At first glance, the answer would appear to be 

yes, it would. Reducing Chinese dependence on Persian Gulf oil, today the largest 

source of its oil imports, has to be seen as in our national interests, and in the interests of the world oil market as a whole. 

But of course there is a tradeoff, as tradeoffs accompany any and all energy-related decisions we make as a nation, and these tradeoffs carry their own risks and 

costs. 

These pipelines, when built, will bring about a closer political and economic integration of Russia and China. Moreover, pipelines carrying natural gas from Russian 

east Siberia might not only supply the Chinese market, but possibly would be extended beyond China to both Koreas, providing reliable fuel supplies that would 

support development and ease strains on their respective economies. 

Yet, this prospective economic integration could eventually evolve into a regional 

political bloc, excluding the United States, and would in part solidify Russia’s future 

place in the region. Once again, however, would this tradeoff meet our national interests, or would it complicate them? 

China today is viewed as one of the most promising consumer markets available, 

particularly by Russia, where the domestic market lags, particularly outside the 

major cities of the country. At the same time, might Russia fear that it would come 

to be regarded as little more than a source of oil and gas, to be used by China as 

a means of developing its own manufacturing potential, a potential that could challenge Russian and other manufacturers? 

Like any seller of goods, it is in Russia’s interests to encourage competition among 

the prospective buyers of the energy it has to sell. At the same time, that competition, say, between China and Japan, must not be allowed to deteriorate into a rivalry. Japan is almost wholly dependent on imported oil while China, now second 

only to the United States in terms of oil consumption, is moving gradually to an 

oil import dependency that in the years ahead may well match the current level of 

relative U.S. dependency. 

With demand for energy in the developing countries of the world very likely exceeding energy use in the industrialized world by the year 2020 if not sooner, the 

future does not appear comfortable nor secure. Current world oil demand is on the 

order of 77 million barrels per day. The International Energy Agency has forecast 

world oil demand approaching 119 million barrels per day by 2020. Can we, should 

we safely assume that oil supply will match demand, or that competition for available supplies will heighten? Under these conditions, how might China fare? 

Having been an oil importer now for a number of years, and sensitive to the workings of the marketplace, would China conduct itself responsibly, or would it employ 

political leverage to secure needed supplies? Whatever its response would very much 

matter to the United States and to other importers. 

Current Chinese dependence on Persian Gulf oil comes to mind. If China is not 

especially successful in reducing its dependence on that region, through investments 

in other oil exporting countries, as seems to be its current program, or through pipeline linkages to Russia, and should Persian Gulf supply be interrupted for political 

reasons, could we expect China to react in concert with other importers, or might 

it seek separate arrangements to cover their losses? 
88

Mr. Chairman, I realize that I have raised far more questions than I have answers for. But that reflects the difficulty of meaningful assessments of China’s future conduct in the world of oil. The questions are easy to come by, because we can 

draw upon past experiences in dealing with the world oil market and interruptions 

in supply. We know where the pitfalls are, sometimes having learned the hard way. 

But, China is a relatively new boy on the block and has yet to face the realities 

of protecting an economy that is steadily increasing its dependency on an adequate, 

timely, and secure supply of oil. 

Yet the country is a major participant in the global trading system, and there is 

reason to believe that it will take a more active, a more responsible role in keeping 

with its energy vulnerability. 

Thank you, Mr. Chairman, and I look forward to any questions you may have.

Co-Chairman LEDEEN. Thank you, Mr. Ebel. 

Mr. Morse, please. 

STATEMENT OF EDWARD L. MORSE

EXECUTIVE ADVISOR, HESS ENERGY TRADING COMPANY 

Mr. MORSE. Thanks, Mr. Ledeen. I am pleased to have been invited to share some observations with the Commission this afternoon, although I was somewhat perplexed as to what I might say 

because I had been the author, along with Mrs. Jaffe, of a study 

on this subject, and I knew that whatever I might have prepared, 

she was also going to say. 

So I thought that it would be useful to share with you some reflections of a general nature that have to do with China’s entry on 

to the scene as a major actor in the international petroleum sector. 

And I want to begin these general observations with a notion that 

comes from the past because the energy sector of today stands 

apart from the other significant sectors of the international economy. 

Like some other sectors of the trade and investment arena, oil 

and gas have seen some significant globalization and the retreat of 

government intervention or market liberalization over the last two 

decades. These have, of course, been accelerated by the collapse of 

the Soviet Union with the withdrawal of the Russian state from 

even more direct involvement in the energy sector than it has 

today. 

But unlike other sectors of the global economy, in the petroleum 

arena and to some consider extent in the natural gas arena, government intervention still looms large, and in some significant 

countries, governments monopolize the sector including in Saudi 

Arabia where they dominate it as they do in China. 

In terms of the market, the rules of the game remain as result 

topsy turvy where we have not a commodity tending toward the 

lowest price, of the lowest cost to produce it, but rather we have 

the lowest cost producers in OPEC and in some key non-OPEC 

countries including Norway and Mexico regulating production to 

put a floor under prices that’s most of the time considerably higher 

than where they otherwise might be. 

In short, we have in the petroleum sector, unlike most other sectors of the international economy, this confrontation between the 

forces of the market and of globalization, against political forces 

and anti-competitive forces that look to political objectives rather 

than to market objectives, and when we find the major participants 

in the market, especially but not only Saudi Arabia and other 
89

members of OPEC, who believe that market forces are their enemy, 

their enemy which needs to be confronted. 

Now, why do I bring this up? I bring it up because for the past 

25 years, there’s been a sort of silent conspiracy between the 

United States and Saudi Arabia as the two largest participants in 

the international oil marketplace, and that conspiracy is to leave 

things alone and to wink from an American perspective at the anticompetitive forces and to allow themselves to play out, and that 

wink began, of course, during the era of the Cold War when it was 

in our interest nationally not simply to support a domestic industry 

but in our interest to support strong governments that were oil producers and to fend off any interest in those areas by the Soviet 

Union. 

Well, times are changing and they’re changing in significant 

ways, and they’re changing fairly rapidly. They’re changing in part 

because the Cold War is over, but as this Commission has listened 

over the past few hours, changing because of the change in the 

number of key players and the nature of those key players. It’s not 

any longer just Saudi Arabia and the United States, and to a 

slightly lesser extent the European Union that are the key makers 

of the rules of the international petroleum sector, but emerging are 

Russia and China as equally important players, players that are 

being given the rules of the game, and the rules of the game, as 

they understand them, may not be from their perspective in their 

own interests. 

We have Russia, as Bob Ebel has just indicated, that’s moving 

from being a large regional supplier of oil and gas to being an exceptionally large global supplier of oil and gas, and as it moves 

from being a large regional supplier to an exceptionally large global 

supplier, it is no longer content at the government level or the company level of being a price taker or rule taker, but its interest is 

keener on what kind of system it wants, what kind of rules it 

wants to enhance its own interests, and those rules are not going 

to be the rules of the United States or the rules of the marketplace 

nor will they be the rules necessarily of Saudi Arabia. They’ll be 

Russian rules. 

And the fourth major player now is becoming China as well for 

the reasons that you understand, from the sheer dramatic increase 

in the economy of China, the energy sector of China and the oil 

consumption levels of China. So it’s incumbent upon us I think to 

think through what the wants are, the objectives are, both of China 

and Russia, as well as what our wants and desires might be in a 

sector where the rules of the game are almost certainly going to 

change, and where we have for the first time perhaps in 25 years 

an opportunity to make sure that the rules of the marketplace become more predominant and where the principal actors working 

against the rules of the marketplace prevailing, not simply OPEC 

but China in particular and to considerable extent Russia. 

I want to come back to that in my final comments, but I want 

to just look at three areas where I think this is important, and 

those three areas are areas that I’m sure others have commented 

on this morning or just a few minutes ago, but where I hope to 

offer a slightly different perspective. 
90

The first, of course, has to do with vulnerability and insecurity, 

an area that I know was commented upon this morning and that 

we just heard from Jim Woolsey with respect to some Qs and As 

on the IEA. But the fact is that the IEA framework is the global 

framework to deal on an international level with the insecurity 

coming from fear of supply disruption and fear or the use of oil instruments by oil supplier countries and as a self-policing mechanism to prevent other consuming countries from competing with 

one another unduly for access to supplies. 

And as we know, the IEA was founded in the aftermath of the 

Arab oil embargo of some 30 years and one week ago, and was set 

up at a time when the members of the OECD, the founding members of the IEA, comprised 80 percent of the oil importers of the 

world, 80 percent of the oil consumption of the world, and where 

they were the only ones that counted. 

But now and increasingly over time as Japan and Europe, unlike 

the countries of North America in the OECD, have managed not 

only to damp oil demand but to reverse oil demand. The new 

sources of demand on the market are the countries of North America and the emerging markets, principally of Asia, and they need 

to be looped into this energy security network in a very direct manner, because unless they are, they will find a way to deal with their 

energy security that is not in our interest and is almost certainly 

going to be against our interest. 

They will do so either by starting as the Chinese have as free 

riders on an energy security system and strategic stockpiles in the 

IEA that were extremely expensive to build, but not only are they 

free riders but they act in anticompetitive ways, and in ways that 

are adverse to the interests of others in the marketplace. 

Last year, in the run-up to and fear of the consequences of a U.S. 

attack on Baghdad, what did the Chinese and what did the Indians 

do? They spoke about the need for strategic stocks, but they actually started hoarding oil, and they started hoarding oil in August 

of last year and they kept building up and building up supplies at 

an incremental level that put pressure on the world market at the 

time when the world market was undergoing that insecurity plus 

the insecurities associated with the disruption from Venezuela and 

later the disruption from Nigeria. 

Nobody has good numbers on what that number was of how 

much hoarding took place, but my own conversations with the Chinese companies would indicate that hoarding in China alone was 

equal to some 30 million barrels. If you add to that what is known 

in the marketplace on extra purchases being made by other countries in Asia, the Asian hoarding by non-IEA members probably 

amounted to 80 or 90 million barrels. 

To put that in context, that’s more than four full days of additional supply for the Asian region, non OECD Asia as a whole, and 

in terms of the Chinese, it’s an extra fortnight of supplies, hoarding 

that would not have taken place had they been part of a system 

of a security net like the OECD provides. 

So I think we need to find a way to provide that, and if we don’t 

find a way to provide that, the likelihood is that others will provide 

it in a way that is not necessarily in our interests, and I think 

pushing forward on the remarks that Bob Ebel made, I think there 
91

is a very good chance that unless China is brought into a global 

safety net, global cushion, against disruption, it will form part of 

a regional arrangement, a regional arrangement that involves Russia as a supplier and involves major OECD countries, Japan and 

Korea probably, as financiers of that arrangement, and we can talk 

about that if you want later. 

Co-Chairman LEDEEN. Would you take a breath, please? 

Mr. MORSE. Yes. 

Co-Chairman LEDEEN. We’re out of time. Dr. Calder has to leave 

at about half past three, so with your permission, we’ll get back to 

this all stuff. I’m most grateful. It’s new, it’s provocative, it’s terribly helpful, and it’s great that you came. And sometimes it’s great 

to break up partnerships even temporarily. All right. You see. Dr. 

Calder, please. 

STATEMENT OF KENT E. CALDER

DIRECTOR, REISCHAUER CENTER FOR EAST ASIAN STUDIES

NITZE SCHOOL FOR ADVANCED INTERNATIONAL STUDIES

JOHNS HOPKINS UNIVERSITY 

Dr. CALDER. Thank you very much. I was glad that Dr. Morse 

raised this question of the broader regional dynamics because actually that was where I was thinking of starting off. My comparative 

advantage perhaps is the broader regional context of Chinese energy policy that I’ve been working on now for close to a decade. 

And it seems to me that it has elements that as a point of departure for thinking about China, of course, we have to look first and 

foremost at this important shift, historic shift really, beginning in 

1993 as China became an energy, a net energy importer, and that 

way that that trend, of course, has steadily deepened beyond—

fueled by very rapid Chinese growth, of course—to levels beyond 

many of the predictions that we were seeing in the mid to the late 

1990s as I wrote my Pacific Defense book. 

This last year, as you know, China imported something like 1.4 

million barrels a day net, and the prospects, of course, are for substantial increase in coming years. Of course, Dr. Morse and others 

are the real specialists in this. My guess would be that we would 

see China perhaps inside of a decade importing at least 30 percent 

of its oil, and that it will rival—at this point, still, of course, Japan 

is a much larger importer—but within a decade certainly China 

will be at Japanese levels or beyond. 

And in terms of thinking about the regional dynamic, it seems 

to me very important to remember the very heavy vulnerabilities—

I’m sure those have been stressed throughout your hearings 

today—not only of China but also of the other nations that import 

oil, LNG, and so on across many of the same pipelines or rather 

sea lanes from the Middle East particularly into northeast Asia. 

Japan is 99 percent dependent on imported oil. Korea is roughly 

the same, no major domestic sources of oil at all. Taiwan, also. Not 

only very heavily dependent on imports, these key nations or these 

key economic areas, but also heavily dependent on imports from 

the Middle East. Japan now about 90 percent dependent on the 

Middle East for its oil imports. Korea, about 75. China, relatively 

low, still at 56. And one of the points that I will stress is that 

China has been trying to diversify. 
92

Clearly, it sees itself as becoming increasingly vulnerable with 

these rapidly rising imports and has been trying to diversify and 

to some extent it has diversified, it is diversifying and is somewhat 

less dependent on the Middle East than the other major northeast 

Asian nations. 

But still a broad pattern for all of them of heavy vulnerability 

due to heavy reliance on imports and then heavy reliance on imports particularly from the Middle East across many of the same 

sea lanes. So, and then also as Dr. Morse was suggesting, safety 

nets which are not nearly so well developed, particularly in the 

case of China, as they are in many other nations. Japan has roughly a 100 day stockpile. Our stockpile, while it’s not that large, of 

course, is also very, very substantial. 

The Chinese stockpile on the order of perhaps seven to ten days, 

something much, much smaller, and not as well developed technically. Japan has been quite concerned about this lack of a Chinese stockpile and the possibility that in a crisis situation that 

there would be competition, and as Dr. Morse suggested hoarding 

and so on, a perverse dynamic. 

We saw this sort of thing, of course, after the Iranian revolution. 

The Japanese got, as many of you know, quite aggressively into the 

markets then and there were, of course, competition with U.S. consumer interests and so on. 

The China stockpile system is not well developed, and that it 

seems to me is a concern, and I certainly applaud the suggestion 

that Dr. Morse was making, that we should be thinking much more 

about a global safety net. Perhaps just to draw the analogy, of 

course, to finance, which is the other major area where East Asia, 

as you know, has a rather unique position in the world system. We 

now have over 50 percent of global foreign exchange reserves in the 

hands of East Asian nations, partly as the result of very heavy 

trade imbalances. 

On the financial side, one of the issues that’s emerging is the degree of independence, degree of autonomy that the region would 

have from the global system, again by analogy to what Dr. Morse 

was saying. 

So I think that there is a whole series of important issues relating to stockpiling and so on flowing from the vulnerability that not 

only China but the other nations in the region have. We only need 

to look to history, for example, to the late 1930s and the early 

1940s, leading up ultimately to Pearl Harbor and for oil 

vulnerabilities, energy vulnerabilities and some of the consequences. 

