ll Resource mercantilism and themilitarization of resourcenranagement

Rising Asia and the future ofAmerican primaçy in the Persian Gulf

Flynt Leverettl

In a broad sense, the "militarization" of resource management describes thegrowing inclination of energy producers and consumers to base decisions abouttheir behavior in global energy markets on political and strategic calculations as

well as on commercial and economic considerations. As this volume attests, theongoing militarization of resource management is generating profound chal-lenges for American interests around the world, challenges that will shape theUS foreign and defense policy agenda for at least the next quarter century.

Some of the most significant policy problems associated with the militariza-tion of resource management are posed by the deepening engagement of theworld's two most important rising powers, China and India, with the world'smost important energy-producing region, the Persian Gulf. Although the UnitedStates has long enjoyed effective hegemonic status in the Middle East, Chinaand India are intensifying their economic, diplomatic, and strategic ties toenergy-producing states there, driven by their exploding demand for importedhydrocarbons.2 More particularly, these states seem to be pursuing energy secur-ity through what can be described as "resource mercantilism" - that is, the use

of economic and foreign policy instruments by national governments to helptheir state-owned national energy companies (NECs) secure access to overseas

hydrocarbon resources on more privileged bases than simple supply contractsbased on market prices.s

Considerable attention has been focused on the presumptively destabilizingimpact of China and India's global "hunt" for hydrocarbon resources on globalenergy markets and international relations.a In the Persian Gulf, the coincidenceof closer Chinese and Indian ties to energy-producing states in "west Asia" withan ongoing decline in America's strategic standing in the region prompts con-

cerns, in some quarters, about the risks of arms races and even military conflictover access to Middle Eastern oil and gas supplies in the future.s In particular,

some analysts see the potential for China to project military power into the

Persian Gult either directly or indirectly, in ways that will chatlenge US inter-ests.ó Others see the potentiat for Sino-lndian conflict over access to the Gulfs

212 F. Leverett

hydrocarbon resources. Such scenarios are frequently used to bolster the case forUS-lndian strategic cooperation to contain China's rising influence.T

I This chapter argues that concerns about China and India's energy-drivenengagement in the Persian Gulf fueling either the destabilization of globalenergy markets or the militarization of resource management in the Middle Eastare overdrawn. Additionally, this chapter argues that, if such concerns becomethe basis for policy-making, the results are likely to be counterproductive to USinterests. As will be discussed, there are significant limits on how far Chineseand Indian NECs can go to "lock up" access to Middle Eastern oil and gasreserves. Moreover, the prospect of military confrontation between the UnitedStates and either China or India over access to Persian Gulf energy resourcesseems remote. In all probability, Beijing and New Delhi will each seek tobalance the other's efforts to expand its naval capabilities in the Indian Ocean,aggravating what Mikkal Herberg has aptly described as the "potential futureproblem of military maritime competition to control the Sea Lanes of Communi-cation in Southeast Asia."8 Nevertheless, for the foreseeable future, the UnitedStates will maintain unique capabilities to exercise military power in the Gulf.This is true with regard to deploying naval forces and maintaining maritimesupremacy in the Gulf.e It is also true with regard to the projection of groundforces into the region. US logistical capabilities to lift sizeable infantry andarmored forces into the Persian Gulf by air and sea will remain unequalled forthe foreseeable future.

There is certainly a risk that the United States could find itself in a competi-tion for geopolitical influence with rising Asian powers - especially China - inthe most shategically critical area of the world.ro To some degree, such acompetition may already have started. But this risk is largely self-generated. IfWashington pursues policies aimed at stabilizing and managing shifting geopo-litical balances in the Gulf, the United States should be able to maintain its stra-tegic primacy in the region, with China and India effectively legitimating thatprimacy. If Washington supplements that articulation of a new grand strategy forthe Middle East with efforts to bring China and lndia into the InternationalEnergy Agency (lEA) and encourage the further internationalization of Chineseand Indian NECs, the United States can help Beijing and New Delhi transition tomore market-oriented approaches to energy security. If, on the other hand, theUnited States continues to pursue policies that are perceived to be regionallydestabilizing, its strategic standing will continue to decline. Under these circum-stances, China and Middle Eastern energy producers may ultimately forge a defacto strategic alliancc and look collaboratively for non-military means tocontain American influence in the Gulf.

This chapter develops these arguments in six sections. The first section looksat resource mercantilism as a particular manifestation of the militarization ofresource management, conditioned by continuing structural shifts in globalenergy markets. The second section then looks more closely at resource mercan-tilism as practiced by China and India in the Persian Gulf as a "top down," stra-tegic response to perceived challenges to their energy security. The third section

Resource mercantilisn and mílitarizatíon 213

takes a different approach, focusing on the interaction of Chinese and Indian

NECs with their governments to prosent resource mercantilism as a fundament-

atly "bottom up" phenomenon driven by the corporate agendas and interests ofindividual NECs. Against this backdrop, the fourth section assesses the eco-

nomic and political limits of resource mercantilism as an energy-security strat-

egy, while itt. nmt section draws implications for US policy. Finally, the sixth

sãótion draws out the likely consequences of poorly conceived US policy.

Conditions for militarization

Resource mercantilism, particularly as practiced by China and India, needs to be

undentood in the wider context of the geopolitics and geoeconomics of energy,

which are being reshaped by continuing structural shifts in global energy

markets, on both the demand side and the supply side. These shifts have encour-

aged the militarization of resource management in various ways, including the

emergence of resource mercantilism.On the demand side, the world has witnessed sustained and robust growth in

the demand for crude oil, refined products, and natural gas since the beginning

of the millennium. More specifically, a consequential portion of the increase in

aggregate demand for oil and natural gas during the past five years or so has

bããn ðonditioned by the emergence of new major demand centers in Asia, espe-

cially China and India. During 20014,35 percent of the increase in oil demand

worldwide was generated by China alone. During 2002-5, that figure increased

to 40 percent. Inãeed, the "explosion" of demand for crude oil and refined prod-

ucts in Asia has been one of the most important contributors (along with con-

tinued demand growth in the United States) to the dramatic rise in energy prices

since late 2003.rrThe International Energy Agency and the US Department of Energy's Energy

Information Administration, among other sources, project that oil demand in

Asia will continue growing robustly over the next 20 to 25 years. However

much cyclical dynamics or idiosyncratic (and, thus, at least theoretically change-

able) nátional policies may have contributed to the recent expansion in Asian

.nrigy demand-, this expansion is fundamentally grounded in the developmental

trajeõiories of the most important emerging Asian economies, China and India -tralectories that are not lik¿ly to change radically in the foreseeable future.12

bn the supply side, there has been a lag in the growth of installed productive

capacity in uþstream oil and gas sectors to accommodate rising demand. Histori'

caily, there has always been a cyclical quality to upstream energy investments;

to sôme degree, the present lag is the predictable outcome of "underinvestment"

in productive capacity since the mid 1980s.r3 But, in the cunent environment,

the potential to expand productive capacity is conditioned by the ever increasing

conðentration of the world's hydrocarbon reserves under the control of national

governments and NECs in the Middle East and former Soviet Union. Combined

iith continuing demand growth, this trend means that, among other things, the

import dependãnce of major energy-consuming states and regions will continue

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214 F. Leverett

growing during the next two decades.r4 This trend also means that, in the future,

state actors, not international energy companies (lECs) and private investors,

will largely determine the pace at which hydrocarbon reserves are developed and

the direction in which they are marketed.

As these trends play out and play off one anotherr5, they are prompting stra-

tegic and political responses by producer and consumer states atike. On the

sulply side of global energy markets, many observers have commented on the

rise of "resource nationalism" in energy-producing states, as national govern-

ments seek to derive greater economic and political power from the monetiza-

tion of their countries' hydrocarbon reserves.ró On the demand side, resource

mercantitism is, in many respects, an analogous strategic response by rising con-

sumer states to structural shifts in global energy markets. At the heart ofcontemporary resource mercantilism is the increasing relianoe of energy-

importing states, especially in Asia, on their own NECs to acquire equity stakes

in oil .nl g.r reserves abroad, with national govemments extending various

kinds of support to their NECs' efforts to conclude such deals.rT

The outstanding exemplars of resurgent resource mercantilism in Asia are, ofcourse, China and India. In broad terms, these two countries - rhetorically col-

lectivized under the neologism, "Chindia" - work within similar parameters in

trying to define their externat energy strategies.rs Both perceive increasingly

aðute vulnerabilities to their energy security stemming from their growing

reliance on imported hydrocarbons to fill critical portions of their energy mix.

Both have state-owned energy companies - originally established to develop

significant indigenous resewes of crude oil and natural gas - that have become

increasingly active overseas.re Both have sought to integrate their NECs' over-

seas acquisition efforts into national strategies for energy security. And, for both

countries, the Persian Gulf is an inescapable focus of their extemal energy

policies.In both the Chinese and the Indian cases, resource mercantilism needs to be

understood on two levels. On one level, external energy strategies grounded in

the logic of resource mercantilism are shaped by high-level calculations in

Beijing and New Delhi about national interests and strategic vulnerabilities.

From this perspective, the overseas acquisition efforts of Chinese and Indian

NECs are structured primarily through "top down" guidance and support from

national governments. But, on another level, Chinese and lndian external energy

strategies are shaped by the corporate agendas and interests of individual

Chinese and Indian NECs. From this perspective, the overseas acquisition

efforts of Chinese and Indian NECs are driven primarily from the "bottom up" -that is, by the NECs themselves

Neither perspective captures "the whole truth' about resource mercantilism

as pursued by China and India; both must be taken into account in any analysis

of China and lndia's external energy strategies.