Of course, there were many, many reasons, but the consequences 

to which vulnerabilities of these kinds ultimately can lead. Our 

subject here, of course, is certainly China, and I want to focus just 

very briefly on a few points of my testimony to you. 

Regarding China, as I say, one major theme I think that’s important is vulnerability. Vulnerability similar in some ways and different other ways to those of the other major nations in the East 

Asian region. The historical record suggests that China fears energy dependence on the broader world, partly because of its own 

historical experience, the early experience with the Soviet Union in 

the 1950s where Soviet advisors played a major role in the oil in-
93

dustry, and then their departure following the Sino-Soviet split 

precipitated rather severe shortages for China. 

They’ve also seen the ways that the Russians, the Soviet Union 

and then the Russians thereafter, have used energy as a lever in 

its relationships with Ukraine, for example, and then in the internal dialogue within China, of course, the issue of energy security 

and the perverse potential consequences of rapidly deepening interdependence as an important theme. 

China has, I would say, to characterize overall, China’s energy 

diplomacy, it would seem to me that the major theme, the most important theme is diversification, geographical diversification, diversifying its reliance on oil toward nuclear, hydro, and natural gas 

which are less susceptible to sea lane interdiction since, of course, 

the long sea lanes from China to the Middle East are dominated 

by the U.S. Navy, which assures freedom of navigation, of course, 

but to the extent that there are delicate relations between China 

and the United States, that, of course, makes that a concern for 

China. 

Now, in its diversification efforts, certainly China has important 

relations with Iran. It’s one of its major suppliers, and number two 

supplier this last year, as you know, and that has the attraction 

of being a nation where it has relative autonomy from outside pressures. 

China has diversified to a much larger degree than most nations 

toward Africa interestingly. The Japanese haven’t paid much attention there. China gets something like 23 percent of its oil imports 

from Africa and both Sudan, of course, with which we’ve had security problems, and then also particularly Angola have become two 

of China’s five largest suppliers. 

Russia and Kazakhstan, as Dr. Ebel also was mentioning, have 

been important recently, particularly because again they have the 

attraction of not exposing China to the vulnerability of sea lanebased imports from the Middle East. 

Co-Chairman LEDEEN. Dr. Calder. 

Dr. CALDER. Yes. 

Co-Chairman LEDEEN. In your own interests, because I know you 

have to leave shortly, could we hold it there? 

Dr. CALDER. Surely. 

Co-Chairman LEDEEN. And then we can get at the rest in question period if that’s okay. 

Dr. CALDER. Yes, certainly. 

[The statement follows:]

Prepared Statement of Kent E. Calder

Director, Reischauer Center for East Asian Studies

Nitze School for Advanced International Studies, Johns Hopkins University

China’s Energy Diplomacy and its Geopolitical Implications

The critical point of departure in thinking about China’s future energy diplomacy 

must be that nation’s substantial and rapidly increasing dependence on energy imports, fueled by its extraordinary economic growth. As late as 1990 China had a net 

oil-trade surplus of over $1 billion/year with Japan alone. Until the fall of 1993 

China was a net oil exporting nation. Yet last year it imported over 1.4 million barrels per day from the broader world. 

And the prospects are strong for substantial future increases in China’s international energy dependency. Economic growth shows strong promise of being both 

rapid and sustained, due to high rates of capital formation and large prospective fu-
94

ture increases in factor productivity. China’s economy shows prospect of growing 

more, rather than less, energy intensive, particularly in the consumer sphere, as 

automobile ownership and usage of energy-intensive appliances like air conditioners 

steadily broadens. Nations at China’s intermediate stage of development typically 

experience large increases in energy usage, with industrial consumption in such sectors as construction and petrochemicals augmenting increasingly buoyant consumer 

demand. 

China certainly enjoys a wealth of natural energy resources, including coal reserves that rival those of the United States as the largest on earth. Yet environmental and infrastructural problems, compounded by a reluctance to offer foreign 

investors the incentives necessary to access state-of-the-art drilling technology, prevent China from realizing its domestic energy production potential. The major reserves, of oil in particular, are located in the North and the West, while energy demand is surging most rapidly in the South and the East. And the railways and pipelines needed to transport oil, coal, and natural gas from one part of the country to 

another remain underdeveloped, and in a woeful state of disrepair. 

The historical record suggests that China fears energy dependence on the broader 

world, and that it has some reason to do so. Soviet advisors in the 1950s played 

a major role in the Chinese oil industry, and their departure following the Sino-Soviet split of 1960 precipitated severe energy shortages in China. It also left China 

more than 50 percent dependent on the Soviet Union, a new adversary, for over 50 

percent of its refined oil product consumption. China has also seen the post-Soviet 

use of both oil and natural gas as a geopolitical lever in Russia’s dealings with 

neighbors such as the Ukraine over the past decade. 

Chinese analysts also appear to see the United States as a prospective threat to 

China’s energy security. There is no nation powerful enough to balance the U.S., 

and the U.S. Navy dominates the 7,000-mile sea lanes from Shanghai to the Straits 

of Hormuz through which well over half of China’s oil supplies must pass. Economic 

sanctions have become an important tool of American policy in the post-Cold War 

world, and China’s vulnerability to U.S. economic pressure, and relative lack of allies, could encourage the consideration of oil sanctions as a prospective option, in 

the view of some Chinese observers. 

In 1999, after the Kosovo conflict, and again during the recent U.S. military intervention in Afghanistan and Iraq, the potential effect that the vulnerability of strategic shipping lanes could have on China’s energy supplies was repeatedly the subject of security policy debates in China. However strong American capabilities at sea 

may consistently have been, until ‘‘9/11,’’ the United States had a relatively limited 

military presence in nations bordering directly on China’s energy sea lanes. Today, 

in the context of the war on terrorism, that is no longer the case. 

Reducing Energy Vulnerability: A Key Imperative

China has at least five strategic options that it can pursue to reduce its vulnerability to prospective international pressure in the energy area: (1) Geographical diversification of its energy supplies; (2) Increasing energy efficiency; (3) Diversifying 

its reliance on oil toward nuclear power, hydro-electric power, and natural gas, the 

supply of which is less susceptible to sea-lane interdiction; (4) Reducing reliance on 

international majors, conversely increasing the share of energy imports flowing 

through Chinese owned or controlled intermediaries; and (5) Developing the military 

capabilities to independently protect Chinese energy supplies. The evidence is that 

China is simultaneously pursuing all of these strategies simultaneously, with the 

strongest emphasis on the first four. In their aggregate, these strategies represent, 

in their international dimensions, the face of Chinese energy diplomacy. 

Economic pressures in China currently gravitate, as they do in virtually all nations, in favor of increasing reliance on the Middle East, at least with respect to 

oil and liquefied natural gas (LNG) supplies. The well-head production cost in the 

Middle East is simply so low that its logic cannot be ignored, unless collusive behavior by the OPEC production cartel forces prices high enough to make other sources 

of supply competitive. For most of the past two decades that has simply not been 

the case. 

Within the Middle East, China has placed substantial priority on developing energy ties with nations where American geopolitical influence is relatively limited: 

Iran and, until the recent war, Saddam’s Iraq in particular. Iran was China’s second 

largest source of imported oil worldwide in 2002, eclipsed only by global low-cost 

producer Saudi Arabia. China took nearly 11 million tons of Iranian crude oil imports. China was also consistently Iraq’s third or fourth best export customer in the 

years immediately prior to the Iraq War, importing 500,000 tons of Iraqi crude in 

2002. This represented less than one percent of China’s total oil imports, however, 

suggesting that Iraq was more dependent on China than vice versa. 
95

Prior to the Iraqi War Chinese firms laid fiberoptic cables enhancing the efficiency 

of Iraqi air defense systems and reducing their vulnerability to air attack. Chinese 

firms also were reportedly modernizing the overall communications network of that 

country, in return for Iraqi oil. By the spring of 2001 at least the Chinese government was telling the U.S. Government that it was pressuring these firms to cease 

and desist, but how serious or effective this pressure was is unclear. 

Iran appears to be a continuing economic and strategic partner for China, although increasing Chinese sensitivity to how this Iranian relationship will play in 

Washington is clearly evident. During the mid-1990s China reportedly sold Iran C–

801 and C–802 anti-ship cruise missiles, posing a threat to oil tanker traffic and 

U.S. naval vessels in the Persian Gulf. 

In 1996 China reportedly began assisting Iran in developing indigenous anti-ship 

cruise missiles, based on Chinese designs. In August 1996 the two countries also 

reportedly signed a $3 billion deal that included the sale of Chinese ballistic missiles, missile guidance technology (including sensitive gyroscopes), and missile production equipment. The Chinese government denied these reports, and U.S. State 

Department officials indicated that they believed Beijing was generally operating 

within the nonproliferation assurances that it had given Washington. Yet gaps between commitments and implementation were a recurring theme, in the view of 

many observers. 

During 1997–1998 the Chinese government committed to stopping these provocative arms exports. Yet Iran still owes Chinese arms producers substantial debts dating from the Iran-Iraq War of the 1980s. These provide at least one incentive apart 

from oil for continuing Sino-Iranian arms transactions, as does continuing Chinese 

irritation at American arms sales to Taiwan. 

While Sino-Iranian interaction is a continuing reality, the more striking development is China’s rapid diversification of its energy supplies, which is helping it to 

limit dependence on the Middle East as a whole. In 2001 China was only dependent 

on the Middle East for 56 percent of its crude oil imports, compared to 90 percent 

for Japan and around 75 percent for South Korea. This relatively low proportional 

figure for Chinese Middle East oil dependence was virtually unchanged from a decade earlier, despite the near ten-fold expansion of overall Chinese oil imports during 

that period. 

Regionally speaking, Africa provides nearly 23 percent of China’s oil imports—a 

remarkably substantial share, considering that continent’s distance from China. Indeed, the Sudan and Angola—both nations where American geopolitical influence is 

limited—were two of China’s five largest suppliers of crude oil in 2002. And their 

contribution is rising. Chinese oil imports from Angola, for example, nearly tripled, 

to over six million tons annually, between mid-2002 and mid-2003. 

Energy efficiency has traditionally been extremely low in China. In 1980, for example, China’s energy usage per unit of GDP was roughly three times the global 

average, and more than four times that in Japan. By 2000 it had risen substantially, to around 90 percent of the global average, but remained only around twothirds of that in Japan, according to World Bank statistics. 

Raising China’s energy efficiency still further is very much in the world’s interest, 

given both the rapid, sustained character of Chinese growth, which is sharply deepening China’s energy dependence on other nations, and the manifest instabilities 

that could arise from a troubled Chinese energy relationship with the broader world. 

This is an area where multilateral cooperation is very much in both America’s and 

China’s national security interest. Japan, in particular, has been very successful at 

energy conservation, especially in the industrial sphere, and including it in broader 

efforts to encourage Chinese energy conservation through its extensive development 

assistance programs in China is very much in the U.S. national interest. 

Diversification away from oil, toward nuclear power and lately toward natural 

gas, have also been important themes in Chinese energy diplomacy. Nuclear power, 

of course, has the attraction of requiring only extremely limited raw material imports. Yet the storage and safety problems that have arrested formerly extensive 

Japanese and Korean nuclear programs are also beginning to concern Chinese authorities. China has built three nuclear power stations so far, all located along the 

eastern coast, and will have installed nuclear capacity by 2005 of around 8.7 million 

kilowatts, or about three percent of total national power output. 

Yet Beijing has so far been quiet about its plans for nuclear generation beyond 

2005, in stark contrast to the Chinese government’s explicit call for increases in natural gas and hydro-electric power production capacity. One source of disquiet is the 

high cost and low level of local technology input associated with most plant-construction proposals. Yet China will likely boost nuclear power capacity in the longterm to supplement thermal and hydro-generation, given the huge prospective 

growth in overall national power demand. 
96

Natural gas does not suffer from the central drawbacks of nuclear power. It is a 

safe, efficient, environmentally attractive fuel. And it has the substantial geopolitical advantage of being accessible overland—immune from prospective interdiction by a U.S. Navy unassailably dominant, in the short-term, along China’s natural 

energy sea lanes. 

Coal, of course, has been the classical form of energy consumption in China. To 

this day China relies on coal for well over 60 percent of its energy supply. Given 

that China has the largest proven coal reserves on earth, it is also likely that China 

will continue to rely heavily on coal in the future. 

Coal causes, however, major environmental damage—not only to China’s own natural environment, but also to that of the broader Northeast Asian region. The acid 

rain that China’s massive use of coal induces decimates forests in both Korea and 

Japan. The rapid dissemination of clean-coal technology thus becomes an important 

precondition to continued use of coal across China, which is clearly advantageous 

on national economic security grounds. 

China clearly suffers from major energy-related environmental problems, mainly 

centering on its extensive use of coal. According to a recent report by the World 

Health Organization (WHO), seven of the world’s ten most polluted cities are in 

China. And China is projected to experience the largest absolute growth in carbon 

dioxide emissions between now and the year 2020. There are thus compelling environmental as well as geopolitical reasons for diversifying away from the current 

heavy dependence on imported oil in China’s overall energy supply. 

Central Asia and Russia have considerable precedence in China’s energy diplomacy—both because they are substantial prospective sources of natural gas, the 

most environmentally attractive and energy-efficient fuel, and because that gas is 

accessible overland. Russia alone has nearly 31 percent of the proven natural gas 

reserves on earth, and they appear to be concentrated heavily in eastern Siberia, 

in manageable proximity to China and Korea. Asia is one of the world’s major regions without a land-based natural gas grid, and creating one seems increasingly 

likely to become an object of Chinese energy diplomacy, as China’s explosive economic growth continues. In this endeavor China will have natural allies in the Korean and Japanese banks, steel producers, and trading companies, as they begin to 

recover from the lingering effects of the financial crises of the 1990s. 

China has placed particular priority on deepening energy relations with 

Kazakhstan—its oil and gas-rich neighbor to the west. Yet results of this commitment have been mixed. CNPC, the large Chinese oil exploration firm, has purchased 

a 60 percent stake in the Kazakh oil firm Aktobemunaigaz, promising to invest substantially in the company’s future development over the coming twenty years. Yet 

it was unable to secure entry into the major Kashagan oil field in the Caspian when 

consortium partners in that project exercised their rights to block the sale of a 16.7 

percent interest in the project to CNOOC. In the late 1990s China and Kazakhstan 

also talked of a possible oil pipeline between them, but construction has not begun. 

Some deepening of China’s energy ties with Kazakhstan may be impending. The 

Kazakh state oil firm announced early in October 2003 that its Chinese counterpart 

had agreed to finance a $800 million oil pipeline from western Kazakhstan to northwestern China, with construction to start in mid-2004. Using the existing pipeline 

network Kazakhstan could then practice oil swaps with its northern neighbor Russia to ensure stable oil supplies to the China-bound route. 

A deepening energy relationship between the giants of Eurasia, China and Russia, 

is both natural and virtually inevitable, barring severe geopolitical conflict. This 

prevailed in the 1960s, 1970s, and 1980s, of course, but the likelihood of an acrimonious Sino-Soviet split is much less likely in the future, due in no small measure 

to energy-sector complementarities. China’s growth is driving it to energy dependence on the world, and nearby Russia is a low-cost supplier, once infrastructural 

costs have been amortized, with at least a third of global gas reserves. 