Resource mercøntilism and militarizatíon 215

Resource mercantilism and energy security

At the strategic level, the attempts by Chinese and Indian NECs to secure access

to oil and natural-gas reserves abroad are part of wider national efforts to deal

with perceived wlnerabilities created by increasing dependence on imported

hydrocarbons. With regard to crude oil, China and India already have strategic'

ally meaningful levels of import-dependence.2o Rising demand for transportation

fuels makes it highly likely that demand for crude oil and refined products in

China and India will continue to grow significantly in coming years; in turn, this

prospect means that, like other major consumer countries, China and India willbecomè even more dependent on foreign sources of oil through the next decade

and beyond.2r China and India only recently started to import natural gas.

Looking forward, though, rising demand for electricity in both countries means

that China and India will almost certainly develop significant import-

dependence for natural gas in coming years.22

As China and India's import-dependence for crude oil has grown over the

past decade, Persian Gulf producers have assumed a central role in supplying

both countries' energy needs. As China and India increase their imports of crude

oil and natural gas in coming years, the Persian Gulf will ûgure even more

prominently in both countries' external energy strategies. Currently, almost halfof China's oil imports are sourced from the Middle East, largely through supply

contracts of varying durations. More than two-thirds of India's oil imports today

come from the Gulf, also through supply contracts supplemented by spot pur-

chases. Although poticy-makers and strategic planners in Beijing and New Delhi

alike stress the importance of diversifying the sources and transport routes forhydrocarbon imports, for a variety of reasons the Middle East will coritinue to

hold a leading position in supplying Chinese and Indian energy markets through

the next decade and beyond. There is little reason to anticipate that China or

India will be able to reduce the percentage of their oil imports sourced from the

Persian Gulf in the next 10-20 years; indeed, the percentage of Chinese and

Indian oil imports sourced from the Gulf is more likely to grow during this

period.For policy-makers and strategic planners in Beijing and New Delhi, this

growing reliance on imported hydrocarbons - and, especially, hydrocarbons

from the Persian Gulf - is at the heart of the energy-security challenge facing

their countries. ln this context, tho attractiveness of resource mercantilism to

Chinese and Indian elites, as a strategy for managing this challenge, flows natu-

rally from their acceptance of certain propositions about the workings of inter-

national enefgy markets, and optimal ways to achieve energy security -propositions that are, in many ways, at odds with liberâl economic orthodoxy.

From the resource-mercantilist perspective held by many elites in Beijing and

New Delhi, the energy-security challenge facing China and India has at least

two dimensions. First, Chinese and Indian elites are concerned about "volume

risk" - that is, the adequacy of oil and gas supplies available on international

rharkets. Volume risk is an inescapable feature of energy markets because of

216 F. Leverett

their inherent physicality and complexity. During the past 30 years or so, tradingin various types of crude oil and refined products has become much more intej-rated on a global basis. This effectively reduced volume risk by making ¡t moft

, difficult for exporters to use oil as a "weapon" merely by cutting off supplies toparttcular customers.

But, as market conditions have tightened all along the supply chain for crudeoil in recent years, the prospective impact of potential suppiy disruptions - as aresult of natural disaster, accident; terrorism, political instability within oil-producing states, or interstate conflict - has grown. Moreover, despite significantmovement toward the creation of a single, integrated market for crude oil andrefined products, there remains a profound degree of "regionalization" in oil-supply relationships. Thus, today, two-thirds of the Middle East's oil exports aredelivered to Asia, and the most important "growth" markets for future produc-tion from the Persian Gulf also lie to the East.

This means that rising Asian economies will be looking to access ever largersupplies of oil, particularly from the Middle East, at the same time that est;b-lished customers, such as Japan and Korea, are looking to expand their ownaccess to those supplies.23 In reality the global oil market has already beendivided up to a great extent through investments in field development anã ffans-port, the historical predominance of Western energy companies, and the relativestability of supply flows in that market., These conditions have created, and con-tinue to reinforce, perceptions in Beijing and New Delhi that, in developingoverseas upstream positions and ensuring secure supply flows from abroad,China and India are doing no more than playing "catch up" with the advancedindustrial countries of the West.2a

The regionalization of energy-supply relationships is even more pronouncedfor natural gas.25 As natural-gas usage expands in coming yeatr, analysts,policy-makers, and strategic planners in Beijing and New Delhi anticipate-thatthere is likely to be intensifying competition - Ínvolving China and India alongwith established energy consuming states in Asia, Europe, and North America Ifor access to pipeline and liquefied natural-gas (LNG) exports, particularly fromthe Persian Gulf.

In light of these considerations, a significant number of Chinese and Indianelites are skeptical of the view propounded by most Western analysts that oiland gas will always be available, albeit at varying prices, on internationalmarkets.2ó From their perspective, energy security is simply too important to betrusted to the uncertainties of energy markets. In addition to their concerns aboutvolume risk, many Chinese and Indian elites are also wonied about heightened"price risk" - that is, volatility in the prices of crude oil, refined produõts, andnatural gas. Given their skepticism about the workings of international energymarkets, some Chinese and Indian elites are more interested in insulating thãirsocieties from the effects of price-volatility than in allowing their economies torespond efficiently to price signals.

Elite skepticism in Beijing and New Delhi about the functioning of inter-national energy markets has been bolstered by the rise of resource nãtionalism,

Resource mercantilism and mílítarízatíon 217

as discussed above. In this regard, many Chinese and Indian elites believe that,if national governments in energy-producing states across the Middle East, theformer Soviet Union, Latin America, and Africa increasingly treat hydrocarbonreseryes as strategic assets, and not simply as economic commodities, China andlndia have no choice but to take a simitar perspective as energy consumers. Inthe Chinese case, the suspicion of international energy markets is further rein-forced by a sense that the United States will not always let these markets workin a disinterested fashion where Chinese interests are in play."

Given their view of the energy-security challenge confronting their countries,many policy-makers and strategic planners in Beijing and New Delhi recom-mend the acquisition of equity positions in overseas oil and gas assets byChinese and Indian NECs so that, if their countries were in a situation in whichthey had adequate financial resources, but were unable to buy oil or gas on inter-national markets because of constrained supply, the NECs' foreign equity pro-duction could be sent home. Similarly, Chinese and Indian advocates of "equityoil" maintain that hydrocarbons produced abroad by Chinese and Indian NECsare insulated from fluctuations in market prices and could provide home-countryconsumeß with cheaper energy supplies than those available on the internationalmarket.

Working from these premises, the Chinese and Indian governments haveadopted external energy strategies grounded, to a considerable degree, in thelogic of resource mercantilism. In broad terms, China has taken the lead indeveloping a resource-mercantilist approach to energy security, with Indiaeffectively following China's example. These strategies seek, ínter alia, toutilize Chinese and Indian NECs to improve - indeed, to maximize - China andIndia's access to overseas hydrocarbon resources, including in the Persian Gulf.Within the Gulf, the region's major energy producers are the highest priority"targets" for Chinese and Indian "energy diplomacy." These targets include the"OPEC Five" - Saudi Arabia, Iran, Iraq, Kuwait, and Abu Dhabi in the UnitedArab Emirates - for oil, and Iran and Qatar for natural gas.28

These strategies also seek to diversiS the sources and transportation routesfor China and India's foreign energy Supplies.2e For many Chinese elites inparticular, diversification of transportation routes is especially important, giventhat 80 percent of China's oil imports - including all of its imports from thePersian Gulf - currently must pass through the Straits of Malacca, where theyare vulnerable to piracy, terrorism, and interdiction by US naval forces.3o Withinthe Persian Gulf lran is uniquely important for Chinese and Indian efforts todiversify transportation routes for oil and gas supplies, as it is the only majorenergy-producing state in the region whose geographic position would pennittransport of oil and gas exports to Asian markets via pipeline as wetl as via sea

routes.3l

China's external energy strategy is codified in the so-called "going out" (zou

chu qu) policy. This policy was elaborated in 2002-3 as the .urt nt, "fourth-generation" leadership cadre was consolidating its accession to power; in sub-stance, though, it reflected positions that had guided official practice under

218 F. Leverett

China's "third-generation" leadership of President and party chief Jiang Zemin

and Premier Zhu Rongji. In keeping with the basic precepts of resource mercan-

tilism, this policy explicitly encourages Chinese NECs to create more secure

energy supplies for China by purchasing equity shares in producing oil and gas

assets overseas, the exploration and production of new fields abroad, and the

construction of refineries and pipelines. Under the rubric of "going out", China's

three major NECs - the China National Petroleum Corporation (CNPC)' China

National Petrochemical Corporation (Sinopec), and China National Offshore Oil

Corporation (CNOOC) - have emerged as prototypes for a new kind of actor on

the global energy scene: the "INOC", or "international/national oil company", as

one Chinese energy executive describes it.32

Broadly speaking, India has followed the Chinese approach to crafting an

external energy strategy rooted in the logic of resource mercantilism. The Indian

govemment first began to articulate elements of its resource mercantilist extemat

energy strategy during the tenure of Prime Minister Atal Bihari Vajpayee's most

recent BJP-led coalition (1999-2004). Although the focus of the Vajpayee

govemment's energy policy-making was the reform of India's domestic energy

iectors, its principal policy document on energy issues included some discussion

of state-supported overseas acquisitions by Indian NECs.33 During the tenure ofthe cunent Prime Minister, Manmohan Singh, New Delhi has deliberately emu-

lated the Chinese approach to empowering NECs as part of its external energy

strategy.3a Singh's first Minister of Petroleum and Natural Gas, Mani Shankar

Aiyar, publicly articulated an ambitious agenda for overseas acquisitions and

projects by Indian NECs; although lower profile, Aiyar's successor' Murli

beoru, is also publicly committed to encouraging foreign "equity oil" deals by

Indian NECs.From a strategic perspective, external energy strategies grounded in the logic

of resource mercantilism, like those of China and India, unfold in three stages.

First, the Chinese and Indian govemments seek to build a wide range of diplo-

matic links to key energy-producing regions, including the Persian Gul{, to pave

the way for Chinese and Indian NECs to develop positions in these regions.

In the Persian Gult Chinese leaders have concluded a number of such agree-

ments with local regimes. These include the elaboration of a "strategic energy

partnership" with Saudi Arabia (starting in 1999 and continuing through the rec-

iprocal visits of Saudi King Abdallah to China and Chinese Premier Hu Jintao to

Saudi Arabia in 2006), multiple trade and investment agreements with Saudi

Arabia and smaller Gulf Arab states over the last several years, an energy'coop-

eration agreement with Kuwait, and a variety of ççonomic and technological

cooperatiòn agreements with the Islamic Republic of lran.3s Additionally, China

has instituted a regular series of dialogues with the Gulf Cooperation Council

(CCC) and is cunently negotiating a free trade agreement with the GCC.36 More

iecentiy, Beijing cancolled lraq's Saddam-era official debt to China.3? In 2005,

China supplemented its diplomatic engagement with energy-producing states in

the Persian Gulf and with the GCC by opening a regular dialogue with OPEC.

In connection with its external energy strategy, India has launched its own

Resource mercantilism and milítarizøtíon 219

"energy diplomacy" directed at hydrocarbon exporters in the Persian Gulf.Although an extensíve Indian expatriate presence in the Gulf has long provided

a basis for positive ties, Indian governments have, in recent years, sought toforge an expanding array ofconnections to the region to facilitate greater access

by Indian NECs to oil and gas supplies.3s In January 2006, during Saudi KingAbdallah's visit to India, the Saudi monarch and Prime Minister Singh signed

the so-called "Delhi Declaration." This document structures the development ofSaudi-lndian relations in a number of strategic issue areas; with regard toenergy, the Delhi Declaration commits the two countries to developing a "stra-tegic energy partnership", including long-term contracts for the supply of Saudi

oil to India and joint ventures in upstream and downstream projects.3e

Indian governments have been pursuing closer ties to the Islamic Republic oflran since the end of the Cold War. Since the beginning of the new millennium,however, energy interests have compelled the Vajpayee and Singh governments

to take lndo-lranian relations to a new level.ao Since 2006, finalization of a

nuclear cooperation agÍeement between the United States and India has induced

some rhetorical caution on the Singh govemment's part regarding Indo-lranianenergy ties; nevertheless, Indian ofñcials and NECs continue to pursue energy-

related agreements (as well as oil and gas deals) in lran.ar Since 2002, the Vaj-payee and Singh govemments have worked steadily to develop bilateralrelations between India and Qatar. The most recent step in the process was the

conclusion of a bilateral defense agreement in 2007, under which India willprovide military+o-military assistance to Qatar.a2 Currently, India is negotiatingits own free-trade agreement with the GCC.

To some extent, Chinese and Indian efforts to formalize closer ties to energy-pro{ucing states in the Gulf are intended to help Chinese and Indian NECs con-clude larger and longer-term supply contracts. But, in keeping with the logic ofresource mercantilism, these diplomatic efforts are also meant to help Chinese

and Indian NECs secure "equity oil" and gas deals in the upstream and develop

strategic assets in the downstream (i.e., refineries and LNG trains). Thus, in the

second stage of their countries' external energy strategies, Chinese and IndianNECs take advantage of the openings created for them by their governments'

diplomatic engagement in energy-producing regions around the world to

develop upstream and downstream positions.

In the Persian Gulf, Chinese NECs have concluded a number of investment

agreements and are continuing to pursue additional deals. In Saudi Arabia,Sinopec won one of the three initial concessions for developing non-associated

gas in the Kingdom in March 2004. Sinopec has also entered into two joint ven-

tures with Saudi Aramco to develop new refining capacity in China (one ofwhich also includes ExxonMobil as a partner). In June 2007, CNPC won a con-

tract to build a pipeline carrying oil from Saudi fields to Fujairah in the United

Arab Emirates.a3 In Kuwait, CNPC \ryon a contract in the late 1990s to build twooil-gathering centers for the Kuwait Petroleum Company (KPC). More recently,

Sinopec has concluded a preliminary agreement with KPC to develop a jointventure refinery project in China.aa

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220 F. Leverett

ln lran, Sinopec signed a memorandum of understanding (MOU) with the

National lranian Oil Company (NIOC) in 2004, prospectively valued at $70

billion to $100 billion, to develop and buy LNG from the South Pars field and to

participate in developing the Yadavaran oil field. Since then, China's two other

major NECs, CNOOC and CNPC, have signed MOUs to undertake significant

LNG and upstream oil and gas projects in lran.as And, in December 2007,

Sinopec concluded an initial investment contract from its MOU with the NIOC,

covering the initial phase of developing the Yadavaran field. Sino-lranian

energy cooperation agreements also envision the construction of a pipeline to

"o*æt lranian oil production to the Kazakhstan-China pipeline.a6

In June 2007 - shortly after Beijing announced the cancellation of lraq's offi-

cial debt to China - CNPC received a commitment from the Iraqi government to

revive the company's agreement with the Saddam Hussein regime to explore

and develop the al-Ahdab oil field.a7 Chinese NECs have also signed production

contracts (including service contracts as well as equity participation) in Oman

and Yemen.as

Like their Chinese counterparts, Indian NECs are seeking to take advantage

of the diplomatic openings created by their government to develop commercial

positions in the Persian Gulf. The most prominent Indian NECs with regard to

àurrrtut acquisitions and operations are: the Oil Naturat Gas Corporation

(ONGC) and its international subsidiary, ONGC Videsh Limited (OVL); the

Indian Oil Corporation (IOC); Oil India Limited (OIL); Bharat Petroleum Cor-

poration Limited (BPCL); Hindustan Petroleum Corporation Limited (HPCL);

ând the Gas Authority of India Limited (GAIL).4e

In the Gulf, Indian NECs have made their greatest progress in developing

commercial positions in lran. [n2002, OVL and OIL acquired rights to explore

and develop the offshore Farsi oil block. 1n2004, OVL signed a memorandum

of agreement taking a roughly 20 percent stake in the development of lran's

Yadãvaran oil field (alongside the primary foreign stakeholder, Sinopec). In

2005, IOC signed a memorandum of agreement with Petropars, a subsidiary ofthe National lranian Oil Company (NIOC), to develop part of the South Pars gas

field and an associated LNG train; that same year, CAIL concluded a similar

memorandum of agreement with the NIOC. Perhaps most significantly, Indian

officials are continuing to negotiate with lranian and Pakistani counterparts to

finalize a framework agreement for a pipeline that would fiansport lranian

natural gas to Pakistan and lndia. Such an agreement would almost certainly

open up new commercial opportunities for Indian NECs.50- Besides lran, Indian NECs are also developing positions in Qatar and lraq. In

2004, Petronet, a consortium of Indian NECs - including OVL, IOC, and GAIL

- with Gaz de France as a strategic partner, concluded the first contract to begin

importing LNG to India from Qatar.sr (The contract was concluded with RasGas

II, a joint venture between Qatar Petroleum and ExxonMobil.) In 2005, OVL

*on â 100 percent stake in the exploration and development of Qatar's Najwet

Najim offshore oil block. ln the afÌermath of the decision to revive CNPC's

Saãdam-era agreement to explore and develop the al-Ahdab oil field, Iraqí

Resource mercantilísm and mllitarization 221

energy officials said that a Saddam-era agreement with OVL to explore and

develop a block in western lraq will also be amended and restored. The Iraqi Oil

Ministry has also invited IOC to consider building new refineries in lraq.s2

Finally, in the third stage of Chinese and Indian external energy strategies,

Beijing and New Delhi continue providing various types of support to their

NEbs-as the companies follow up on the openings created for them by China

and India's energy diplomacy. As Chinese NECs pursue and implement

"equity" oil and gas deals in energy-producing regions around the world, the

Chinese govefnment provides them with both financial and political support.

Financially, the Chinese government provides direct support to the NECs

through the provision of loans, at below-market rates and sometimes even

without interest, by state-owned "policy banks" to underwrite the companies'

overseas acquisitions. The government also provides indirect support to Chinese

NECs by eitending a variety of incentives for energy-producing states to offer

investment opportunities to the companies; these incentives include the provi'

sion of foreþ aid and the construction of basic infrastructure by Chinese

firms.s3 With ôonsiderable variation across specific cases' Beijing has employed

all of these measures to support Chinese NECs' acquisition efforts in the Persian

Gulf.saPolitically, the Chinese govenrment supports its NECs with high-level meet-

ings between Chinese leaders and their counterparts in energy-producing states,

thó involvement of China's leaders in negotiations over specific projects, and the

use of China's membership in various intemational organizations to cover the

interests of important energy exporters.ss Beijing has employed all of these tools

in supporting acquisitions by Chinese NECs in the Persian Gulf in addition to

the financial tools just discussed.

In the context of the Gult the most salient example of Chinese policy-makers

using their country's political influence to buttress its external energy strategy is

Beijing's handling of the lranian nuqlear issue. All of China's energy agree-

ments with Iran run against long-standing US policy, which seeks, in effect, to

keep the Islamic Republic's oil and gas reserves in the ground. On the nuclear

issuì, China is working to balance its interests in continued good relations with

the United States and acting as a "responsible stakeholder" on non-protiferation

with its interests in developing closer energy ties to lran, and in defending what

policy-makers see as important principles in Chinese foreign policy, including

ihe pêaceful resolution ofdisputes and non-interference in the internal affairs ofother states.56

In the Indian case, the government requires its NECs to finance their overseas

acquisitions on international capital markets, for the most part. The Indian

gou.**.nt, however, is stepping up its political support for the efforts of Indian

ÑECr to develop positions abroad, particularly through high-level meetings

between Indian ieaders and their counterparts in energy-producing states and

other manifestations of "energy diplomacy."