A Sino-Russian gas grid, starting perhaps with the Irkutsk-Baikal project, would 

have a long-term economic logic that could cement a deepening political-economic 

relationship between these giants. It would also insulate China much more from 

American naval leverage along its sea lanes, and from American political-military 

preeminence in the Middle East, than is currently the case. If anything, the recent 

war in Iraq has deepened the geopolitical logic of an Asian gas grid for China. 

A fourth strategic option for China’s energy diplomacy is increasing the share of 

Chinese energy imports flowing through Chinese owned or controlled corporate 

intermediaries. The three largest Chinese oil and gas firms—Sinopec, CNPC, and 

CNOOC, have all strengthened their financial capacity to expand in international 

markets by carrying out successful initial public offerings (IPOs) of stock between 

2000 and 2002. They have expanded into a diverse range of international ventures, 

ranging from the Northeast shelf of Queensland in Australia, to the Sudan and 
97

Kazakhstan. China has also selectively encouraged energy producers from the developing world, including Middle East oil producers, to become active downstream in 

China. 

China has generally been wary of the international oil majors, but has occasionally teamed up even with them, in keeping with its overall strategy of diversification. Shell, for example, is the lead firm in China’s current ‘‘West-to-East Pipeline,’’ 

currently under construction, which will convey natural gas from Xinjiang to Shanghai. Gazprom and ExxonMobil have additional stakes. Construction began in July 

2002, with a section of the pipeline scheduled to begin operation in early 2003. This 

could be the trunkline for a future natural gas pipeline between China and Central 

Asia. 

China’s final strategic option for assuring its energy supplies, of course, is military. China has, as noted earlier, cooperated in military construction and arms 

transfers with pariah nations in the Middle East such as Iran and Iraq, as noted 

earlier. Yet it appears so far not to have taken determined steps to expand and modernize the long-range naval and air force capabilities needed to protect its expanding imported energy supplies, contrary to earlier expectations. There is clearly a 

long-term logic to a Chinese blue-water navy with the capacity to assure smooth energy imports into China, but that navy has not yet clearly begun to materialize. 

China’s current sea power remains more potential than actual, contrary to expectations a decade ago, as China’s energy imports began to spiral. The PRC retains 

major shortcomings in the areas of anti-submarine warfare, anti-air warfare, and 

electronic warfare. Correcting these shortcomings will require major capital investments that China is only gradually gaining the economic capacity to make. Meanwhile, China’s naval strength lies mainly in its numerical advantage in relation to 

other regional actors. The PLAN (People’s Liberation Army Navy) currently has over 

50 destroyers and frigates, about 60 diesel and 6 Han and Xia-class submarines, 

and nearly 50 landing ships. But the PLAN lags beyond other regional navies, including that of Taiwan, in most technological areas, especially air defense and surveillance. 

The Importance of American Policies

In the final analysis, the course of Chinese energy diplomacy remains to a fateful 

degree indeterminate. Within a decade China will almost inevitably be one of the 

largest energy importers in the world, rivaling the United States and Japan. Over 

30 percent of China’s energy consumption will in all likelihood be imported. Yet how 

Beijing will assure the security of the massive imports that it will require, and how 

it will procure them from the broader world, is still unclear. 

Particularly important, yet nontransparent, is the political-military dimension. It 

is not clear what China will do in terms of blue-water naval development. In the 

context of the war on terrorism, Japan has been expanding its capabilities in the 

Indian Ocean and the Arabian Sea. China may well do so as well. Carefully monitoring China’s political-military response to its rising energy dependency on the 

broader world is a clear imperative for the future. 

Historical precedents suggest that it is when the energy security of nations is 

most precarious and vulnerable that they are most dangerous. Clearly that was true 

of expansionist Imperial Japan in the days leading up to Pearl Harbor. Japan’s lack 

of stable energy supplies was a major factor in its decision to strike on December 

7, 1941. 

Obviously historical parallels are never exact. Yet Japan’s belligerence when it 

was vulnerable suggests that taking positive steps to support China’s energy security can be in America’s national interest, as long as China is dealing in constructive 

ways with mature members of the international community. This could mean, for 

example, rendering technical assistance to expansion of the Chinese oil stockpile, 

which currently provides only a seven day supply, compared to 60 days in the 

United States, and 100 days in Japan. In this context, China might be encouraged 

to re-deploy some of its massive foreign-exchange reserves, currently totaling upwards of $400 billion, into the energy area in constructive ways. 

Much in China’s future course will depend on the receptivity of the United States 

and the broader international community to China’s deepening integration with the 

world. Clearly, the world must insist on a more open China in the calculus of economic affairs, and progress in reducing the massive trans-Pacific trade and financial 

imbalances that have emerged in recent years. Yet if the U.S. continues to support 

and ensure unbiased freedom of navigation in the global sea lanes, as has been this 

country’s longstanding tradition, to that degree China will have reduced incentives 

to develop an autonomous blue-water naval capability of its own. Conversely, to the 

extent that China feels vulnerable regarding its energy sea-lane access, it may be 

encouraged to accelerate its buildup. The changing Chinese energy calculus is gener-
98

ating major new political-economic equations that the world must watch with great 

care in coming years.

Co-Chairman LEDEEN. But thank you very much indeed. 

Dr. Menges, good to see you. 

STATEMENT OF CONSTANTINE C. MENGES, Ph.D.

SENIOR FELLOW, HUDSON INSTITUTE 

Dr. MENGES. Good to see you, Mr. Chairman. I’m delighted to be 

here. I’m going to try to stay within the ten minutes that you had 

indicated we should, and I am so pleased that the U.S.-China Commission is willing to hear a broad range of views on the very important, all the aspects of our relationships with the People’s Republic 

of China. 

Co-Chairman LEDEEN. Otherwise we would die of boredom. 

Dr. MENGES. I’m going to begin with a brief perspective on my 

view. My title is ‘‘China: Its Geostrategy and Energy Needs.’’ I’m 

going to offer a brief perspective on what I view as China’s 

geostrategic purposes in the world today, and then move on to a 

discussion of six parts of the world and how China’s geopolitical 

and energy interests are operative, and conclude with five policy 

suggestions since you asked for policy suggestions, and I shall allocate about two minutes to each of these topics, so we’ll go quickly. 

My own view is that the People’s Republic of China is a country 

that is determined to move toward dominance, dominance in Asia, 

dominance in Eurasia, and dominance in the world. I have recently 

completed a book entitled 2008, The Preventable War: The Strategic Challenge of China and Russia. 

I’ve spent several years on this and my focus has been an overview of China’s actions in the world. So my focus today is on geopolitics and geostrategy. 

I believe that we recall that in the 1950s China spoke about the 

five principles of peaceful coexistence, which it continues to speak 

about, but unfortunately undertook a number of aggressive actions 

including sending nearly a million men in to support the North Korean aggression and supporting armed subversion and invading 

India in 1962. 

Fortunately, in the post-Mao years, China’s foreign policy has 

moved away from a number of those very direct aggressive actions, 

but I believe after some years in which the Chinese regime during 

the 1980s was open to a possibility of moving toward more political 

pluralism as its economic pluralism increased, that a decision was 

made around the time of the decision on Tiananmen Square that 

the Communist Party of China would not in any way surrender political power, and while there could be movement toward economic 

pluralism and happily a great degree of improvement in lifestyle 

pluralism in China, all of which is to the good, the decision was 

firmly made that the Communist Party of China would remain in 

power, would not go the way of Eastern European countries or as 

it then saw the dissolution of the Soviet Union in 1991, and it’s at 

that time that the Communist Chinese Party again defined, again 

defined the United States as its main enemy instead of the Soviet 

Union, which had been its main enemy from 1960 to 1985 when 

normalization began with Gorbachev. 
99

Part of the actions of China, which I’ll summarize, which I’ll 

summarize briefly, suggesting these purposes included aggressiveness in a number of territorial disputes—it has territorial disputes 

with 25 neighboring countries including 11 contiguous countries; its 

transfer of weapons of mass destruction technology to a number of 

state sponsors of terrorism including Iran; its extensive espionage 

and covert action activities against the United States, which have 

been well documented by the congressional commissions, the Cox 

Committee, and its continuing espionage; its military build-up 

which has been extensive, and, as you know, there’s the Asian 

proverb that a rich country has a strong army. 

And China has been showing that. As its wealth has increased, 

it has invested evermore in its military build up, and I believe its 

fundamental method of action is what I call one of stealth movement toward stealth hegemony. That is trying to seek dominance, 

seeking dominance in the world, without open war if at all possible, 

through a combination of political, economic, covert, paramilitary, 

and at times coercive actions. So a whole series of actions, and that 

there is a set of things being done together in a coherent, systematic and managed way. 

So the reasons for China’s pursuit of dominance in my view are 

three. First, to preserve the power of the Communist Party of 

China, not to risk that China would move toward a situation of political democracy or a transition to democracy, where the party 

might be unseated. 

Secondly, to counter the military power of the United States and 

its allies which China sees as the brake on its ambitions for dominance. 

And thirdly, to ensure access to economic resources including energy and especially energy. And here I would say that in my discussion, China’s quest for energy supplies, energy security, is a 

very important part of its strategy, but it’s a subsidiary part to the 

overall geopolitical purposes that I’ve indicated: maintenance of the 

parties in power; countering the military power of the United 

States and its allies; and thirdly, seeking access to economic resources. 

You’ve had a lot of discussion here I know about China’s increasing demand for energy, and I have a nice table in my prepared 

presentation. Here we see China’s production remains under four 

million barrels a day. It will need more than ten million barrels a 

day by 2025 with a rapidly rising curve, so China needs energy, access to energy resources in the world. 

I cite Manning’s work, which I thought was very well done, in 

pulling all this together. With that in mind, I’m going to turn to 

six regions of the world and discuss them briefly. 

First, the South China Sea first island chain of defense region, 

namely, the whole offshore region from China. Here we know that 

China for decades has contended that it has sovereignty over the 

entire South China Sea, which is an international waterway of 

450,000 square miles to which more than 50 percent of world’s 

shipping passes including the 99 percent of the oil that Dr. Calder 

mentioned going to Japan and South Korea and so forth. 

China says it has sovereignty over the entire South China Sea, 

and it has acted during the 1990s in a coercive way in a number 
100

of situations to take territory by force, to expand its presence militarily in the South China Sea, and I believe the fundamental purpose in doing so has been geopolitical. That is an exercise in its expression of dominance in Asia, dominance over Japan and South 

Korea and Indonesia and regional powers. But also it has an energy—there’s an energy component to that. 

We know that from recent estimates that even looking at the energy in the exclusion zone and the economic zone allocated properly 

to China, in its current proper borders, not its claimed borders but 

its proper borders, that there’s roughly 29 billion barrels of oil in 

the South China Sea, the East China Sea, the Bohai Sea and the 

Yellow Sea. 

And my contention is that China’s view is that by being aggressive and coercive in the South China Sea, it seeks to intimidate 

other claimants to energy resources, which will go far beyond the 

29 billion barrels in other parts of the exclusion zone such as 

Japan, Indonesia and other countries. And that that’s part of a tactic and approach that China is using in that arena. 

Turning to Central Asia, with the unraveling of the Soviet Union 

in 1991, there were 15 new post-Soviet republics. China began a 

very careful and cautious and prudent process of getting to establish relationships with the Central Asian countries on its border, 

not wanting to offend the Soviet Union. 

China gradually moved that relationship into a regularized process of meeting, convened in Shanghai in 1995, which essentially became in a formal treaty agreement in June 2001, the Shanghai Cooperation Organization, which consists of China, Russia and the 

Central Asian countries of Tajikistan, Kyrgyzstan, Uzbekistan, and 

Kazakhstan. Actually, together this alliance is about 1.5 billion 

people, and about 3.6 million in its armed forces, though it’s not 

an alliance building toward a military effort. It is an alliance with 

a political purpose and implication. 

China wisely included Russia in order to allay any Russian concerns about China’s relationship with the Central Asian countries, 

and of course has an important geopolitical reason, namely to have 

a secure area on its border, on the one hand, but to normalize the 

border and normalize the border discussions, continuing the discussions begun with the Soviet Union in 1985, but also the energy aspect is important. 

It has now an agreement with Kazakhstan for the importation to 

begin next year of roughly 600,000 barrels a day in a pipeline from 

Kazakhstan directly into China, and the new Iran pipeline that is 

planned will transport many hundreds of thousand barrels a day 

transiting these Shanghai Cooperation Organization countries into 

China. I have in my testimony a very nice map that Mr. Christopher Brown, who is working with me and is skilled at research, 

found that illustrates this. 

The third domain is the relationship with Russia, and here I 

think it’s very important to understand that the fundamental aspect of the new China-Russia relationship is geopolitical, and my 

book is perhaps the only book that actually discusses the ChinaRussia relationship. 

The relationship with Russia went from deep hostility from 1960 

to 1985 to normalization talks, and then with Yeltsin coming to 
101

* Constantine C. Menges, Ph.D., a Senior Fellow with the Hudson Institute, formerly 

served as Special Assistant for National Security Affairs to the President. His latest book is 

2008: The Preventable War—The Strategic Challenge of China and Russia (forthcoming). [He 

can be reached at (202)–974–2410 or (202)–297–9040.] 1 Immanuel C.Y. Hsu ̈, The Rise of Modern China, New York and Oxford: Oxford University 

Press, 1995, Page. 662. 2 Ibid. 

3People’s Republic of China, State Council, Report on National Defense, October 2000, 2 

[www.chinaguide.org/e-white/2000/20]. 

power, Yeltsin held China at a distance, but continued normalization talks, but then gradually at China’s behest, Yeltsin moved toward in 1996 a strategic partnership, annual summits, ever closer 

geopolitical agreement with China on a number of issues, and then 

into a formal alliance signed in July 2001 which, as you all know, 

may have escaped most of the media’s attention and most of the 

official Washington’s attention and the major democracies, but 

there is a new China-Russia alliance. 

I believe China and Russia are pursuing with the United States 

a two-level strategy. One is to maintain normal relations in order 

to have civil relations and to maintain the flow of economic benefits, on the one hand, and the other is to work discretely and carefully against the United States and its allies in a coherent way. I 

think it’s worth noting that China——

Co-Chairman LEDEEN. Dr. Menges, I’m afraid we’re going to 

have to stop with that. 

Dr. MENGES. All right. And so the balance of this analysis and 

the other three domains we’ll have to get to later on. 

[The statement follows:]

Prepared Statement of Constantine C. Menges, Ph.D.

Senior Fellow, Hudson Institute

China: Its Geostrategy and Energy Needs *

Introduction—Perspectives on China’s Geostrategy 

Beginning in 1950, the communist government of China said that its goal in international politics is to promote peaceful relations with other states. Therefore, its 

international conduct would always be governed by the ‘‘five principles of peaceful 

coexistence’’ which China defined to include: mutual nonaggression and mutual noninterference.1

Yet, during the 1950s China committed many acts of aggression including: sending nearly a million troops to battle the United Nations forces in support of North 

Korea; threatening invasion and attacking island territories controlled by Taiwan; 

and, supporting armed communist insurgent movements seeking to overthrow regional governments. Nevertheless, as the historian Hsu put it, ‘‘Peking succeeded 

to a large extent in preventing [most Asian] states from aligning with the West,’’ 2

even India despite China’s surprise attack in 1962 and continuing occupation of part 

of its territory. 