222 F. Leverett

Resource mercantilism and corporate interests

Looking at China and India's external energy strategies as "top down" initi-

atives, Chinese and Indian NECs seem to be more or less interchangeable instru-

ments through which unitary state apparatuses in Beijing and New Delhi pursue

well-elaborated programs for securing privileged access to hydrocarbon

resources in targeted countries, including in the Persian Gulf. But there is

another level on which China and India's external energy strategies need to be

understood. This level focuses on the corporate agendas and interests of indi-

vidual NECs.Chinese and Indian extemal energy strategies are not solely the reflection of

national efforts to assuage strategic vulnerabilities stemming from these coun-

tries' growing reliance on imported hydrocarbons. These strategies are also the

evolving products of bargaining and competitive maneuvering between various

elements of the bureaucratic apparatuses in Beijing and New Delhi, on the one

hand, and Chinese and Indian NECs, on the other. And, in this process, the auto-

nomy of Chinese and Indian NECs vis-à-vis their respective national govern-

ments is growing. This trend is especially pronounced in the Chinese case, but itis observable in the lndian case as well.

The increasing autonomy of Chinese and Indian NECs is a function of their

origins and evolution as corporate enterprises in a policy envirönment character-

izedby continuing economic liberalization. In the Chinese case, all three of the

major NECs were created out of ministerial structures in the 1980s as part of the

initial reform program championed by Deng Xiaoping and China's "second-

generation" leadership.s? Under China's "third-generation" leadership, all three

NECs became ever more market-oriented and profit-driven in their strategic ori-

entation and opefational practices as a result of additional restructuring.

Between 1997 and 1999, CNPC and Sinopec were restructured as vertically

integrated energy companies operating across the whole supply chain for oil and

gas - upstream, midstream, and downstream. Both companies retained some oftheir original strengths and weaknesses after the restructuring, with CNPC still

more established as an upstream player and Sinopec more established in the

downstream and each still maintaining regional strongholds in different parts ofChina.58 At the same time, though, vertical integration helped them become

more efficient and expanded their political resources vis-ri-vis the state. Between

1999 and 2001, all three of the major Chinese NECs were transformed into

holding companies that transfened most of their assets to operational sub-

sidiaries that were then publicly listed on various stock exchanges. rilhile the

Chinese government remains the majority shareholder in all three NECs, the fact

that the companies are listed on international stock exchanges thnough these sub-

sidiaries reinforces their market orientation and focus on profitability.se

In the Indian case, the major NECs were created out of previously established

state agencies in the early days of Indian economic reform in the 1990s. Thus,

India's Oil and Natural Gas Commission, established originally to oversee the

development of the country's upstream oil resources, was converted into ONGC

Resource mercantílísm and nílìtarìzation 223

in l99l and later partially privatized through the public offering of a minority ofits equity.@ Similarly, IOC - originally established as a state-owned enterprise

(SOE) focused on downstream âctivities - was corporatized and partially priva-

tized in the late 1990s.ór

The autonomy of Indian NECs has been reinforced by other policy initiatives.

Most importantly, since 1997, the Indian government has granted its most prof-

itable SOEs - in India, state-owned enterprises are formally described as central

public-sector enterprises (CPSEs) - considerable operational autonomy and a

more limited degree of financial autonomy. So far, nine SOEs/CPSEs - collec-

tively described as navaratnøs ("nine jewels") - have been treated this way.62

The major Indian NECs - including ONGC, IOC, and GAIL - are all in this

special category.From a "bottom up" perspective, the increasing autonomy of Chinese and

Indian NECs has had a critical impact on the formulation and implementation ofChina and India's external energy strategies, in at least three important ways.

First, the corporate agendas and interests of Chinese and Indian NECs were at

least as important as the strategic preferences of policy-makers in Beijing and

New Delhi in launching these strategies. In the Chinese case, it was NECs -specifically CNPC - and not the state that initially pushed for overseas invest-

ment opportunities in the early 1990s. Initially, the Chinese leadership did not

support overseas investments by Chinese NECs, but, as China's oil imports

increased over the course the 1990s and CNPC began to earn money from itsinitial investments abroad, the Chinese government became more supportive ofits NECs' overseas activities.

As in the Chinese case, the interest of Indian NECs in investing abroad pre-

ceded but eventually overlapped with the strategic interests of national-levelpolicy-makers. According to Indian energy executives and researchers, both

ONGC and IOC were prompted to undertake their initial oveßeas investments

because economic reform and restructuring in the 1990s had made them more

profitable, and corporate leaders did not want to lose their higher profits to arevenue-hungry government.63

Second, the relative autonomy of NECs, in both China and India, means that

there is no comprehensive national strategy, let alone a specific plan, for acquir-

ing oil and gas assets abroad. On a project-specific basis, the foreign investments

of Chinese and Indian NECs are driven primarily by the companies themselves,

even in countries where the Chinese and/or Indian governments have concluded

"strategic energy partnerships" or other similar agreements. For both Chinese

and Indian NECs, the primary motives to invest overseas are to acquire new

reserves, generate profits, and become more internationally competitive.Third, in both China and India, the NECs are applying market- and profit-

oriented criteria in making investment decisions. Particularly in the Chinese

case, the leading NECs are developing ever greater independence in this regard.rWhile pteferential financing through state agencies may give the NECs a lower

"capital hurdle" than that of IECs, Chinese NECs nonetheless seem to consider

anticipated return on capital carefully in making investment decisions.n Indeed,

224 F. Leverett

there are a growing number of instances in which Chinese NECs have refused,

on business grounds, to pursue overseas (and domestic) initiatives that were

favored by the national government. In this context, it is interesting to note that

there is a growing public debate in both China and India about the relationship

between NECs' foreign acquisitions and energy security. In China, several NEC

executives have said publicly that they fundamentally disagree with the notion

that the acquisition of oil and gas assets abroad can enhance China's energy

security.ó5In India, as noted, the government requires its NECs to finance their overseas

acquisitions on international capital markets, for the most part. Just last year, the

State Planning Commission recommended that NECs undertake overseas invest-

ments only in accordance with sound commercial criteria.ó6 A recent study ofoverseas investments by NECs by two analysts at the rWood Mackenzie consul-

tancy found that ONGC is making its investment decisions according to criteria

comparable to those applied by private energy companies.6?

In the Persian Gult the agendas and interests of individual NECs and the

increasing autonomy of NECs vis-à-vis their governments have significantly

affected "on-the-ground" outcomes with regard to Chinese and Indian energy

investments. The pattern of Chinese and.lndian investments in energy projects in

Iran illustrates this with particular clarity. Vfith regard to the behavior of indi-

vidual Chinese NECs, it is noteworthy that Sinopec - the Chinese company with

the most developed downstream capabilities and a strong interest in using over-

seas acquisitions to compensate for its weakness relative to CNPC in the natural-

gas sector - was the first Chinese company to conclude a memofandum ofagfeement for an LNG project in lran. Both CNPC and CNOOC were subse-

quently motivated to sign their memoranda of agreement with Tehran for LNG

projects to avoid being left out of potential opportunities in lran. More signific-

antly, with regard to the NECs' interaction with Beijing, all three companies

have sought to develop positions in lran even after initial enthusiasm for their

efforts in some parts of the Chinese government has cooled as the Iranian

nuclear issue has heated up.68

Nevertheless, it is also noteworthy that the three Chinese NECs have been

slow to conclude actual investment contracts for their planned projects in lran,

particularly for LNG. rWhile it is tempting to conclude that the companies are

responding to directives from Beijing, their behavior is actually shaped far more

by the agendas and interests of the NECs themselves. Like Royal Dutch Shell'

Total, and other European IECs that are negotiating contracts for planned LNG

projects in lran, all three Chinese NECs perceived a significant measure of polit-

ical risk posed by the possibility of US military action against the Islamic

Republic over Tehran's nuclear activities. Furthermore, like their European

counterparts, the major Chinese NECs are all concerned about the impact ofrising costs for LNG projects on the profitability of their prospective invest-

ments in lran. The companies are unlikely to proceed to conclude contracts and

make sizeable investments in the projects until these concerns are resolved.

A similar dynamic is reflected in the Chinese NECs' handling of potential

Resource mercantilísm and militarization 225

upstream oil deals in lran. Apart from supply contracts, only one of the upstream

oil p.¡r.t, in lran to which Chinese NECs have committed themselves has

moved-to an actual investment contract, much less implementation of that con'

tract; the one investment contract concluded so far is Sinopec's Decembet 2007

æt .r.n, with the NIOC regarding the initial phase of developing the

yãdavaran field. Even that deai - coming in the immediate aftermath of the

public release of the December 2007 US National Intelligence Estimate on

iran's nuclear program - primarily reflects Sinopec's interest in protecting the

position it stakåd out in its 2004 MOU. Again, concern about the profitability of

uprtr.u* oil projects under the notoriously difficult terms offered to foreign

investors under the Islamic Republic's "buy-back" system seems to be the prin-

cipal constraint to more fulsome investment by Chinese NECs' As a Beijing-

based analyst for a leading Western oil and gas consultancy says' "At the 919 of

the day, Cirinese rotpuniã. are out to-make money. If they just wanted oil they

wouldhave signed more'buy backs'."6e

lndian NECs have also been slow to move beyond MOUs to actual contracts

on upstream oil and gas and LNG projects in lran. In this regard, Indian and

Iranian consultants .ñd tn.tgy executives suggest that Petronet has used IOC

and CAIL's commitments to i.NC projects in lran to leverage better prices for

future LNG supplies from Qatar. They also suggest that Indian NECs are reluct-

ant to conclude LNG contracts in lran for the same reasons as their Chinese

rouni.tpunsJo Similarly, despite the Indian government's strong interest in

movinjahead with the iran-Päkistan-lndia "peace pipeline" (as long as security

issues-can be adequately addressed), Indian NECs are and will continue to be

reluctant to make contiactual commitments to the project until the price for

Iranian gas supplies is set on terms they consider commercially sound.