In the post-Mao years, with China’s economic opening to the industrial democracies and other countries, there have been major changes in the methods of Chinese action in the world. While China continues to say that it seeks to promote 

peace and the principles of peaceful coexistence, it has now added the major purpose 

of promoting its own economic development. Also during the 1990s China increasingly repeated, as officially stated in its October 2000 Report on National Defense, 

that it seeks ‘‘a new international political, economic, and security order, responsive 

to the needs of our times.’’ 3

While the content and structure of this ‘‘new international order’’ has not been 

made clear, obstacles to its realization that China often mentions are the alleged 

intention of the United States to dominate the world by what China calls 

‘‘unipolarism’’ or ‘‘hegemonism.’’ Also, impeding the Chinese ‘‘new world order’’ are 

the alliances maintained by the United States in Asia, Europe and the world, all 

of which China condemns as contrary to peace and relics of ‘‘the cold war mentality.’’ China also opposes the plans of the United States for national missile de-
102

4These facts are sourced in my completed book, 2008: The Preventable War—The Strategic 

Challenge of China and Russia (forthcoming). 5 Ibid. 

6This includes disputes with 3 of 14 bordering states, and 8 of 11 neighboring states. 

7People’s Republic of China, State Council, The National Defense Report, October 2000 op cit. 

2.

fense and for Asian missile defense involving Japan, South Korea, and potentially 

other countries. 

Since 1990: Increased Aggressiveness Despite Export-led Economic Growth 

Since 1980, China has had open access for its exports to the U.S. and other major 

democracies (while keeping restrictions on access to its market). Economic benefits 

for China from 1990 to 2002 have included a cumulative trade surplus with the 

U.S., Japan, and the EU greater than $1.1 trillion (of which $612 billion is with the 

U.S.), foreign direct investment exceeding $320 billion, and western economic assistance of more then $60 billion, all contributing to significant economic growth. These 

Chinese trade surpluses have led to its accumulation of more then $330 billion in 

hard currency reserves.4

Instead of these benefits from the democracies leading to a more peaceful and less 

politically repressive China, the opposite has occurred. During the 1990s there was 

a deepening of political and religious repression within China and an acceleration 

of military modernization in nuclear weapons, missiles, and other advanced weapons.5

China has spoken about building peaceful relations but in fact has often been coercive since 1990. It has territorial disputes with eleven of twenty-five bordering 

and neighboring states; 6 continues to transfer technology for weapons of mass destruction to potentially aggressive dictatorships which are also state sponsors of terrorism; has conducted large scale military espionage and covert influence operations 

against the United States and other countries; and, has failed to keep many of the 

arms limitation agreements it has signed. It is the pattern of actions by communist 

China and China’s own official pronouncements that indicate its purpose is to seek 

dominance, first in Asia and then more widely in the world. 

Reasons for China’s Pursuit of Dominance in Asia and the World 

The history of the twentieth century demonstrates that it is the inclination of political democracies to seek international security through conflict resolution, conflict 

prevention, and defensive alliances. In contrast, ideological or expansionist dictatorships such as the regime in China seek international security through the domination and the neutralization of potentially threatening governments. As the 21st century began, the government of China defined the world situation as follows:

. . . in today’s world, factors that may cause instability and uncertainty have 

markedly increased. The world is far from peaceful. There is a serious disequilibrium in the relative strength of certain countries. No fundamental change has 

been made in the old, familiar and irrational international political and economic 

order. Hegemonism and power politics [the actions of the United States] still exist 

and are pursuing and developing further in the international political, economic, 

and security spheres. Certain big powers [the United States] are pursuing 

neointerventionism, neogunboat policy, and neo-economic colonialism, which are 

seriously damaging the sovereignty, independence, and developmental interests of 

many countries and threatening world peace and security.7

This negative assessment echoed accusations also made publicly by the thenPresident Jiang Zemin of China. These are the public declarations of the private 

conclusions reached by the Chinese communist rulers in 1990, following their repression in Tiananmen Square. To protect itself from the actions of the United 

States defined as hostile ‘‘neointerventionism,’’ ‘‘neogunboat diplomacy’’ and ‘‘neoeconomic colonialism,’’ China seeks to become dominant for a number of reasons. 

1. Preserve the Power of the Chinese Communist Party 

The first reason China seeks international dominance is to preserve the power of 

the communist party and its unquestioned rule. The Party leadership has been concerned since the 1950s about what it perceives to be an American plot of promoting 

‘‘peaceful evolution’’ from communist dictatorship to democracy. It believes that the 

United States and the democracies caused the end of communist rule in Eastern Europe and the unraveling of the Soviet Union. Speaking publicly in June 2000, President Jiang Zemin reflected these concerns when he said: ‘‘Our struggle to fight 

against western hostile forces infiltrating and seeking to overthrow [the Party] is 
103

8 Agence France Press, 18 July 2000. 

9David Sanger, ‘‘U.S. Would Defend Taiwan, Bush says,’’ New York Times, April 26, 2001, 

A1. 10Pillsbury, 2000, op. cit. ch. 5, Geopolitical power calculations. 11Graph based on information contained in Appendix A at the end of this testimony Oil Production and Demand History and Projections. 12 Robert A. Manning, The Asian Energy Factor, New York, Polygrave, 2000, 104. 

a long and a complicated struggle that at times will be very intense.’’ 8 A few 

months later, the Chinese leadership witnessed the people of Serbia removing the 

long established communist dictatorship of that country (1945–2000) through an essentially peaceful popular uprising that some believed was secretly encouraged and 

aided by the United States and other democracies. 

2. Counter the Military Power of the United States and its Allies 

China’s second concern is the military power of the United States which is perceived as limiting its ability to take control of Taiwan and attain its other territorial 

aims in Asia. It is this military power which permits the U.S. virtually alone in the 

world to announce the sale of a large number of defensive weapons to Taiwan on 

April 23, 2001, followed the next day by the statement of President George W. Bush 

that if China attacked Taiwan, the U.S. would do ‘‘whatever it took to help Taiwan 

defend itself.’’ 9 This military power was demonstrated in the 1991 Gulf War, in the 

2001 removal of the Taliban and in the 2003 removed of the Saddam Hussein regime in Iraq. It is inherent in the U.S. arsenal of 6,000 strategic nuclear weapons, 

and in its system of alliances. 

3. Ensure Access to Economic Resources 

A third reason for China to seek dominance is to ensure its continued economic 

modernization and growth. Chinese strategists have defined ‘‘comprehensive national power’’ to include the political will and leadership of a country, its economic, 

scientific, and technological resources and development as well as its military capabilities.10 China’s involvement with the world economy since 1978, its rapid economic growth and enormous success in developing contemporary and advanced civilian and military technology all have made clear to the communist leadership that 

access to the economic, technological, energy and mineral resources of the world are 

essential to its future success. 

Table 1: China: Oil Production Versus Demand11

Oil imports are an example of China’s inevitably growing dependence on resources 

from abroad. In the year 2000, China used about 4 million barrels of oil a day and 

produced about 3 million barrels a day.12 A comprehensive analysis by Robert A. 

Manning concluded that China’s energy production may increase slightly in the next 
104

13 Ibid. 14World Oil Consumption by Region, Reference Case, 1990–2025 From International Energy 

Outlook 2003 by the Energy Information Administration Department of Energy http://

www.eia.doe.gov/oiaf/ieo/tblla4.html. (All figures are represented in Million of Barrels per 

Day.) 15World Oil Production Capacity by Region and Country, Reference Case, 1990–2025 from 

International Energy Outlook 2003 Energy Information Agency Department of Energy http://

www.eia.doe.gov/oiaf/ieo/tblld1.html. (All figures are represented in Million of Barrels 

per Day.) 16David G. Winncek, The South China Sea Dispute: Background Briefing, February 11, 1999, 

Manuscript, 2. Other useful sources on this issue include: John H. Nore with David Gregory, 

Chokepoints: Maritime Economic Concerns in Southeast Asia, Washington, DC, National Defense 

University Press, 1996; and Scott Snyder, The South China Sea Dispute: Prospects for Preventive 

Diplomacy, U.S. Institute of Peace, Washington, DC, August 1996; and the article by Rublee 

cited earlier. 17Winncek, op cit., 4. 

years but that its oil and other energy import requirements will rise steadily as China’s economy continues to expand and becomes more developed and as more motor 

vehicles are used. The economy of China has been growing by more than 7% annually for many years. Assuming that in the next years China’s economy grew at a 

rate of about 5.5%, China is estimated to need to import about 4 million barrels of 

oil a day by 2010 and 6 million barrels of oil a day by 2020.13

Despite the leveling off in domestic Chinese oil production and its growing economy requiring more oil, the U.S. Department of Energy estimates that the total 

global demand for oil will increase to approximately 119 million barrels per day by 

2025.14 However, global production for that same year is expected to be at 124 million barrels per day which is double the number of barrels in the current reserve 

capacity.15 China therefore has no objective need to be concerned about access to 

available oil resources through the international oil market. However, it is also very 

possible that in spite of the market realities that China’s leadership is likely to continue seeking guaranteed access and exclusive control over foreign oil resources. 

China has witnessed economic sanctions imposed under U.S. leadership on Serbia, 

Iraq, Iran, North Korea, and Cuba. China also experienced the negative effects of 

the temporary reduction in economic assistance and benefits imposed by the United 

States, Japan, and other countries after the Tiananmen massacre. For the Chinese 

regime, the best way to avoid the potential of future economic denial may be an extensive program combining geopolitical influence building and geoeconomic positioning. It has been seeking positions of dominance and political influence such that 

no major power would consider denying China the resources that it considers vital 

for the functioning of its economy and society. Examples of this include China’s systematic efforts to have positions of potential control on a number of key international shipping routes such as its South China Sea claims, its naval bases in 

Myanmar/Burma, its control of ports at both ends of the Panama Canal, and its control of major port facilities in the Bahamas, Rotterdam and the Suez Canal. (See 

map 1 following.) 

With these perspectives in mind, we now turn to a discussion of China’s 

geostrategy and energy needs in five regions of the world. 

I. South China Sea/‘‘First Island Chain of Defense’’

Since 1992, China has again explicitly declared the South China Sea to be its sovereign territory, although these are international waters with vital sea-lanes. To enforce its offshore territorial claims, China has occupied disputed islands by force 

which has involved threats against the Philippines, Japan, Vietnam, and Indonesia. 

There are two main island groups in the South China Sea: the Paracel Islands 

are in the northern part, about 200 miles from the coast of Vietnam and they are 

claimed by Vietnam as well as by China. The Spratly islands are spread through 

the southern part of the South China Sea and include about 100 small islets, sand 

bars, reefs, and rocks, comprising a total area of no more than 1.8 square miles in 

a vast ocean.16 While China claims all the Spratly islands, they are also claimed 

by Vietnam, which currently occupies 27 of the 100; the Philippines, which occupies 

8, Malaysia which occupies 3; Taiwan which occupies 1, while China currently occupies 7.17 To date, there has been no definitive international arbitration of these competing claims. 

In February 1995, the Philippines revealed that one of the Spratly Islands, named 

Mischief Reef, which was 150 miles from its island of Pelawan, and nearly 1,000 

miles from mainland of China, had been occupied by China. In May 1995 the Clinton Administration privately told the Philippines not to invoke the mutual defense 

treaty. Instead the U.S. urged diplomacy and officially stated that it has:
105

18Department of State, ‘‘United States policy on the South China Sea,’’ May 1995. 19 Ibid. 20 Admiral Dennis C. Blair, ‘‘U.S. Security Concerns in Asia,’’ Testimony Before the House 

International Relations Committee, Subcommittee on Asia and the Pacific, March 8, 2000, 19–

20. 

. . . an abiding interest in the maintenance of peace and stability in the South 

China Sea. The United States calls upon claimants to intensify efforts to address 

issues related to competing claims, taking into account the interest of all parties 

and which contribute to peace and prosperity in the region. The United States is 

willing to assist in any way the claimants deem helpful. The United States reaffirms its welcome of the 1992 ASEAN declaration on the South China Sea.’’ 18

That formal pronouncement by the Department of State was ignored by China. 

In turn, the United States mostly ignored China’s further aggressive actions. 

Yet, the May 1995 U.S. statement provides a preview of possible conflict with 

China in addition to that which might occur about Taiwan. The United States totally rejected the Chinese claim of sovereignty over the South China Sea and said 

further:

Maintaining freedom of navigation is a fundamental interest of the United 

States. Unhindered navigation by all ships and aircraft in the South China Sea 

is essential for the peace and prosperity of the entire Asia-Pacific region, including 

the United States. . . . The United States would . . . view with serious concern any 

maritime claim or restriction on activity in the South China Sea that was not consistent with international law. . . .19

Testifying to the U.S. Congress in March 2000, the then Commander in Chief of 

U.S. Forces in the Pacific, Admiral Dennis C. Blair, said that in addition to their 

Taiwan claims, ‘‘Chinese authorities have also claimed sovereignty over the South 

China Sea. The resulting uncertainty over Chinese intentions in using force to resolve territorial claims creates concerns throughout the Asia Pacific region.’’ 20

The effect of continuing acquiescence in these Chinese claims and actions could 

be to cede China de facto control over the islands in the South China Sea. China 

could then use the sovereign rights under international law over waters extending 

to twelve miles from land boundaries and the economic exclusion zone of 200 miles 

from the land border recognized under the 1982 United Nations Law of the Sea in 

order to essentially establish large domains of sovereign control from the many 

Spratly islands and Paracel islands that might in effect give it operational or economic control over much of the South China Sea. 

Map 1: Vital Sea Lanes 21
106

21 ‘‘China’s Worldwide Quest for Energy Security,’’ International Energy Agency, 2000. 22Testimony of Admiral Prueher, CINCPAC as cited in Washington Times. 23 As discussed in, C. Menges ‘‘The China Puzzle,’’ The Washington Post, March 5, 2000. 24 John Lewis and Xue Litai, China’s Strategic Seapower, Palo Alto, CA Stanford University 

Press, 1994, 226–230. 25 Erica Strecker Downs, ‘‘China’s Quest for Energy Security,’’ Santa Monica, California: Rand 

Corporation, 2000. 