Limits of resource mercantilism

Of course, resggrce mercantilism is not a new phenomenon, "invented" by

Chinese and Indian policy-makers and energy executives during the past decade'

Both France in the igOOõ and 70s and Japan in the 1970s and 80s crafted exter-

nal energy strategies based on state-supported NECs working to access crude-oil

,.r.*r, ábroad. Ultimately, these poiicies' excessive costs and lack of results

forced Paris and Tokyo to move toward less statist and more market-oriented

approaches.tf Chinese and Indian extemal energy strategies are viewed as "bottom up"

initiatives, driven largely by the corporàte agendas and interests of Chinese and

Indian NECs, it ¡s stiking how scriãus are the limits on resource mercantilism,

as either a potential threaf to the stability of intemational energy markets, ot ?f-aiãng+erm basis for Chinese and Indian energy-security strategies' While

incieased demand from China and other rising Asian economies has had a very

direct effect on global oil prices, there is little evidence that Chinese and Indianr..equity" oil and gas deals, in the Persian Gulf as wetl as other energy-producing

,rgionr, are keeping or wilt keep an economically or strategically significant part

226 F. Leverett

of the world's hydrocarbon reserves "locked up" and unavailable to international

markets. Currently, oil produced from Chinese and Indian overseas equity assets

worldwide represents less than I percent of the oil produced and traded globally.

If the most optimistic projections of Chinese and Indian acquisitions abroad

prove correct, overseas equity oil production by Chinese and lndian NECs mightrepresent as much as 2 percent of total worldwide production in 2020 - hardly a

major "blow" to the stability of the global oil market.

Just as Chinese and Indian "equity" oil and gas deals will not fundamentally

alter the structure of international energy markets by themselves, there is littleevidence that they will significantly ameliorate the energy-security challenges

posed by China and India's growing reliance on imported hydrocarbons. Today,

the amount of oil produced by Chinese NECs from equity assets outside China

equals roughly I I percent of the country's domestic oil production, and consti-

tutes approximately 15 percent of its total oil imports and 8 percent of its overalloil consumption. The amount of oil produced by Indian NECs from equity assets

outside India represents an even smaller portion of India's oil demand. Givenprojections of growth in demand for oil and natural gas in China and India, and

the intensity of intemational competitíon for upstream positions around the

world, it is difficult to imagine that, in the next one to three decades, Chinese

and Indian NECs, will be able to fill a dramatically higher portion of their coun-

tries' demand for imported hydrocarbons from oveßeas "equity" oil and gas

projects.Tr As the limits of resource mercantilism as an energy-security strategy

become ever more apparent in coming years, it seems highly likely that the

pursuit of state-backed "equity" oil and gas deals by Chinese and Indian NECs

will increasingly be justified as industrial policy rather than as extemal energypolicy.72

Beyond the issue of how much "equity" oil and gas Chinese and Indian NECs

will produce in coming years, the direct contribution of that production to China

and India's energy security is subject to serious question. In most of their over-

seas equity projects, Chinese and Indian NECs are minority stakeholders, notmajority stakeholders and/or operators. Thus they do not really "control" most

of the foreign assets in which they have invested. Moreover, much of the

"equity" oil produced from these foreign assets is not likely to be physically

transferred to China and India. Rather, it will be sold on local markéts to reduce

transportation costs and generate higher profits for the producing companies.

This is particularly the case for the Chinese NECs. Chinese energy executives

and officials say that less than l0 percent of the oil produced outside China bythe three major Chinese NECs is physically transported to China. The rest issotd on local markets.T3 Clearly, Chinese NECs are prioritizing higher returns on

the sale of their production over satisfying statist perceptions of China's energy-

security requirements. It would seem that Indian NECs transfer a higher percent-

age of their "equity" oil production to India than Chinese NECs send back toChina. Nonetheless, Indian NECs currently sell a significant share of their over-

seas production on international markets and are likely to increase that share inthe future.

Resource mercantilísm and militørizatíon 227

With regard to the Persian Culf, very little of China or India's equity oil iscurrently produced there. In the future, there are likely to be truly severe con-

straints on how far Chinese and Indian NECs will be able to go in developing

equity positions there. 'When the prospective cumulative impact of these con-

straintsare considered, it seems likely that China and India will increase their

access to oil and gas supplies in the Persian Gulf primarily through supply con-

tracts, rather than the expansion of equity positions by their NECs.?a

Although their capabilities are steadily improving, Chinese and Indian NECs

cannot yet offer the same range of technical expertise and experience as more

experienced and sophisticated IECs, which puts them at a competitive disadvan-

tage as potential operators for technically challenging projects. In three of the..OPEC Five" countries, Chinese and Indian NECs face the same barriers to

foreign involvement in upstream oil and gas projects as US and European IECs.

These barriers include an outright ban on foreign participation in upstream oilprojects in Saudi Arabia and Kuwait, and the poor security and political environ-

ment in lraq. In Qatar, Chinese and Indian NECs will be challenged to access

more LNG in the face of an indefinite moratorium on new gas projects there. In

Iran, the unattractiveness of the "buy back" system will almost certainly con-

tinue to restrain the growth of foreign investment in upstream energy projects,

including investment by Chinese and Indian NECs, even with the recent decline

in the perceived risk of US-lranian military confrontation. Barring a significant

shift in the lranian approach to foreign energy investments, the expansion of the

positions of Chinese and Indian NECs in the Islamic Republic is likely toproceed slowly.

Implications for US policy

The US response to Chinese and Indian engagement in the Persian Gulf should

be guided, first of all, by an appreciation of the political and economic limits ofresource mercantilism. US policy should also be guided by unexaggerated

assessments of the ability and inclination of rising Asian powers to challenge US

hegemony in the Persian Gulf directly, at least in the near-to-medium term. As

two Harvard researchers note with regard to China, Beijing "recognizes that it isnot about to replace the United States in this region, rather it is focusing on

shifts at the margin."?5 The same could be said about India's strategic ambitions

in the region.On this basis, the US policy response to China and India's energy-driven

engagement in the Persian Gulf needs to contain two þrincipal elements. The

first is the formulation and implementation of a ne\ry American "grand strategy"

toward the Middle East, to restore the legitimacy of US hegemony in the region.

The second is the renovation of the cunent global energy "architecture" to meet

the requirements of a new era. ,

228 F. Leverett

Grand strateg¡t in the Middle East

As previously noted, China and India's intensifying engagement with energy-producing states in the Persian Gulf is taking place against a backdrop of an

r ongoing decline in America's strategic standing in the region. Perceptions of adecline in America's strategic standing in the Gulf may create some opportunis-tic openings for China and India to increase their influence in the region, and forChinese and Indian NECs to pursue investment opportunities there. Neverthe-less, America's cunent difficulties in the Middle East also create profounddilemmas for Chinese and Indian policy-makers (and for decision-makers in theGulf. On the whole, China and India have a better chance to meet their energy-security goals and other important strategic objectives if the United States isacting as an effective hegemon in the Persian Gulf. They suffer no less thanother energy consumers if US policies in the region prove to be destabilizing, orare widely perceived as introducing additional risks that the market mustsomehow discount - as is presently the case with respect to the possibility of USmilitary action against Iran to slow the Islamic Republic's nuclear development.

Since the end of the Cold War and the prosecution of the first Gulf War in1990-1, America's exercise of hegemony in the region has played out in aninternational environment characterized by deepening processes of globaliza-tion. China and India's energy-driven engagement in the Gulf reflects the inten-sifying participation of both Asian and Middle Eastern players in theseprocesses. As Daniel Yergin points out, the explosion of energy demand inChina and India is a globalization "success story," as investment inflows, exportexpansion, and sustained economic growth lift hundreds of millions of Chinese

and Indians out of poverty and these populations consume ever greater amounts

of energy.76

In the Middle East as well, Saudi Arabia, smaller energy-producing states inthe GCC and other regional states (like Egypt) are making their own belated, butnow increasingly apparent turn toward globalization. In the 1990s, analysts ofthe Middle East regularly lamented the region's slow embrace of economic lib-eralization. However, by the end of the decade, regionat leaderships werelaunching serious economic reform initiatives. The intersection of those initi-atives with the liquidity "boom" generated by high energy prices in recent years

has turned the Middle East - especially the Gulf - into one of the world's mosteconomically dynamÍc regions, making it a global economic player in ways notseen before.??

Globalization has bcen closely associated with America's economic and mili-tary primacy, both globally and in key regions. Globalization has also been

linked to America's leading role in shaping a global energy "architecture",meaning an interconnected set of market nofrns and practices, together withformal and informal institutions, which are collectively intended to promote

various aspects of global energy security.Ts This architecture has several con-stituent elements that were initially put in place by the United States and othermajor consumer states to counter the dramatic display of market power by the

Resource mercantilism and mílítarízatíon 229

Organization of Petroleum-Exporting Countries (OPEC) in the 1970s' All these

elelments remain bound up with America's role as international leader: the

United States played a key role in establishing the lnternational Energy Agency

(lEA) in the 197õs, in response to the 19734 oil'price "shock"; it encouraged

ihe liberalization and internationalization of upstream investment, reflected in

major "plays" by IECs in the l9?0s, 1980s, and 1990s, in places such as the

Nortfr Sla, the Ñorth Slope, and the deepwater Gulf of Mexico; and it provided

critical support to the creätion of a single, integrated, and truly global market for

trading cruäe oil and refined products, with prices based on sp_ot transactions and

the dollar serving as the.unànry in which crude oil is priced.?e

US leadership in shaping thã global energy architecture has been reinforced

by America's commitmónt io provide physical security for the world's major oil

fläws, particularly from the Pèrsian Gulf. Since the promulgation of the Carter

Doctrine in 1980 and the "Reagan corollary" in 1981, the united states has pub-

licly committed itself to use force to defend the security of Persian Gulf oil

,"ró*r, and the free flow of oil exports from the region as vital American inter-

ests. Spurred by these commitments, the United States has built up operational

capabiiities ovãr the past quarter-century that have turned the Persian Gulf in

military terms, into an "American lake."