China has acted and spoken in a tone of belligerent entitlement in pressing its 

claims in the South China Sea and to the Paracel and Spratly islands. China has 

used force and has made clear that it is willing to use more force in the future if 

the other claimant countries fail to acquiesce in China’s purposes. Control of the 

South China Sea would facilitate China’s dominance of Asia, since U.S. ships and 

aircraft as well as those of Japan, South Korea and other countries would have to 

have Chinese permission to transit the South China Sea, a major supply and transit 

route. It is estimated that 50% of world commerce and more than 41,000 ships annually transit the South China Sea (in comparison with about 4,000 ships transiting 

through the Panama Canal each year).22 If China controlled the South China Sea 

it could decide which country’s ships could transit and which could not, and thereby 

it would have a means to exert political pressure on Japan, South Korea, and other 

countries in the region that depend on supplies moving through the South China 

Sea for their energy and commercial deliveries. Energy and other supplies could be 

transported around the South China Sea but this would increase costs.23

Such a coercive use of control over the South China Sea would be consistent with 

the new Chinese geopolitical doctrine of the ‘‘first island chain of defense.’’ This was 

advanced as a strategic concept in the 1990’s by General Liu Huaqing, a close associate of Deng Xiaoping, Vice Chairman of the Central Military Commission and 

member of the Politburo elite until his retirement in 1997. The first island chain 

of defense doctrine holds that to be secure China needs to control the entire region 

off its shores in a line from Japan to Taiwan and the Philippines.24

In addition to this geopolitical purpose, dominance over the South China Sea and 

other adjacent waters could help China meet its future energy needs. Current estimates are that there could be 8 billion barrels of oil beneath the waters of the South 

China Sea within the internationally recognized exclusive economic zone of China. 

This could mean large additional energy resources in the entire South China Sea. 

The following table summarizes the estimated 29 billion barrels of oil within the 

recognized Chinese Economic Exclusion Zones within the four adjacent seas. In all 

these situations it is probable that large additional reserves also exist under waters 

claimed by Japan and other regional states within their economic exclusion zones.

Table 2: China Offshore Oil Resources 25

Domestic Holding Proven/Reported Reserves 

South China Sea 

(including the Taiwan 8 Billion Barrels 

Strait) 

Yellow Sea 4.5 Billion Barrels

Bohai Gulf 4.5 Billion Barrels

East China Sea 12 Billion Barrels 

II. Central Asia

The unraveling of the Soviet Union in 1991 opened new opportunities for China 

to establish relations with the newly independent-post Soviet States of Central Asia. 

Year by year, but gradually and carefully, China expanded its political economic relations with the Central Asian states directly on its border and continued the talks 

it had been conducting with the USSR on the demarcation of those borders. By 1995 

China had begun a regular series of summit meetings with the leaders of 

Kazakhstan, Kyrgyzstan, Uzbekistan, Turkmenistan, and Tajikistan. 

In 1996, Russia was invited to join in these gatherings usually held in Shanghai 

and then in June 2001, the Presidents of China, Russia and four Central Asian 

states established a political-security alliance which they named the Shanghai Cooperation Organization and which President Jiang Zemin called the ‘‘Shanghai 

Pact.’’ This alliance treaty includes: political, economic, and security aspects. 

China’s purposes in establishing this alliance included:
107

26 ‘‘China’s Worldwide Quest for Energy Security,’’ International Energy Agency, 2000. 

1. an effort to assure normal and friendly relations with states on its borders for 

security reasons; 

2. using these relations to bring Russia closer to its geopolitical purposes while 

also reassuring Russia; and 

3. increasing access to and the security of its energy supplies from Central Asia 

as well as from the Middle East.

The proposed energy pipeline from Kazakhstan will transit directly into China. 

In addition, the proposed overland pipeline from Iran to China would first traverse 

Central Asia. (See the following map.) 

Map 2: Proposed Central Asian Pipelines 26

III. The China Russia Alliance

The relationship between Russia and China went from alliance in the 1950s to 

deep hostility from 1960 to 1985 followed by gradual normalization during the 

Gorbachev years. After 1991, Yeltsin continued talks on defining the 2,000-mile border but kept a political distance because China remained communist, had publicly 

endorsed the 1991 coup attempt by Soviet communist hardliners and also opposed 

Yeltsin’s democratic aspirations. 

However, in April 1996, Yeltsin changed this policy and at China’s urging agreed 

to a ‘‘strategic partnership’’ with China. This meant foreign policy cooperation and 

increased Russian weapons sales. Through a series of regular summit meetings, 

China moved the ‘‘partnership’’ with Russia toward strategic alignment marked by 

an ever larger component of shared anti-U.S. political objectives (e.g., support for 

dictatorships in Serbia, Iraq, Iran, and opposition to U.S. missile defenses) along 

with increased Russian military sales and military cooperation. 

In July 2001, Presidents Putin and Jiang signed a treaty of alliance, which formalizes and expands Chinese-Russian strategic coordination. While the treaty states 

that it ‘‘is not aimed at any third country,’’ it explicitly seeks to promote a ‘‘new 

international order.’’ This is the phrase China and now Russia use to describe international politics when the United States no longer has or seeks what they have 

jointly called ‘‘unilateral military and security advantages.’’

China-Russia: Their Two-level Strategy Toward the U.S. 

After the terrorist attack on the U.S. of September 11, 2001, Russia provided extensive and welcome cooperation as the U.S. moved in Afghanistan against international terrorists who were also arming groups attacking Russia and to a lesser 
108

27 C. Menges, ‘‘Russia, China and What’s Really on the Table,’’ The Washington Post, July 29, 

2001. 28Michael Lelyveld, ‘‘Russia: Moscow Sees No Profit In Japan Oil Line,’’ Radio Free Europe 

Radio Liberty, 04/15/2003. 29 ‘‘Putin prefers oil pipeline to Japan, not China,’’ Associated Press, 06/20/03. 30Le-Min Lim and Eduard Gismatullin, ‘‘Russia rethinks China pipeline venture,’’ Bloomberg 

News, 09/18/2003. 31 Ibid. 32 ‘‘Russia delays China pipeline deal,’’ BBC, 09/24/2003. 33Sergei Blagov, ‘‘Putin pushes his case at APEC,’’ Asia Times, 10/18/2003. 34 Erica Strecker Downs, Op. Cit.

extent China. China also provided some modest cooperation, though it was and remains extremely concerned about U.S. force deployments in Central Asia. 

Nevertheless, China and Russia have continued to pursue a two-level strategy toward the United States. First, the two countries maintain a sense of normal relations with the United States and other democracies so that they will continue providing China and Russia with vitally needed economic benefits. For example, since 

1992 Russia has received more than $150 billion in U.S., western and international 

economic aid; from 1990 to 2002 China obtained more then $1.4 trillion in economic 

benefits from the U.S., EU, and Japan. 

At the second level, Russia and China are using mostly political and covert means 

to oppose the United States selectively on security issues including by providing 

support and weapons of mass destruction/ballistic missiles components and expertise to hostile regimes which the U.S. judges to be state sponsors of terrorism such 

as Iran, Libya, and North Korea.27

Other negative aspects include: Russia’s continued sales of advanced weapons to 

China, which aims these at U.S. forces in the Pacific—since 1998 about $18 billion 

have already been sold with an estimated $20 billion more scheduled through 2004. 

And the political and military-to-military relationship with communist China is 

strengthening authoritarian trends within Russia. 

China has pursued the new relationship with Russia in an effort to bring Moscow 

to its side on as many issues as possible while moving Russia away from the United 

States. It has also seen the new alliance with Russia as a means to have access to 

Central Asian and Russian energy supplies. For example in July 2001 President 

Putin and Jiang signed an agreement on the establishment of a 600,000 barrels a 

day oil pipeline between Russia and China (which has yet been realized).28 Russia 

with 49 billion barrels in oil reserves (2002) could be an important energy supplier 

for China. 

Beginning in October 2002, Japan began buying Russian oil for the first time 

since 1978, and offered to finance the building of a pipeline to the Russian port of 

Nakhodka for exports of Russian oil and gas to Japan. Discussions continued in 

2003, concerning a Russian pipeline for energy exports to both Japan and China. 

Then, on June 20 2003, Russian President Vladimir Putin said he ‘‘would prefer 

Russia built an oil pipeline to the Pacific coast near Japan over a proposed link to 

China. . . . [Putin] added he considered the project more flexible than a pipeline ending in Daqing, China.’’ 29

Liu Hongbin, a director general of the Chinese company’s publicly traded unit, 

PetroChina, said ‘‘The Daqing route has definitely been delayed. Now, we have to 

see how Russia wants to proceed with this project.’’ 30 This after a July 2003 visit 

by Japan’s Agency of Natural Resources and Energy with promises of not only financing a potential pipeline but also assisting in the development of Siberian oil 

fields.31

On September 24th 2003, the Russian Prime Minister announced that Russia will 

‘‘honor the agreement on establishing a pipeline to Daqing for China.’’ 32 This announcement came on the eve of the China-Russia bilateral summit followed by the 

meeting of the Shanghai Cooperation Organization. Nevertheless, at the October 

2003 APEC summit meeting Japan ‘‘offered a financial package worth US$7 billion 

in assistance for Russia in return for the oil pipeline being used to provide oil for 

Japan.’’ 33 This competition between China and Japan for access to Russian energy 

supplies has not yet been resolved and undoubtedly increases China’s interest in securing guaranteed access to oil in other regions. 

IV. The Middle East

In 1998, China imported 61% of its oil, from the Middle East, a proportion that 

is expected to rise to as high as 80% by 2010.34 The following table indicates the 

amounts supplied to China by various Middle Eastern countries in 2002. 
109

35 ‘‘Global Reliance on Mideast Gulf Oil,’’ Energy Intelligence, 2003. 36Le-Min Lim and Eduard Gismatullin, ‘‘Russia rethinks China pipeline venture,’’ Bloomberg 

News, 09/18/2003. 37Statement distributed by the Office of Congresswoman Nancy Pelosi, June 1998. 38Statement of Director of Central Intelligence George J. Tenet before the Senate Select Committee on Intelligence on the ‘‘Worldwide Threat 2001: National Security in Changing World,’’ 

February 7, 2001, and Statement of the Director of the Defense Intelligence Agency Vice Admiral Thomas R. Wilson, ‘‘Global Threats and Challenges Through 2015,’’ February 7, 2001. 

Table 3: Chinese: Oil Sources in the Middle 

East 35

Countries 

Volumes 1,000

b/per day 

Reserves in

Billions of Barrels 

Saudi Arabia 245 261.7

Kuwait 23 96.5

Iran 229 89.7

Oman 173 —

Iraq 12 112.5

Qatar 10 —

Yemen 49 —

Total: 741 560.4

Clearly China has the economic means to purchase oil from responsible Middle 

Eastern countries. However, for geostrategic reasons as well as to have preferential 

access to energy supplies China has established very close relations with terrorist 

sponsoring countries such as Iran, Libya, and formerly, Saddam’s Iraq. 

Iran and Saddam’s Iraq 

China’s current imports from Iran are about 229,000 barrels per day but it intends to increase this significantly once the over land pipeline through Central Asia 

has been completed. After opposing Iran’s development of nuclear weapons, Japan 

lost the exclusive right to develop the new Azadegan field in Iran which is now 

being opened up to European and Asian firms including Chinese firms.36

In 1980, Iraq invaded Iran and began an eight year long conflict which caused 

two million dead and wounded on both sides. In that war, both sides attacked with 

short-range ballistic missiles and sought to develop nuclear, chemical, and biological 

weapons for use against the other. 

China sold weapons to both Iran and Iraq during and after the war. These military sales by China provided hard currency earnings for the Chinese military industrial complex and a means of developing close relations with two oil-rich dictatorships, which could help to meet China’s oil needs, in the present and future. Both 

Iran and Iraq wanted to develop increasingly destructive weapons for mutual deterrence or battlefield use if another war should occur. They were also both hostile to 

the United States and its allies in the region. 

In 1990 Iraq invaded Kuwait. The United States led a broad coalition in 1990–

91 to enforce UN Security Council resolutions requiring Iraq to withdraw from Kuwait. This meant that the United States and several of its NATO allies had to face 

the possibility of dealing with an opponent that might use chemical, or biological 

weapons as well as ballistic missiles. 

In 1997 the Office of Naval Intelligence stated: ‘‘discoveries after the Gulf War 

clearly indicate that Iraq maintained an aggressive WMD [weapons of mass destruction] procurement program. A similar program exists today in Iran, with a steady 

flow of materials and technologies from China to Iran. This exchange is one of the 

most active WMD programs in the third world. . . .’’ 37 In succeeding years, the public 

congressional testimony of the Director of Central Intelligence, and the Director of 

the Defense Intelligence Agency indicated that China and Russia continued the active proliferation of weapons of mass destruction technology, expertise and components to a number of hostile and potentially dangerous countries including Iran, 

Iraq, and North Korea.38

Although the Saddam Hussein regime in Iraq did fire a number of ballistic missiles in 1991, it was deterred by threats of massive retaliation from using chemical 
110

39Due in significant part to the reports of Bill Gertz in The Washington Times and Jeff Gerth 

in The New York Times, and the public reports mandated by the U.S. Congress as discussed 

earlier. 40Testimony of Thomas R. Wilson, February 7, 2001, 14, op cit. 41 CIA, op cit. August 9, 2000. 42 Bill Gertz, Washington Times, February 2001. 43Wisconsin Project on Nuclear Arms Control, U.S. Exports to China, 1988–98: Fueling Proliferation, Washington, DC, April 1999, Chart: China’s Dangerous Exports. 

or biological warheads. But the fact that 400,000 U.S. and allied troops had faced 

this threat for many months added impetus to the expressed policy of the first Bush 

Administration that preventing the spread of these weapons of mass destruction 

and the means to deliver them was one of the highest priority concerns of U.S. foreign policy. 

As China shifted in 1990 to the view that the United States was its ‘‘main 

enemy,’’ it viewed the sale of components for weapons of mass destruction and the 

sale of technical assistance in building these to Iran, Iraq, North Korea, Syria, Libya 

and other states hostile to the United States, as not only financially profitable but 

also a way to strengthen the enemies of its ‘‘main enemy.’’ During the 1990s a great 

deal of government information became public in the United States about first Chinese and then later Chinese and Russian activities in transferring weapons of mass 

destruction to the main state sponsors of terrorism.39

During the 1990s and since, China has provided Iran with ballistic missile components as well as air, land and ship-based cruise missiles. By 2001, the Director of 

DIA, testified that ‘‘these along with Iran’s submarines, mines, and missile patrol 

boats can attack ships including U.S. Naval forces in the Middle East and stem the 

flow of oil from the [Persian Gulf] for brief periods.’’ 40 China also sent Iran key ingredients for the development of nuclear weapons, poison gas production ingredients, rocket propellants, and a ‘‘research’’ nuclear reactor. The CIA noted that in 

1999 Iran ‘‘continued to seek production technology, training, expertise, and chemicals that could be used as precursor agents in its chemical warfare program from 

entities in Russia and China.’’ 41

In 2001, the newly inaugurated Bush Administration publicly accused Chinese organizations of breaking UN Security Council prohibitions by providing advanced 

fiber optics support for the military command and control systems of Iraq.42 During 

the 1990s, China reportedly provided ingredients that Iraq used for nerve gases, 

missiles and nuclear weapons, and China also sold Iraq chemicals that are used to 

produce missile fuel.43 There had been no United Nations inspection of Iraq since 

the autumn of 1998 when Saddam Hussein refused to cooperate any longer with the 

inspection system that had been set up under the terms of the UN Security Council 

Resolutions. As permanent members of the Security Council, China and Russia 

colluded to undo the inspection regime and to delay its resumption until November 

2002. 

The U.S. lead liberation of Iraq in 2003 ended most risks posed by that regime. 