The rise of China and India as players on the Persian Gulf energy scene is

taking place during a period in which American primacy in the region is coming

undei mounting strain. Much of this strain has been generated not by outside

actors, howevei but by US policy choices - on lraq, Iran, AraÞlsraeli affairs,

and other issues - that have àisappointed regional and intemational expectations

of America's leadership in the iJgion during a period of continuing globaliza-

tion. In a strategic ,.nrr, globalizãtion is fundamentally about the diffusion of

economic power across naiional boundaries. Thus, in a globalizing world, there

will inevitably be shifts in geopolitical balances, both globally and regionally'

The responsiúitity of the hegemon, in such an environment, is to manage these

shiftinj geopolitical balancés and mediate important conflicts so that increas-

ingty ãoõpeätive frameworks can develop, both within key regions and across

regions."Unfortgnately, for much of the post-Cold tWar period, US policy toward the

Middle East - under the Clinton administration.as well as under the current

Bush administration - has run increasingly in diiections that are incompatible

with these expectations.so Regional dismay with America's choices is prompting

Middle Eastern energy producers to explore various versions of an "Eastern

option" in their foreign þolicies, creating openings for China, India, and other

eitemal players to expand their influence in the Culf'For eiample, Sauài Arabia is using its status as the world's largest oil pro-

ducer, oil exporter, and holder of oil reserves to cultivate closer ties to China,

India, and odher important energy importers in Asia; the Kingdom is forging a

genuínely strategic relationship-with China, in particular, partly as a "hedge"r

ãgaihst precipitous deterioration in the Kingdom's traditional strategic partner-

.ñip *itlrr tne united States.sr The Islamic Republic of lran, for its part, has long

230 F. Leverett

sought to reduce US influence and presence in the Gulf as a high foreign-policypriority. Today, Iranian diplomats describe lran's expanding relations withrising and established economic powers in Asia as providing it with alternativesto the United States and Europe for investment and trade partners. They alsonote that these relations give Tehran cover against US pressure over lran'snuclear activities, involvement in post-Saddam lraq, and other points ofUS-lranian contention.s2

These developments are exacerbated by a relative decline in America's eco-nomic influence in the Middle East, as other international actors - including theEuropean Union, as well as rising Asian powers - increase their trade andinvestment ties to the region.83 Current and prospective investments by Chineseand Indian NECs in the Persian Culf are part of this broader trend.

In this context, an important part of the US policy response to China andIndia's energy-driven engagement in the Persian Gulf is the formutation andimplementation of a new "grand strategy" toward the Middle East. This grandstrategy should combine pursuit of a multilateral regional settlement on lraq,carrots-and-sticks engagement with lran and Syria, and definition of a substan-tive political horizon for resolving the various tracks of the Arab-lsraeliconflict.sa A new strategy for the Middle East should also include a return to the"over-the-horizon" military posture that served US interests in the region so wellin the 1980s and early 1990s, but from which American administrations havemoved away since the end of the first Gulf War. Such an approach would reviv-ify and re-legitimate American primacy in the region, and would win broadinternational support - including that of China and India.

Renovøting the globol energy orchiteclure

Beyond getting its Middle East policy "right", the US response to expandedChinese and Indian engagement in the Persian Gulf also needs to include a neweffort to renovate the global energy architecture for a new era. Defining thisagenda in full is beyond the scope of this chapter. However, it is relevant here toconsider the integration of China and India into the IEA, the principal inter-national regime for important energy-consuming states. While the IEA isworking to build closer working relations with both China and India, full inclu-sion of these countries in the organization would require, effectively, the IEA'sreinvention.

Western officials frequently point to China and India's deficiencies as poten.tial members of the IEA (i.e., their non-membership in the OECD and their laçkof strategic petroleum reserves specified by IEA guidelines for member states).But, it is just as important to recognize that Western powers would have toaccept significant changes in the IEA regime for Chinese and Indian member-ship to become plausible. In particular, under current IEA rules, new membersare allocated weighted voting power in the organization based on their oil con-sumption in 1974. This is hardly an attractive prospect for either China or lndia,and even if accepted would introduce a substantial degree of unreality into IEA

Resource mercantilism and militarízation 231

proceedings. To date, thore has been little serious discussion among IEA

members about the necessity of reforming the organization's decision-making

structure to accommodate China and India's eventual inclusion.

ln this context, the United States should also strongly support the inter-

nationalization of Chinese and Indian NECs as a way to encourage China and

India to take more market-oriented approaohes to ensuring their energy security.

Current US policy is, at best, ambiguous on this issue. The NECs are, in many

respects, already America's best allies to promote more market-based policies in

both China and India. Their further internationalization (including through joint

venture projects with US and other IECs) will make them even stronger advo-

cates of more liberal approaches.

The consequences of incorrigibility

If the United States takes these steps, it can maintain its strategic primacy in the

Persian Gulf, as well as its dominant role in the global energy architecture. If,however, the United States persists in a more unilateral approach to the most

strategically critical region of the world - in a manner that is dysfunctional for

the interests of other important regional and international players - and eschews

effective leadership in reforming the global energy architecture to accommodate

rising powers like China and India, the long-term consequences for America's

regional position in the Middle East and its international standing generally are

potentially serious.Under these conditions, Middle Eastern energy producers and rising Asian

energy consumefs, especially China, may ultimately forge a de facto strategic

alliance and look collaboratively for non-military means to contain American

influence in the Gulf. Such as scenario is consistent with the conditions for and

modalities of "soft balancing" against US power, as described by Robert Pape

and others.85

The dramatic rise in energy prices in recent years has prompted an enormous

transfer of resources from established consumer states to energy producers and

to manufacturers who serve markets in energy-producing states.86 (Thus, along-

side China, which is expanding its manufactured exports to energy-producing

states in the Persian Gult Germany has built up a significant current account

surplus in recent years, and Japan has maintained its surplus.) At this point, what

energy-producing states in the Middle East do with their current account sur-

pluses is at least as important to the financing of global economic imbalances as

ih. runugtment of China's current account surplus. China and a number ofMiddle Eastern energy-producing ststes with significant current account sur-

pluses seem to be in the early stages of diversifying their foreign exchange

reserves away from dollar-denominated assets.

Given these realities, at least two options for strategic cooperation between

China and Middle Eastern energy producers to contain US influence in therpersian Gulf present themselves.s? First, China and Middle Eastem states could

ultimately move to use their continued willingness to finance America's

232 F. Leverett

burgeoning ourrent account deficit and overall debt levels as a soufce ofstrategic

i*ã*gr oîer US foreign policy.ss Second, China and Middle Eastern states with

substantial influence iri oþEc'courd coordinate their actions to effect a shift in

ih, ,u*.nry regime for international oil trading so that oil would no longer be

pi6[.oi.íy in-dollars, but rather against a basket of cunencies' Such a move

would put significant pressup on tht value of the dollar and, by extension, on

the US economy.Either of these two options would constitute a major blow to America's inter-

national standing. Fortunately, neither of these scenarios is likely to play out.in

the near term; the United States still has time to fecover from its strategic mis-

takes in the Persian Gulf and other critical arenas. But, if these strategic mis-

takes are perpetuated, the long-term consequences for America's global

leadership are likely to be profound.

Notes

I The author gratefully acknowledges the contributions of Hillary -Yunn Lererett and

pierre Noël to his;;alt;i; ãnd uñdrrrtunding of the issues treated in this chapter. He

also thanks John Mearsheimer, Robert pupã, $g. partìcipants in the University of

Chicago's nrogrom-ã; Internaiional Security Poliiy woikshop; R1i,::LT':.1Î^n:Gbbaî public-policy lnstitute's Transatlantic Energy Security Dialogue' "ulobal

Energy Cone-an ã'un¿-tttt Rise of China and tnãía"; and Fatih Birol and staff

members of the International Energy ngengyls -Ecortomic ll?lytit Division, oil

ináurt y "n¿

M"rk; óilision, and õfncã of õlobal Energy Dialogue for comments

on earlíer versions of arguments presented here'

2 For discuss¡on orõtrinãse and tidian engagement in the Persian Gulf, see Geoffrey

Kemp, ..East Moves ùest,' The Nationít ínrcrrtt, summer _2006; Masataka osumi,

..lndia and Chinaü en;-tgy btr*egies in Middle Eastem Oil-Producin8 Natiolt¡'l'

Presentation to itre tnstl¡iute of-Energy E991on-ri-cs, l"p.ln' 25 Au^gust-2006'

il;-Ji;t¡r".ir"¡.ärjø.J_o.tø4 rtn l.yíí; Afshin Molayi,'Îhe New silk Road,"

ttashíngton p^tiii"ll¡l lO,Q; and bominic Barton, Kito -de

Boer, and Gregory

Wilson,,.Ttre Neiv Silk"it".û ópportunities for Asia and the Gulf," in a special issue

of McKinsey g*lüìly, lrUtiuty ZOOZ, htç://www.mckinseYquarterlyrom/Eco-

nomic-Studi eVprjuct¡'uity-Performancyitrejew-S ilk-Road-Opportunities-for-A

sia-and-the-Gull I 8 I 4-abstract'