However, Iran continues as the leading state sponsor of terrorism and is moving 

rapidly toward acquiring nuclear weapons. China continues to provide political and 

military support to that clerical dictatorship for both strategic and energy related 

reasons. 

V. Latin America

There is an emerging pro-Castro axis in Latin America which has largely escaped 

public and official notice. China is not the cause of this trend, but it is a close political and military ally of the Castro regime in Cuba which is working with its allies 

in the region to bring this about. The following chart summarizes my perspective 

that the pro-Castro axis now includes four countries with a combined population of 

223 million which also produce 5 million barrels of oil daily and have an estimated 

84 billion (2000) barrels in reserve. The table also shows other countries risk.

Table 4: South America: The New Pro-Castro Axis and Countries at Risk 

Country 

Population,

millions

(2001) a

GDP,

$ billions

(2001) a

Per Capita

GDP a

Oil Production

(Millions of

barrels a day)

(2000) b

Est. Oil Reserves

(Billions of

barrels)

(2000) b

Cuba * 11 26 2,300

Venezuela * 24 146 6,100 3.3 73
111

44 Juan Benemeles, Cuba: Assessing the Threat to U.S. National Security, Cuban American 

National Foundation, Washington, DC, 2002. 45 Ibid. 46 ‘‘Iran and Cuba bolster ties, strengthen anti-U.S. solidarity,’’ Agence France Presse, May 10, 

2001, available online at http://www.canf.org/News/archived/010917newsa.htm. 

Table 4: South America: The New Pro-Castro Axis and Countries at Risk—

Continued

Country 

Population,

millions

(2001) a

GDP,

$ billions

(2001) a

Per Capita

GDP a

Oil Production

(Millions of

barrels a day)

(2000) b

Est. Oil Reserves

(Billions of

barrels)

(2000) b

Brazil * 175 1,130 7,400 1.4 8.1

Ecuador * 13 37 3,000 0.4 3

Subtotal * 223 1,339 5.1 84.1

Argentina 37 453 12,000 0.8 3.1

Bolivia 8 20 2,500 [negligible] [negligible]

Paraguay 6 26 4,600 [negligible] [negligible]

Peru 27 123 4,500 0.1 0.3

Colombia 40 250 6,250 0.8 2.3

Total 341 2,211 6 90.1

* Indicates regimes in the pro-Castro Axis. 

a CIA World Factbook, 2002. 

b ‘‘World Production of Crude Oil,’’ Department of Energy, 2001. 

During the 1990’s, China established ever closer political and military relations 

with the Cuban regime including a military accord in 1999 and obtained facilities 

for espionage against the United States and other targets on Cuban territory. For 

China the primary benefit of this emerging pro-Castro axis is to weaken and distract the United States as it faces partially hostile governments on its southern border. In addition however, as regimes friendly to Cuba and China take control of 

countries with significant energy resources—such as the Chavez regime in Venezuela—China can expect to have preferential or guaranteed access to those energy 

resources. 

A New Castro Strategy

Since 1959, the Castro regime in Cuba has been using political means as well as 

covert action, terrorism and insurgency to bring anti-U.S., radical regimes to power 

in the Western Hemisphere and other regions. 

In 2002, a high level defector from Cuban intelligence wrote, ‘‘Cuba’s espionage 

apparatus (the DGI), one of the largest and most efficient on the planet, with more 

than 10,000 spies, has been active on a global scale. The DGI rapidly [learned] . . . 

undercover operations, . . . cryptography, falsification of documents, training of 

operatives, theft of secret information, [establishing] illegal centers, the penetration 

of governments and armed forces, disinformation, assassination of political figures. 

. . .’’ 44

Furthermore, Cuba trained more than 30,000 terrorists from various continents 

of which 10,000 were from Latin America, with the rest being operatives from the 

Middle East and Europe.45 Castro’s terrorist/insurgent methods mostly failed in 

Latin America, except in Colombia where the threat from the communist insurgency 

continues and has increased. However, the 10,000 DGI personnel and many of the 

30,000 Cuban-trained terrorists provide the cadre for Castro’s new strategy. 

Castro’s intentions have not changed since 1959, or since the end of the Cold War. 

In 2001, during a visit to Iran, Castro said ‘‘The people and the governments of 

Cuba and Iran can bring the United States to its knees.’’ 46 In 1990, Castro initiated 

the Forum of Sao Paulo with Lula da Silva as its Chairman. This organization is 

a successor to Castro’s Tricontinental Congress which, beginning in 1966, increased 

collusion among terrorist organizations from Latin America, the Middle East and 

Europe. The Forum of Sao Paulo also convenes all the communist parties and terrorist organizations of Latin America, along with terrorist organizations from the 
112

47 Adolpho Joa ̃o de Paulo Couto, A Face Oculta da Estrela: Retrocesso, Falsidade e Iluusoes, 

Gente do Livro, Porto Alegre, Brazil, 2001, 57. This book is a history of the Brazilian Worker’s 

Party, referring to the white star on its red flag. 48Magali Rey Rosa and Martin Rodriguez, ‘‘La Izquierda se Reune en Antigua: El XI Foro 

de Sao Paulo Convoca a Diversos Personajes de Izquierda de Los Cinco Continentes,’’ Prensa 

Libre, December 1, 2002, available online at http://www.prensalibre.com/; ‘‘Leftists Open Havana 

Meeting,’’ The Orlando Sentinel, December 5, 2001. 

Middle East and Europe, as well as representatives from Iraq, Libya, North Korea, 

China, Laos, and Vietnam. (See list at Appendix B.) 

The main theme of the First (1990) and Fourth (1993) annual meetings of the 

Forum of Sao Paulo was that ‘‘our losses in Eastern Europe will be offset by 

our victories in Latin America.’’ 47 This was an explicit indication of its solidarity with communist regimes and of Castro’s future intentions, which in fact are 

being realized. 

Participants at the 2001 Forum meeting in Cuba and the December 2002 meeting 

in Guatemala included communist and radical parties from nearly every state in 

Latin America—including the Worker’s Party of Brazil and Chavez’s MVR of Venezuela; Latin American terrorist groups like the FARC, ELN, MIR, M19, Tupac 

Amaru and global terrorist groups like the IRA, ETA, and Popular Front for the 

Liberation of Palestine-General Command. In December 2002, as in most past years, 

there were representatives from supportive regimes such as Saddam Hussein’s Iraq, 

Libya (both of which have had connections to Cuba and its allies during and after 

the Cold War) and the communist regimes of North Korea, Laos, Vietnam, and 

China.48

During the 1990s, Castro decided on a new strategy: helping radical political leaders friendly to him take control of their countries by winning national elections in 

which they present themselves as ‘‘populists,’’ opposed to corruption, while concealing their ultimate purposes. This new Castro method has four components:

1. Providing propaganda and political support openly and covertly to radical, proCastro leaders, not officially members of any communist party, who would run 

for the Presidency of their countries. They would avoid Marxist-Leninist rhetoric and instead favor ‘‘populism’’ and oppose ‘‘neoliberalism,’’ expressing the 

Castro ideological agenda in more neutral terms. 

2. These pro-Castro, democratically elected Presidents would then use the Chinese communist approach of pursuing a two-level international strategy. One 

level would involve normal relations with all countries and with foreign and 

especially U.S. economic interests. They would favor international trade and 

business relations and encourage foreign investment, all of which would both 

provide useful income for the regime and assure a friendly voice about it from 

the foreign business and international financial community. 

3. At the second level, while professing to seek ‘‘good relations with all countries,’’ 

these radical pro-Castro Presidents would seek to help other pro-Castro groups 

take power by working with radical or communist political and armed groups 

in Latin America such as the FARC, ELN, and others in the Forum of Sao 

Paolo; with state sponsors of terror such as Cuba and Iran as well as with communist regimes like China and North Korea. 

4. Step by step, these pro-Castro Presidents would use pseudo-constitutional 

means to consolidate their rule internally and make it irreversible. 

Chinese Activity in Latin America

Communist China and Cuba formalized their growing relationship with a military 

agreement in 1999. In the same year, Lula da Silva’s Brazilian Worker’s Party formalized party-to-party relations with the Communist Party of China. 

In Late 2000, China and Venezuela established a close military relationship that 

has expanded since. In the last two years, reports of Chinese military personnel in 

Venezuela have become more frequent. 

Soon after Lula da Silva took office in July 2003 as President of Brazil, the Chinese-Brazilian strategic and military relationship grew, with a permanent Chinese 

military staff arriving in Brazil shortly after inauguration. 

Other forms of cooperation have increased simultaneously. Lula declared a ‘‘strategic partnership’’ with China in May 2003. Since then, Brazil has undertaken to 

forge relations with China through Mercosur, the G–22 and in partnerships involving satellites and aerospace technology transfers to China. 

The President of Ecuador, Col. Lucio Gutierrez, is a part of the Pro Castro Axis 

and made a state visit to China in September 2003. Ecuador and Venezuela have 

completed oil deals with Chinese Oil Company SINOPEC and the Chinese government. 
113

VI. Policy Suggestions—Realistic Engagement

For nearly a quarter century U.S. policy towards China has been one that can 

be termed ‘‘unconditional engagement.’’ The hope, repeated by Presidents of both 

major political parties was that free trade would bring political freedom to China 

and lead to its becoming evermore cooperative internationally. 

This has not occurred and since 1990 China has both again defined the U.S. as 

its ‘‘Main Enemy’’ and has used the increased wealth from its one-sided unfair trade 

with the U.S. and other democracies to support an ever expanding military and a 

strategy which can be called one of domination through stealth. 

This requires realism and prudence on the part of the U.S. The U.S. should pursue a strategy of ‘‘realistic engagement’’ with China which would include the following:

1. strengthening defensive alliance relationships with friendly countries in Asia; 

2. deploying Asian regional missile defenses and a U.S. national missile defense; 

3. opposing the use of force and coercion by China in all of its territorial disputes 

including that with Taiwan; 

4. a policy of strict reciprocity in trade, which permits China, with its restricted 

market access, to sell only as much in the U.S. market as the U.S. may sell 

in China unless China ceases its strategic nuclear buildup, its proliferation of 

weapons of mass destruction, and implements the human rights commitments 

to which it has obligated itself; 

5. the U.S. should consider multilateral agreements which would provide China 

reassurance for its future access to energy supplies under normal market conditions provided that the conditions stated in item 4 are met.

It should be understood and communicated to China that there are enough energy 

supplies for all countries and that reasonable projections to 2025 indicate total 

world energy capacity of 125 mbpd and total world wide demand of 119 even without considering the 280 billion barrels of sand-based oil which will become available 

in Canada as a result of new extraction technologies. A peaceful and cooperative 

China would be assured of adequate energy resources for the future.
114

49World Oil Production Capacity by Region and Country, Reference Case, 1990–2025 from 

International Energy Outlook 2003, Energy Information Agency, Department of Energy, http:/

/www.eia.doe.gov/oiaf/ieo/tblld1.html (All figures are represented in Million of Barrels 

per Day.) 50World Oil Consumption by Region, Reference Case, 1990–2025 from International Energy 

Outlook 2003 by the Energy Information Administration, Department of Energy, http://

www.eia.doe.gov/oiaf/ieo/tblla4.html (All figures are represented in Million of Barrels per 

Day.)

Appendix A: Oil Production and Demand History and Projections

Oil Production Capacity 49

Region/Country

History (Estimates) Projections 

1990 2001 2005 2010 2015 2020 2025

Total Persian Gulf 18.7 22.4 24.5 28.7 33.0 38.9 45.2

Total OPEC 27.2 32.6 35.1 40.7 46.3 53.9 61.8

Total Non-OPEC 42.2 46.6 49.1 53.2 57.0 59.6 62.7

China 2.8 3.3 3.5 3.6 3.5 3.5 3.4

Total World 69.4 79.2 84.2 93.9 103.3 113.5 124.5

Oil Demand50

Region/Country

History Projections 

1990 2000 2001 2005 2010 2015 2020 2025

United States 17.0 19.7 19.6 20.5 23.0 25.2 27.1 29.2

Western Europe 12.5 13.8 14.0 14.1 14.4 14.6 14.8 15.3

Japan 5.1 5.5 5.4 5.5 5.8 6.1 6.3 6.5

Total Developed Nations 38.8 44.1 43.9 45.6 49.3 52.9 55.8 59.3

Eastern Europe Former Soviet 

Union 10.0 5.2 5.3 6.1 6.8 7.2 7.9 8.8

China 2.3 4.8 5.0 5.5 6.5 7.7 9.4 10.9

India 1.2 2.1 2.1 2.3 2.8 3.5 4.5 5.5

Total Developing Nations 17.3 27.6 27.9 29.4 33.5 38.7 44.5 50.7

Total World 66.1 76.9 77.1 81.1 89.7 98.8 108.2 118.8
115

Appendix B: Members of the Forum of Sa ̃ o Paulo

Nation Party 

Argentina Frente Democracia Avanzada 

Argentina Partido Comunista Argentino 

Argentina Partido Intransigente 

Brasil Partido dos Trabalhadores 

Brasil Partido Socialista Brasileiro 

Brasil Partido Comunista do Brasil 

Brasil Movimento Revoluciona ́ rio 8 de Outubro 

Brasil Partido Popular Socialista 

Coloˆmbia Alianza Democra ́ tica M19

Coloˆmbia ELN

Coloˆmbia FARC–EP

Coloˆmbia Partido Comunista Colombiano 

Coloˆmbia Presentes por el Socialismo 

Cuba Partido Comunista 

Chile MIR

Chile Partido Comunista de Chile 

Equador Movimiento Popular Democra ́tico 

Equador Partido Socialista—Frente Amplio 

El Salvador FMLN

Guatemala URNG

Me ́xico Partido de la Revolucio ́n Democra ́tica 

Me ́xico Partido del Trabajo 

Nicara ́gua FSLN

Porto Rico Partido Independentista Puertorriquen ̃ o 

Porto Rico Nuevo Movimiento Independentista Puertorriquen ̃ o 

Porto Rico Frente Socialista 

Panama ́ Partido Revoluciona ́ rio Democra ́tico 

Peru Movimiento Revolucionario Tupac Amaru

Peru Partido Comunista Peruano 

Repu ́ blica Dominicana Alianza por la Democracia 

Repu ́ blica Dominicana Fuerza de la Revolucio ́n 

Repu ́ blica Dominicana Movimiento Izquierda Unida 

Repu ́ blica Dominicana Partido de los Trabajadores Dominicanos 

Uruguai Frente Amplio 

Uruguai Partido Comunista 

Uruguai Partido Socialista de Uruguay 

Uruguai Movimiento de Participacio ́n Popular 

Uruguai Partido Obrero Revolucionario Trotskista-Posadista 

Venezuela Partido Comunista de Venezuela 

[From Forum of Sa ̃o Paulo Website, Jan. 2003, Bold are armed terrorist groups.] 
116

51 ‘‘La Izquerda Se Reunie a Antigua: El XI Foro de Sao Paulo Convoca a Diversos Personajes 

de Izquierda de los Cinco Continentes,’’ Prensa Libre (Managua), December 1, 2002; http://

www.prensalibre.com/pls/prensa/detnoticia.jsp?plcnoticia=42357&plfedicion=01–12–02. 52 ‘‘Foro de San Pablo,’’ web document at www.asamblea.org.uy/forosp.htm; this website is for 

an intellectual project associated with leaders of Forum member Frente Amplio of Uruguay.

Members not listed on Website

Venezuela MVR Fifth Republic Movement; joined in 1995

Bolivia MAS (Movement to Socialism of coca grower Evo Morales)

Ecuador Movements associated with Lucio Gutierrez

Observer Delegations

China Chinese Communist Party 51

North Korea Korean Worker’s Party

Vietnam Vietnamese Communist Party

Laos Laoatian Communist Party (Pathet Lao)

Germany Party of Democratic Socialism [former East German Communists]

Spain ETA

Ireland Provisional IRA

Palestine PFLP-General Command

Palestine Palestinian Liberation Organization

Libya Unknown Government/Ruling Party officials

Iran Unknown Government/Ruling Party officials

Iraq Baath Party

Soviet Union [Sent representatives in 1990] 52

[Bold are communist regimes, state sponsors of terrorism or terrorist organizations.] 
117

Discussion, Questions and Answers 

Chairman ROBINSON. Thank all of you. This has been a very illuminating session. This is directed toward Dr. Calder and Mr. 

Morse, and Dr. Ebel. This notion of China accepting increasingly 

its responsibilities in a multinational context as a big emerging 

player in the energy markets, and the fact the OECD and IEA 

have a fairly elaborate mechanism to curtail price spikes of oil that 

are fueled by speculators in particular——

Dr. CALDER. Uh-huh, yes. 

Chairman ROBINSON. —in the case of disruption or crisis of one 

form or another, and you know the mechanism very well. 

It involves the building of stocks in a pre-crisis period. It also 

means the coordinated release of stocks in a manner that eludes 

the understanding of speculators if it’s done right, so that we don’t 

have another 1973 or 1979 oil price hikes. 

China isn’t there yet, as I understand it. It hasn’t built its stocks. 

It has a fairly nascent stockpiling policy. 

Dr. CALDER. Yes, definitely. 

Chairman ROBINSON. There’s a risk that China could take advantage of a shock in the oil markets by, in effect, building stocks at 

the wrong time, a kind of hoarding, and actually negate our release 

of the SPRO, for example, and comparable stocks of our other allies. 

Would a prudent recommendation for this Commission be in the 

interest of encouraging China to be a more responsible and orderly 

member of the international energy community, to accelerate its 

engagement in this kind of IEA mechanism to avoid price spikes 

and that China might be strongly urged to get on with the building 

of stocks now? 

Dr. CALDER. Yes. 

Chairman ROBINSON. And just basically moving everything to 

fast forward in terms of our working with China to bring them into 

what is a fairly established and I think effective International Energy Agency mechanism to maintain stability of world oil prices 

and supply? 

Dr. CALDER. Yes, I think that’s an excellent recommendation. On 

the technical details, I’m sure Dr. Morse is more versed. Perhaps 

what I could add in addition to a very strong support for the suggestion you make also is the notion that Japan’s role, I think, can 

be quite positive. 

As I was saying earlier, the competitive elements of the energy 

situation in the region, particularly in some sort of crisis situation, 

I think could be potentially strong, and ways of defusing that 

would be positive. Japan with 100 days has one of the largest and 

most well developed stockpile programs in the world. Korea also 

has been quite sophisticated in its management, and I think cooperation of that sort, subject exactly to the caveat that Dr. Morse 

perhaps was about to suggest, that I don’t think we want to see 

regionalism emerging, which is independent of the global system, 

but as one element in this, I think some technical assistance from 

the Japanese—they’ve already begun some—is probably good as 

long as it’s within a global context. 

Chairman ROBINSON. Mr. Morse. 
118

Mr. MORSE. Yes, I very much concur with Dr. Calder’s observations and what was implicit in your question. I believe that consistent with the obligations we and others have as members of the 

IEA and consistent with developments that have occurred in financial instruments over the past quarter of a century. There are, in 

fact, ways that could be examined that are not farfetched to bring 

China into the energy security network and the safety net that’s 

already emerged. 

And let me make two such suggestions of things that are feasible 

and not beyond the imagination. One is to have the IEA countries 

loop in emerging markets that want to be looped into their safety 

net through the sale, as it were, not of full participation but of options, insurance policy, as it were, so that for a small fee, if an 

emergency emerges, China or India or Brazil or any other large 

still importing country that so chooses can, for the price of that option, get access at the market price of the time to the strategic 

stockpiles of the IEA countries. That’s one relatively inexpensive 

way of bringing them in, and then, of course, China would be part 

of international discussions in the IEA context associated with coordinated release of stocks. 

A second approach that could be taken is an approach in which 

IEA countries decide to jointly finance and sponsor regional stockpiles, and there are places around the world, Saldanha Bay in 

South Africa is one—which could serve as an Atlantic basin and 

South Asian arena. 

Our former bases in the Philippines are another. There are areas 

in Singapore that are yet another where different IEA countries or 

the IEA countries collectively could bring in a new arrangement, 

affiliated with the IEA, making available on the same kind of option arrangement or a buy-in arrangement for these emerging markets that are not members of the IEA. And finally one could loop 

Russia into this as well by purchasing perhaps Russian oil as the 

base of the stockpiles. 

Chairman ROBINSON. Thank you. 

Co-Chairman LEDEEN. Why doesn’t China just go nuclear and 

beat this whole game? 

Mr. MORSE. It’s hard to drive a car with nuclear fuel. 

Co-Chairman LEDEEN. Well, okay, but I mean it reduces—I mean 

the one thing that everybody is agreed is that China is going to be 

facing increasing need for energy. Some of it is to drive automobiles, but a hell of a lot of it is for other purposes. For other purposes, for sort of normal running factories, running homes, all 

these things, electricity, and what have you, nuclear power plants 

beat that whole game; right? Reduces their vulnerability, gives 

them energy security, proven source of energy, self-renewable, all 

of that. I mean why not? Why aren’t they doing that? And why 

aren’t people proposing that here? Why? Have I missed something? 

Mr. EBEL. I think China is very much aware of the problems that 

nuclear power faces worldwide, one of which is what you do with 

the spent fuel? 

Co-Chairman LEDEEN. Well, they know what to do with spent 

fuel. They have weapons. They have plenty of things to do with 

spent fuel. 
119

Mr. EBEL. Yeah. We wouldn’t like to see that, I’m sure. To go 

back to the question posed, regional authorities, getting China involved in regional authority has its pros and cons. Of course, the 

major con being it’s regional, not international. Second, regional 

stockpiles are an idea who has been around for sometime, but who 

pays for the oil going into the stockpiles? 

Third, it’s not as easy to bring about a coordinated draw down 

of stocks than you would think. There’s always the temptation, particularly in this country, to use stockpiles to manipulate prices, and 

they’re not designed for that particular purpose. The plan in the 

IEA is a coordinated draw down where there is a significant interruption in supply taking seven—let’s say trigger at seven percent 

or so of the market. 

Unfortunately, I had the pleasure or what have you of drafting 

that first plan, and I think we made it so complicated that it’s likely never to be used. 

Chairman ROBINSON. We used it during the tanker war in ’84 to 

good effect, and the adjustment we made then was potentially to 

pull the trigger before reaching the seven percent threshold. 

Mr. EBEL. Right. 

Chairman ROBINSON. Because even that threshold was predictable. We threw it open, but I thought we had a good result in that 

circumstance. 

Mr. EBEL. Yeah. 

Chairman ROBINSON. I was part of that NSC effort. 

Mr. EBEL. Okay. 

Mr. MORSE. And it was actually used in a coordinated basis in 

January of 1991 when the liberation of Kuwait began and the price 

of oil collapsed by $14 a barrel that minute. 

Co-Chairman LEDEEN. Right. Commissioner Bartholomew. 

Commissioner BARTHOLOMEW. Thank you very much and thank 

you to our panelists for appearing today. I don’t know a whole lot 

about the IEA so this might turn out to be a very simple question 

for you to answer, but it seems to me that China seems quite expert at accruing the benefits of multilateral regimes that it joins 

without quite living up to the responsibilities that membership entails. 

And, what I wonder is are there any benefits that would accrue 

to the Chinese from participating in an IEA-type regime that we’re 

essentially talking about, and also are there any risks to the international system or to the U.S. of bringing the Chinese into this sort 

of regime? 

Mr. MORSE. The only risk in my mind is that the basis of the 

IEA were members of the OECD, and they were defined as mostly 

industrialized democracies. There were a few that were on the edge 

of not being democracies at the time. Turkey was a member for political reasons, but essentially they were the industrialized democracies. 

So it would be a stretch to invite the Chinese government as a 

full member unless the elements, the constitutional roots of the association were changed. And of course, that’s feasible in that IEA 

is the only international body that has a watchdog or regulatory 

role to play in the interests of the countries who are members of 

the IEA and the members of the world. 
120

China is, as a non-member of the IEA, China has had some of 

the advantages of membership in the IEA. The IEA has sent missions to China, environmental missions, oil, energy sector missions. 

The Chinese economy has undergone the same review, peer group 

review, within the IEA context that the U.S. energy sector has undergone, that the Canadian and French and other members of the 

IEA have undergone. So you have the value of experts from within 

the IEA reviewing what you have and haven’t done within the energy sector, and taking advantage of that. 

Dr. CALDER. I think that you’re certainly right that there’s always the problem of free-riding and historically that certainly has 

been true. The danger it seems to me which we will increasingly 

find, and it’s not only energy, but as I say, finance, we saw the beginnings of this in 1996, the Japanese Asian Monetary Fund proposal. China at the time opposed that, but more recently with the 

Chiangmai Agreement, some regional arrangements have begun to 

emerge in finance. 

The point I think is the potential competition between global arrangements and regional arrangements, and if we don’t let China 

into or we don’t accelerate, as the Chairman was suggesting earlier, the creation of appropriate global arrangements, then what 

we’re going to get, again arrangements that bind China, that are 

monitored and where it plays its part, but unless we accelerate the 

global arrangements, then we’ll get more regionalism, and I don’t 

think that’s in our interest. 

Dr. MENGES. If I may, I’d like to comment on that also. I think 

you’re absolutely right that there is a pattern of China gaining benefits and not taking responsibilities. And, I believe in my policy 

suggestions which will be in the testimony you’ll receive, we need 

to move toward what I call away from the unconditional engagement with China toward a strategy of realistic engagement with 

China where benefits received in turn result in actions by China 

toward peace and cooperation. 

I also propose a form of multilateral agreement that would reassure China about energy supplie. We should remember that by 

2025, it’s estimated that there will be 125 million barrels a day 

available of energy and only about 119 million barrels per day of 

demand. So that actually there is enough oil for everybody, not to 

mention the 280 billion barrels in Canada’s shale sands that can 

now be processed. 

I do think, though, as a general rule, what you’re getting at is 

absolutely fundamental, that benefits given to China and reassurances given, which I would favor in terms of energy, and I think 

it’s a very interesting idea, need to come with specific undertakings 

by China. 

For example, one thing might be that it stops its coercion in the 

territorial disputes and submits these to normal negotiations and 

normal arbitration, that it removes clout of coercion and intimidation that it has established since the 1990s in the region and 

around the claimants. And, in fact, I would say that it drops its 

claim to the entire South China Sea. 

That is a preposterous claim, and obviously a claim which will 

lead to a grave risk of military confrontation with the United 

States, which will never accede to the South China Sea being the 
121

sovereign territory of any country, and I think if something is 

given, something needs to be received, and I think that’s—we have 

in the WTO, China has signed on and gets the benefits; it’s not carrying out the agreements. And your phrase summarized it exactly—that’s the Chinese pattern. That needs to change. We need 

to move away from unconditional engagement toward what I call 

realistic engagement. 

Co-Chairman LEDEEN. Commissioner Wessel. 

Co-Chairman WESSEL. Thank you. I’d like to go back to a question I raised with Mr. Woolsey, but also the broader question that 

comes up today as well, which is, is there a clear and direct correlation between China’s energy supply patterns and some of its activities relating to weapons proliferation? I mean there appears to 

be with certain cases there is—Iran, Saudi Arabia, Sudan, et 

cetera. We’ve now seen with Brazil and Brazil’s helping on the nuclear program the potential for entering this hemisphere with certain problems that we may not want to face in our home court. 

I would like your views on whether there is a correlation between 

the two, as well as does the participation in our own hemisphere 

raise additional concerns? 

Dr. MENGES. I’d be pleased to comment on that first. I think, yes, 

there is a large correlation. It is interesting to note that of the Middle East suppliers, most are moderate countries, most are responsible countries. It’s Iran and Saddam Hussein’s Iraq and Libya that 

have been the state sponsors of terror where China has moved very 

close. 

And I believe that what we’ve seen in especially this large Chinese activity in Iran, which I summarize in my paper from the unclassified intelligence reports that have been done every year, as 

you know, by the Director of Central Intelligence and for the reports to Congress, that this is an effort to obtain a preferential relationship with these dangerous dictatorships in order both to 

counter the United States and its allies in the world, the geopolitical purpose, but also to have the preferential access to energy. 

And a good example is that, as you know, recently with respect 

to the Azadegan field in Iran, when Japan joined the world in opposing the nuclear weapon that Iran is developing secretly, they 

were excluded from bidding and now China is going to do that. 

And so I think there is a correlation and there is a lot of that. 

And with respect to Latin America, where I have a section on Latin 

America, I think there’s a very serious issue, and I believe there’s 

a new pro-Castro axis that’s being formed in Latin America that 

involves Castro and Chavez in Venezuela and Lula da Silva in 

Brazil, Gutierrez in Ecuador, and soon when the interim president 

in Bolivia is destabilized again in the spring, that will likely move 

into the pro-Castro column there, and it’s a new process which I 

lay out briefly. I’ve followed it, and I’ve worked on this area for 

some years. 

And I believe it’s actually very, very dangerous to the well being 

of the people of the region and to our interests and involves fundamentally Castro’s initiative. He’s been at this for 44 years of revolutionary warfare. It’s a new method he’s using, but the linkage 

to China is also very important. China and Castro moved closer in 

the ’90s. They have a military relationship since 1999. China has 
122

an espionage base in Cuba. China and Venezuela, Chavez, have a 

military relationship since 2000. Immediately after the inauguration of Lula da Silva as president of Brazil in January 2003, China 

established a large military presence in Brazil. 

There’s been a long and—the Workers’ Party in Brazil under 

Lula da Silva has a party-to-party relationship with the Communist Party of China established in 1999, and Lula da Silva himself has said he wants to move much closer to China. China is not 

the cause of the pro-Castro axis, but I believe what China is doing 

is riding on that process in order to, as friendly regimes, friendly 

to it come to power, in order to have both a means of 

counterbalancing the United States, hostile governments in the 

Western Hemisphere, tying the United States down, and also having preferential access to energy as we see in the Chavez-China energy relationships, the new Ecuador-China energy agreements, and 

I think we’ll be seeing some things coming out in other cases. 

So China is not the cause, but China is involved, and I should 

mention to you that——

Co-Chairman LEDEEN. We have to keep these answers shorter. 

Dr. MENGES. I’ll just conclude. The four countries that I see in 

the pro-Castro axis comprise 223 million people, five million barrels 

a day of oil production. I have a table in my testimony. And about 

85 billion barrels in reserves. So they’re an interesting target for 

China’s having preferential access and special deals. So I think it’s 

a very serious matter geopolitically, and I think it’s a very serious 

matter for our national interests. 

Commissioner MULLOY. May we have a copy of your paper? 

Dr. MENGES. Yes, I will. 

Co-Chairman WESSEL. Dr. Calder. 

Dr. CALDER. I think it’s worth remembering, of course, there are 

varied interests in China, and there are certainly some that understand the implications of some of the actions that Dr. Menges was 

suggesting and understand that those are counterproductive. 

I would say, though, it certainly is true that actions like he mentioned with respect to the Azadegan field in Iran do undermine our 

allies and some of the steps the Japanese, for example, were taking 

to support us on Iran, to have China then go in and take over those 

contracts, of course, undermines and makes our own situation more 

difficult. 

Co-Chairman WESSEL. Other comments? 

Mr. EBEL. If there is a correlation between military sales and 

preferential access to oil supplies, it’s not been very successful. The 

Chinese when you look around at the investments that they have 

made in Kazakhstan or wherever, not enough really to make a real 

impact on their reliance on imported oil. You know if they’re trying 

to develop larger and larger equity oil, okay, but they have not 

been very successful. 

Co-Chairman WESSEL. Thank you. 

Co-Chairman LEDEEN. Commissioner Mulloy. 

Commissioner MULLOY. Thank you, Mr. Chairman. This is just 

to clarify because this may be something the Commission would 

want to make a recommendation on. We asked Mr. Woolsey about 

the IEA and whether China should become a member even 
123

though—or whether there should be some kind of relationship built 

in where China can participate? 

As a young lawyer, I was in the Antitrust Division. As you know, 

the oil companies to participate in the IEA have to have an antitrust defense or else they won’t participate. So I used to go to these 

meetings in Paris. I have some idea how that organization works. 

Do you think that we should be trying to get China in or should 

we invite Chinese participation in the IEA? Is that in our interest? 

And if so, why, and if not, what is the downside for us of having 

them in there? 

Mr. Morse, if you could take the lead on that, I think it would 

be very helpful. 

Mr. MORSE. Yes. Let me make one comment to begin with, and, 

yes the antitrust exemption offered firms was very important in 

the 1970s. It is really insignificant today and the reason for that 

is, in the 1970s, what the companies were asked to do was to deal 

with an emergency sharing system before strategic stocks existed 

in any IEA country. 

After the 1980s, when strategic stockpiles went from zero to now 

1.4 billion barrels, and when companies in the more complicated 

world we live in no longer could, a few of them, control the network 

of delivery of petroleum and petroleum products, that sharing system is no longer significant. 

So the world has changed enough to set aside that concern. But 

on the general question that Mr. Wessel asked, we have China pursuing bilateral ties, much as the French did in the 1970s, much as 

the Japanese did largely in the ’70s and the ’80s, and the IEA was 

one mechanism, one, but only one mechanism. The European 

Union has their own internal mechanisms for making sure that 

there aren’t these tradeoffs of, let’s say, arms for oil or U.N. votes 

for oil, that the Chinese have been pursuing so assiduously. 

So, my general view is that the IEA and other international institutions need to be reviewed carefully to find ways to bring in 

these large emerging markets, China being the largest one. In 

2000–2001, I chaired a committee at the Council on Foreign Relations and the Baker Institute. The committee was looking at national energy security policy—had on it a wide array of people including Ken Lay from Enron, Chuck Watson from his former company, but some people elsewhere in the political spectrum. 

The report we wrote, which was beady, had not a single dissent 

and had included in it the urgent need for the Administration to 

consider ways to bring emerging market countries into the IEA 

mechanism. So I do think it’s an important thing to focus on. 

Commissioner MULLOY. Is that a report that you can——

Mr. MORSE. Yes, I’ll make it available and it’s publicly available. 

Commissioner MULLOY. That would be very helpful. Thank you. 

Does anyone else have a comment? 

Mr. EBEL. I think that’s a wise move, but until then, we need to 

continue to do what we can to encourage China to build up its own 

stocks. 

Co-Chairman LEDEEN. Further questions? 

Commissioner Reinsch. 
124

Commissioner REINSCH. Thank you. To the rest of the panel, Dr. 

Menges has put forward a number of interesting thoughts. I’d like 

to ask the other three of you if you agree with him? 

Mr. MORSE. I don’t, and I don’t in terms of some of the very specific policy prescriptions. It strikes me that our desire is to create 

a world in the world of energy that is depoliticized, in which governments do not use energy as instruments of foreign policy, 

whether we are speaking of oil exporting countries or gas-exporting 

countries or oil importing countries, and with the caveat that there 

are national security circumstances in which sanctions are critical. 

But with that caveat, it strikes me that dealing with China in 

the engaged way that Mr. Menges has suggested is a mechanism 

for politicizing a very area of the international economy that we 

want to depoliticize and defuse rather than to open it up for further politicization. 

Commissioner REINSCH. You should have appeared with Mr. 

Woolsey when he was here. It would have been an interesting debate. Mr. Ebel? 

Mr. EBEL. We have to be careful not to forget that the marketplace is the right place where the decisions are made, and any 

time, I’m always concerned that when governments get involved in 

the process, they’re trying to be helpful, but usually they take the 

wrong actions. So governments can debate these issues, but in the 

mean time my feeling is let the market work, and they’ll make the 

right decisions. It may not be as quickly as you would like, and 

sometimes it may not be in the direction you would like, but the 

decisions will be made. 

Commissioner REINSCH. Dr. Calder, you want to follow on? 

Dr. CALDER. Yes, as a general principle, it seems to me it would 

be nice if the market, in fact, would work. Unfortunately, if one 

looks historically at various patterns in East Asia, trans-Pacific relations, I think one finds that frequently the market doesn’t work, 

and in the case of energy, we have an unusual circumstance given 

the collective vulnerabilities of the nations in question, and to some 

extent also the rivalries, you know, very heavy importers. 

I mean mainly economic rivalries. Of course, it depends on the 

nature of the market. If we’re in tight markets, those things become more pronounced, but just given the nature of the northeast 

Asian political economies and maybe particularly China, political 

dimensions, geostrategic dimensions, I think almost inevitably to 

some extent come in. That isn’t to say that it’s good, but those 

things are there to some extent. 

And finally, on this relationship with Iran, as I say, clearly in the 

interaction of China, Japan and Iran and the United States, on 

those issues China for some reasons that are understandable in 

terms of their national interest doesn’t have these sort of inhibitions that Japan has with respect to dealing with Iran because of 

the deeper security relationship that we have with Japan. 

Commissioner REINSCH. Mr. Morse, would you like to come back? 

Mr. MORSE. Yes, I’d like to make another observation. You know, 

in the world of politics, there is an old saying that where you stand 

depends on where you sit. And I just want to share with you the 

world of oil and security from a Chinese perspective. We have 

talked about the potential growth of Chinese oil demand and the 
125

potential growth of Chinese oil imports. Let’s look at the 1990s. In 

the 1990s, global oil trade increased by just short of ten million 

barrels a day. 

The single-most important component of that was the 3.5 million 

barrel a day increase in imports into the United States, more than 

35 percent of the total increase in global oil trade was our import—

incremental imports. And our incremental imports at 3.5 million 

barrels a day is larger than the total oil consumption of all countries in the world with the exception of two, Japan and China. 

If we look at the Department of Energy and its projections for 

this decade, given the continuing decline in U.S. production and 

the continuing increase in U.S. consumption, the expectation is 

that over this decade, U.S. oil imports will grow from ten million 

to 16.5 million barrels a day. 

China is at the six million barrel a day consumption level. So 

we’re going to have projected 6.5 million barrels a day increase in 

our demands on the oil system. The same DOE forecast has China 

and India combined having an increase in imports half of the imports of the United States. So from the other party’s perspective, 

their insecurity is because guess who’s gobbling up the lion’s share 

of the world’s oil supply? Thank you. 

Mr. EBEL. I’d like to take it one step further. Let’s look out a little bit further to the year 2030 and combining forecasts prepared 

both by the IEA and the EIA. I always have a little difficulty with 

these acronyms. 

If you combine the two estimates of U.S. import requirements by 

2030 and projected Chinese import requirements by 2030, they 

would exceed—the two countries together—they would exceed current OPEC production capability—current OPEC production capability. 

Co-Chairman LEDEEN. Mr. Ebel, can I just say that I mean I’ve 

been looking at forecasting for a very long time. The view of this 

Commission published is that Chinese statistics are fundamentally 

fanciful, not reliable. And that projections based on fanciful statistics are themselves going to be fanciful. I mean, in the American 

case, maybe it’s a bit more reasonable to do it, but it’s just not serious in my opinion to start basing policy on projections 20 years 

from now and 30 years from now. That’s my only objection. 

With regard to Mr. Menges’ comments about what kind of policy 

we should have toward China, I listened carefully. I only heard an 

outline of it, a description of it, but not the specific components of 

it. So why he should be criticized for specifics that he hasn’t yet 

presented to us is frankly a bit beyond me. 

Thirdly, while the call for a de-politicized market for energy or 

any other thing is admirable and desirable, it’s not real. I’m an historian. I always marvel at the fact that Americans are the first 

people in the history of the world to believe that peace is normal 

and that the things that go on during peacetime are normal and 

define life, when the last several thousand years argue the opposite. 

And so, in terms of making policy, any country has to prepare 

for wartime conditions, not peacetime conditions. Peacetime conditions are rare, very rare in the history of the world. 
126

So with that, I must say this has been a terrific panel. I mean 

wonderfully and gratefully I say to you that when you get the last 

panel of the day the most lively, the most interesting, the most 

original and so forth, that’s really a great thing. 

Thank you all very much. This session is closed. 

[Whereupon, at 3:55 p.m., the hearing was adjourned.] 
(127)

STATUTORY MANDATE OF THE U.S.-CHINA ECONOMIC AND SECURITY 

REVIEW COMMISSION 

Pursuant to Public Law 108–7, Division P, enacted February 20, 

2003

RESPONSIBILITIES OF THE COMMISSION.—The United 

States-China Commission shall focus, in lieu of any other areas of 

work or study, on the following:

PROLIFERATION PRACTICES.—The Commission shall analyze and assess the Chinese role in the proliferation of weapons of 

mass destruction and other weapons (including dual use technologies) to terrorist-sponsoring states, and suggest possible steps 

which the United States might take, including economic sanctions, 

to encourage the Chinese to stop such practices.

ECONOMIC REFORMS AND UNITED STATES ECONOMIC TRANSFERS.—The Commission shall analyze and assess 

the qualitative and quantitative nature of the shift of United 

States production activities to China, including the relocation of 

high-technology, manufacturing, and R&D facilities; the impact of 

these transfers on United States national security, including political influence by the Chinese Government over American firms, dependence of the United States national security industrial base on 

Chinese imports, the adequacy of United States export control 

laws, and the effect of these transfers on United States economic 

security, employment, and the standard of living of the American 

people; analyze China’s national budget and assess China’s fiscal 

strength to address internal instability problems and assess the 

likelihood of externalization of such problems.

ENERGY.—The Commission shall evaluate and assess how China’s large and growing economy will impact upon world energy 

supplies and the role the United States can play, including joint 

R&D efforts and technological assistance, in influencing China’s energy policy.

UNITED STATES CAPITAL MARKETS.—The Commission 

shall evaluate the extent of Chinese access to, and use of United 

States capital markets, and whether the existing disclosure and 

transparency rules are adequate to identify Chinese companies 

which are active in United States markets and are also engaged in 

proliferation activities or other activities harmful to United States 

security interests.

CORPORATE REPORTING.—The Commission shall assess 

United States trade and investment relationship with China, including the need for corporate reporting on United States investments in China and incentives that China may be offering to 

United States corporations to relocate production and R&D to 

China.
128

REGIONAL ECONOMIC AND SECURITY IMPACTS.—The 

Commission shall assess the extent of China’s ‘‘hollowing-out’’ of 

Asian manufacturing economies, and the impact on United States 

economic and security interests in the region; review the triangular 

economic and security relationship among the United States, Taipei and Beijing, including Beijing’s military modernization and 

force deployments aimed at Taipei, and the adequacy of United 

States executive branch coordination and consultation with Congress on United States arms sales and defense relationship with 

Taipei.

UNITED STATES-CHINA BILATERAL PROGRAMS.—The 

Commission shall assess science and technology programs to evaluate if the United States is developing an adequate coordinating 

mechanism with appropriate review by the intelligence community 

with Congress; assess the degree of non-compliance by China and 

[with] United States-China agreements on prison labor imports and 

intellectual property rights; evaluate United States enforcement 

policies; and recommend what new measures the United States 

Government might take to strengthen our laws and enforcement 

activities and to encourage compliance by the Chinese.

WORLD TRADE ORGANIZATION COMPLIANCE.—The 

Commission shall review China’s record of compliance to date with 

its accession agreement to the WTO, and explore what incentives 

and policy initiatives should be pursued to promote further compliance by China.

MEDIA CONTROL.—The Commission shall evaluate Chinese 

government efforts to influence and control perceptions of the 

United States and its policies through the internet, the Chinese 

print and electronic media, and Chinese internal propaganda. 
(I)

LIST OF WITNESSES, COMMUNICATIONS, AND 

PREPARED STATEMENTS 

Page 

Calder, Kent E., Director, Reischauer Center for East Asian Studies, Nitze 

School for Advanced International Studies, Johns Hopkins University .......... 91

Prepared statement .......................................................................................... 93

Caruso, Guy, Administrator, Energy Information Administration ..................... 6

Prepared statement .......................................................................................... 10

D’Amato, Vice Chairman C. Richard 

Opening remarks of .......................................................................................... 2

Ebel, Robert E., Chairman, Energy Program, Center for Strategic and International Studies ................................................................................................... 83

Prepared statement .......................................................................................... 86

Girdis, Dean P., Director, PFC Energy .................................................................. 43

Prepared statement .......................................................................................... 46

Jaffe, Amy Myers, Wallace Wilson Fellow for Energy Studies, James A. Baker 

III Institute for Public Policy, Rice University .................................................. 27

Prepared statement .......................................................................................... 30

Ledeen, Michael, Hearing Co-Chair 

Opening remarks of .......................................................................................... 5

Prepared statement .......................................................................................... 6

Menges, Constantine C., Ph.D., Senior Fellow, Hudson Institute ....................... 98

Prepared statement .......................................................................................... 101

Morse, Edward L., Executive Advisor, Hess Energy Trading Company ............. 88

Robinson, Chairman Roger W., Jr. 

Opening remarks of .......................................................................................... 1

Prepared statement .......................................................................................... 2

Schlesinger, James R., Chairman, Board of Trustees, The Mitre Corporation .. 66

Wessel, Michael R., Hearing Co-Chair 

Opening remarks of .......................................................................................... 3

Prepared statement .......................................................................................... 4

Woolsey, R. James, Vice President, Booz Allen & Hamilton ............................... 72

Wu, Kang, Ph.D., Fellow and Head of China Energy Project, East-West Center .......................................................................................................................... 36

Prepared statement .......................................................................................... 39