3 The phrase..r"roìr"à ñercantilism" was first coined by Flynt Leverett.in^"The- Arópãffis of Oil and America's Intemational Standing," testimony to the US Senate

Committee on gnätgy .n¿ Ñut*ut Resources, l0 Jãnuary 2007, httpllgeostrate-

ltãp..õt¡f*epdfs/-IinergvJestimoÍy-Leverett' pdf'

4 For exampte, tneÜéìi,iñá e.ono*ic an¿ secu¡b Review Commission claimed in

its 2006 annual report to the US Congress that

China's strategy of securing ownership and control of oil and natural gas assets

abroad "oum

iúUrtunii.lty àffect US tntrgy security -. reducing the ability of the

;i;b;i p.trotzum-muittíto ametiorate teäporary ând limited petroleum supply

ãisruptions in the United States and elsewhere'

More broadly, the Commission argued that

china's energy policies, taken as a whole, arenot consistent with the economic or

Jrop"f¡trc.i tËfräuioï oi o responsible søúeholder; they distort markets and desta-

bitize votatii;';äì;;;. Át C¡lnu't enerE needs and consumption. grows' its

faiture to oUrã*ãifttse international normõbecomes increasingly problematic'

Resource mercantilism and milítarizatíon 233

See US-China Economic and Security Review Commission, Report to Congless,November 2006, pp. 7-8, http://www.uscc.gov/annual-report/2006/annual-report-full-06.pdf.

5 In this regard, Henry Kissinger has gone so far as to argue that competition overaccess to hydrocarbon resources will be the most likely cause for international con-flict in coming years; see Caroline Daniel, "Kissinger Vfams of Energy Conflict,"Fínancial Times,2 June 2005.

6 For example, Ian Lesser claims that

In Asia, growing reliance on Middle Eastern ... energy sources may encourage

importers to augment political and commercial ties with deeper security relation-ships and increased direct investment in regional energy projects. This could go

well beyond existing arms transfer relationships. With China set to import everlarger quantities of oil from the Gulf, it is not inconceivable that some form ofChinese naval presence in the region will be commonplace in 2010.

See Lesser, "Energy and Middle Eastern Security: New Dimensions and SfiategicImplications," in Nora Bensahel and Daniel Byman, e'ds,, The Future SecarityEnvìronment in the Middle East: Conflìct, Stabilíty, and Political Change, SantaMonica, CA: RAND,20M. On the risk of Sino-American military confrontation inthe Middle East, see also Toshi Yoshihara and Richard Sokolsky, "The United States

and China in the Persian Gulf: Challenges and Opportunities," The Fletcher Forum oflltorld Afaírs 2611, Winter-Spring 2002; and, more sensationally, Jed Babbin andEdward Timperlake, Showdown: ll/hy China llants llar with the United Sfafes, NewYork: Regnery,2006. Alongside the risk of Sino-American military confrontation,Richard Russell argues that China's energy-driven engagement in the Middle East

will prompt Beijing to continue transfening weapons of mass destruction capabilitiesand expertise to regional states, with potentially destabilizing consequences for the

regional security environment and US interests; see Russell, "China's WMD Foot inthe Greater Middle East's Door," Middle East Revìew of International Alþìrs 913,

September 2005, http://meria.idc.ac.il/journaV2005/issue3/jv9no3a6.html. Kenneth

Pollack claims that Chinese engag€ment with energy-producing states in the region

"can be very detrimental to the US, particularly if the Chinese were to adopt the rolethat the Soviets did during the Cold War, supporting whichever state opposed the

United States"; see Adla Mæsoud, "Oil May Fuel Sino-US Conflict," al'Jazeerø,29June 2006, http://globalpolicy.igc.org/security/nafresloill2006/0629massoud.htm.

7 See for example Ashley Tellis, "South Asia," in Richard Ellings and Aaron Fried-berg, eds., Strategíc Asia 2001-02: Power and Purpose, Seattte, WA: NationalBureau for Asian Research, 2002; Stephen Blank, "India and the Gulf after Saddam,"Strategìc Insíghts, April 2004, http://www.ccc.nps.navy.miVsil2004/apr/blankApr04.asp; Enders Wimbush, "The Shape of New Asia," Asían lílall Street

Journal,20 September 20M; C. Raja Mohan and Parag Khanna, "Getting IndiaRight," Policy Revíew, February/March 2006, http://www.hoover.org/publications/policyreview/2913806.htm1; C. Raja Mohan, "lndia and the Balance of Power,"Foreígn ffiirs 85/4, July-August 2006; Ashton Carter, "America's New Strategic

Partner," ibid.; and Ashley Tellis,'What Should rWe Expect from India as a Shategic

Partner," in Henry Sokolski, ed,, Gauging US-lndian Strategíc Cooperation, Carlisle,PA: United States Army War College Strategic Studies Institute, March 2007,

http://www.strategicstudiesinstitute.army.mil/pdffilesþub755:pdf. In addition, see

Robert Blackwill (then-US ambassador to lndia), "The United States, India, and

Asian Security," Presentation to the Institute for Defense Analyses Fifth Asian Secur-

ity Conference, 27 January 2003, httptlwww.mtholyoke,eddacadlintrel/busb/blpk-will2.htm. For analyses of Sino-lndian relations that question whether India can

ultimately be induced to ally ìvith the United States to contain China, see Peter

Brookes, "Meeting 2lsÞCentury Security Challenges in Asia," Testimony to the

234 F. Leverett

United States House of Representatives Committee on Armed Services,2T September

iOOS, trttp:llwww.heritage.org/Research/AsiaandthePacific/upload/85825-l.pdf; Lora

Saalman,',,Redrawing lñdia's-Geostrategic Maps with China and the United States,"j"poi-lor*, 2I Seitember 2005, httpl/wwwjapanfocls.orglproducts/detailsl2065:Cfri.t¡g Bajpaee, "lndia Recovers Lost Ground in the Intemational Energy Gaqe"l

Power and Interest News Report, l6 March 2005, http://www.pinr'com/report¡hp?

ac=view-report&report-id=2i9&language-id=l; and Kemp, "East Moves \Mest.''

8 Mikkal Herbrrg, "Th, E trgence oiChina throughout Asia: Security and Bconomic- Co|r.drn.r, îot the US,"-Testimony to the United States Senate Committee on

foreign Relations, 7 June 20q5r http://www.senate.gov/-foreign/hearings/

ZõOSÃrgOSO607p.html. For an insightfut discussion of the enerqy:rgl1t_el dime¡sions

of Sino-Indian strategic interactionl see Stein Tønnesson and Âshild Kolås, Energt

Secwity in Asia: Chína, India, Oil, and Peace, Report tothe-Norwegian Ministry^of

Foreigá Affairs, Oslo: Internationat Peace Research Institute, April 2006'

http:/www.prio.no/page/Publication-detailsll9429l47777.html; see also Anindita

óftãtte¡"* dnd Uoirit-Sinha, Powei ReatignmSnß. in A2i9:. Chína, India, and the

Ilnited States - Report of a US-lndia Pot¡"y Dialogue, University of Pennsylvania

Center for the Advänced Study of India, and The Observer Research Foundation, pp.

14-17 , Decembei 2006, http://casi.ssc.upenn.edu/researclVPowero/o20Realign-

mentso/o20rePort.Pdf.9 Dennis Blaii and'Kenneth Lieberthâl note that China and lndia (along with-Japan and

nurri.) ..are the only other countries with the economic potential to build large blue-

water áavies in the same league with the United States', but they are still at least 20

yru* .*.y from developin! ttre fleet strength, naval-supply networks, and opera-

íønut rt¡tir" needed to mount sustained operations far from their home ports; see

Blair and Lieberthal, "smooth Sailing: The World's Shipping Lanes Are. Safe,"

fü"ig, Alfaírs 86/3, May-June 2007..Beijing.is wgrki¡re.to expand.its blue-w¿ter

naval"capä[ilities ovór time, including the ireation of a "string of pearls" network ofUasing fäcilities along the iea-lanes from the Persian Gulf to China. Neverthetess,

China's naval moderãization appears to be focused primarily on -the promotion of

Chinese interests vis-à-vis faiwaï. In this regard, Bemard Cole judges that Beijing's..concem for the security of its overseas ãnerry supplies does not dominate its

national security policy piocess, and the mo¡t imþran1a¡pects.of energy securiry for

Beijing are económi" äriO potitical, not military"; see Cole, "Chinese Naval Modern-

izat-ion-and Energy Securiþ," paper presented to the National Defense University's

Institute for Nãí¡onal Sóóurity Siudies Pacific Symposium, 20 June 2006,

http,iñ**."du.edu/inss/sy.posía/pacific2006/colepaper.pdf. For discussion ofChina,s naval developretrt

"åd its implications for ihe military balance in the Persian

õ"ii,'tt. nichard Sokolsky and Eugene Rumer, "The Role-of Outside Powers," in

nictrard Sokolsky, ed, The Llnited Sntes and the Persian Gulf: Reshaping Se-cyrity

itiot"g lo, the-Post-Containment Erø, Washington,.DC: National Defense Univer-

rity pîrJr, 20ß; bavid Shambaugh,' 'Chinais Mil¡tary Modernization: Making

ItóaOy aná Surprising Progress," in Ashley Tellis and Michael rvVills, eds., Strotegic

Asia 200546: Mítiíary -Modernization in an Era of Uncertainq', Seattlgt. WA:

National Bureau of Asian Rosearch, 2006; Anthony Cordesman and Martin Kleiber,

Chinese Military Modernization, Force Development .and Strategig-Capabilities,

ùashington, DC: Center for Strategic and International Studies, 2007; and Ronald

ô'Rourñ., .lçhina Naval Modemization: lmplications for US Naval Capabilities^-

nactgrounC and issues for Congress," Congressional Re_search Service Report for

ðongir5, 29 May 200?, htp:llwww.fas.org/sgp/crslrow/Rl33^l53.pdf. lndia.is.better

posiiioned than ôhina,'botir geographicaily and in tgttnl. of naval capabilities, to

ilojr.t ñ*rr along sea-laneiofiommunication running lhrgugh the Indian Otu..tn'

and the Indian navy-has embarked on an ambitious modemization program. Neverthe-

iãg, ur John Cill ïotes, "deficiencies in logistical support, reconnaissance aircraft,

Resource mercantílism and militarization 235

and command/control will ... contiriue to hamper the navy's efforts to achieve a true

btuo water power ñüi"; ;.iut;;;-ttt Gill, "india and Pakistan: A Shift in the Mili'

tary Calculüs?," in Tãllis and Wills, Slraregrc Atjo'. ! ..

l0 On this point ttt Ëiynt il.uttutt inO rleflw Badgr, "YTuqt:F China-US E!||ry'- ð"t"pã¡ü"" in the'ù¡¿¿tt East," Íl/ashiigron Quartery ?9!1, December 2005'

htrp:/ ryww.twq.coøOã*iniãtl¿o.tiOOt"¡nter-ievereñ.pdf. The risk of a Sino-American

.ol"óriitlon foï influence in key ,n.tgy'pïodu.ing regions is also hig¡lighted in

Council on fotelgtr'Reiáiiins,Ñational'Sàeurity Consequences ofus.Oil-Depend'

ency,lndepen¿rnt i.ti'îåi..'ntpott 58, New Vork: Council on Foreign Relations'

2006, frttpy¡www.c-fi.";il;l"it/publióations/attachmentVgnergyTFR'pdf; .Joh¡Keefer Douglas, ñ;úõ Nelson, and Kevin schwarrz, *Fueling

!!g- Prlgon':Flame: r¡ow clrinål;Ë;;rgy or*.iror Affect lts Relationships.in the Middle East,"

p.prt prir.n6O o ifrr Úfthina Economic and Security Review Commission' 14

September ZOOO, frttp:liwww.-ùscc.gov/researchp-apery2Ob6/China-ME-FlNAl'pdf;and Hanns cungrei'Ïiiipert :;Ári* in der Nahe/tviittlere osten: Wirtschaftliche und

Energie Interesseni' inîu¡rL Asseburg, ed, Regionale ('teu)o/nuryg-.ím Na!e2

und Mittleren Osten und díe Rotle erteíner Àktãrrr, Berlin: Stiftung Wissenschaft

und Politik, March 2007.

I I The recent tr"n¿ tã*áiå higher oil prices can be dated to March 1999' when the"

O;;""ñion of pri.f.ur--Bxportiñg Countries (OPEC) successfully increased

market prices by limiting member sqt^.:1 productioì for the first time since 1985'

Between March tóöö;ã i.pi.tUo 2000, oil prices rougìlv triple{ - u]g:tl f* 1

low base - as a,rJtãiopÉc's actions. in septemter.2o00,.opgc pub^licly stated

that it would *otf.î Èrrp itr;Uãtf..t" price for'crude oil within a $22-28-per-banel

band. oil p.i... ,rrnãii.á"t 'tut¡n"lv

statre until November 2003, whe'n rising demand

from Asia u.g.n älrin"-p¡.tt tfu.oily upward. Since then, world oil prices have

more than triPled again.

12 See Ken Koyami,'eioputtves on AsÍan oìl Demand: outlook and Uncertainties'- -

iãtyot lnstiiute oi enerþ Economics,february 2007' --

13 See Daniet v.rgin,;ii;ti;ih; il¡ órttre olthge," Washington P-ost,3l July 2005'

14 See Friedemann úr;,iíir, nntrgt Secarity: Demands Impos.ed 91t

German and Euro'

pean Foreign p"iö-'iv1 9i"14'g.þ'fs"rati91^!i the tïorld Enerst Market''srrl¡n' Stift"ung Wisienichaft und Politik, January 2007.'

15 see Flynt Levere.i-;;ã-púil NoëI,.,îhe New Axis of oil," National Interest,

summer 2006. Foi a áìs"ussion of somewhat analogous,trends in international gas

markers, see em-y i.ff;-;;ã Ñald Soligo, "lt!u$9, Stn¡cture in the New Gas

Economy: Is Caiei¡zaúon Possible?," ln-óavid Victor, eds., Natural-Gas and

Ciopotiíi"s, fror- ifiO,Cambridge; Cambridge University Press, 2006' For a com'

;;"íi"" ;.fvrir'oi J"i.tuioitt ñ¿t in oil and gas markets, see Mueller' Energt

SecuritY,l6 Resource nationalism is often defined as a national govgrnt.ngnl's assertion of owner-

ship rights over oil and ggs reserves within their -tenitorial

boundaries, usually in

ways that.on,r.diä libäù;*¡itts foi encouraging foreign investment' and work

against the interesa; of feCi. ThiJspecies of reso-urce nationalism is epitomized by

the efforts of presiAãnt äu¿i*¡t Pütin's administration to re'establish a dominant

measure of state ätr"ioviiRussia's hydrocarbon resources, and by-the nationaliza'

tion of foreign inuurt*tntt in Veneiuela's Orinoco region by President Hugo

Chávez's a¿minititaiion.-nut, Utyond this essentialty economic aspect' there is. a

;;;; dt tt potiticat dimension io contemporary -resource

nationalism - namely'

national gourrnr.ng t.tL*g to derive.stratägic inffuence.from the control over the

production rn¿ rrïliint "i ftyOtçarbon ræerves exercised by their NECs' The

political species åii*oùtî. natíonalism can take the blunt form of unilateral supply

cut-offs, as Uotfr ôhiuet anO lranian President Mahmoud Ahmedinejad have threat'

ened, notwithranãitfi ópgc't commiment not to use oil as a political weapon; on

'il.

"lli

'll

[,

II

I

i

236 F. Laryrett

this point, see Mueller, Energt Security,The political species of resource nationalism

can ãlro take a more subtlJ form, with resource-owning governments using their

control over the monetization of reserves as a source of strategic leveragej on the stra-

tø. ãtn"nrions of contemporary resource nationalism, see Leverett, "The Geopoli-

tici of Oil and America's Intemational Standing."

17 On Asian NECs and their roles in national govemments' extemal energy strategies,

r* John Mitchetl and Glada Lahn, "oil for Asia," briefing paper, Energy, Eny19n-

ment and Development Programme, London: Royal Institute of_lnternational Affairs,

tvtarch 2007,http:llwww.isñ.ethz.clr/pubs/ph/details.cfrn?_v2l=lll300&lng=el&,¡,lic¡53=lll300ótord6l=alphaNavi&id=3b644i Keun-Woon Paik, Valerie Marcel, Glada

L.nn, ¡ohn Mitchell, änd Erkin Adylov, Trends in Asian NOC Investment Abroad,

worting background paper, Energy, Environment and Development Programme,

lonáoñ noyailnstituie'of international Affairs, March 2007,http:llwww.chatham'

ñooæ.otg.or¡files/?076-r0307anoc.pdf; Hiroyu\i Ishida, Flrrg Strategies ín Cling

inà tn¿¡ã and Møior Cõunffies' Views,Tokyo: Institute-of-ÐtJgy Economics,.Y.:..h

inOi, ittprtt"neten.ieej.or iplenldata/pdfl3il8.pdq and- Mikkal Herberg, "Asia's

National Oil Companiõs: Internationd nxpañsion and Competitive Implications,"

Presentation to tire Institute of Energy Economics, Japan, 5 April 2007,

http://eneken. ieej.orj p/en/data/pdf/3 89.pdf.

lg On China's externaiänergy strãtegy see Mikkal Herberg, "Asia's Energy Insecurity,- Cttinu, and India: tmplicãiions foi-the US," Testimony to the United States Senate

Committee on foróign Relations, 26 July 2005, http://www,prio.no/filos/file

47 777 -O6¡4Z0-enerryiecurity-in-asia-final.pdf?PHPsEsslD=b8a3+ac; David

Z*.il""O gilianñãi, "Chiriat CloUal Hunt for Energy," Forgígn Atfairs.84l.5,

S.pi.äUrOctober ZOOS; Unitø States Depa.tryent of Energy, Energt Polìcy Act

20'0J, Section 1387: National Security Review of Interyaþngl^lnergl Requirements'

F;úüty 2006, http://www.epagov/oust/fedlaws/publ-109458-pdf; Kenneth

L¡eUertlial and Mikkal iTerberg,'thìna's Search for Energy Security: Implications.

øi US policy," NBR Anatysls l7ll, April 2006, http://www.nbr.org/publicationV

istue.aìp*flpá3a9dcaa-b9å 54601-ac32-93f702696db5: Aaron Friedberg."'Going

Out': Cïina's Pursuit of Natural Resources and Implications for the PRC's Grand

inuægy," NBR Analysis 1713, September 2006, http:/ vwtv.nbr.orglpublicatio¡s/

issùe.íJjxffO492;incaDowns, China,The Brookings lnstitution, Foreign Policy

SioOir., Bn.rgy Security Series, December 2006, http:/ vww.brookings.edu/reports/

20064ichinu.-*p*; andbaniel H. Rosen and Trevor Houser, China Energt: A Guide

øiinL-iirp,lexàd,'Washington,. DC: Peterson lnstitute for lnternational Economics,y.ri ZOOIihtþ://www.iieiom/publicationsþpers/rosen050?.pdf. On India's exter-

nal energy strategy, see Herberg, "Asia's E-nirgy lnsecurity"; Vibhuti Hate, "lndia's

È"rtgy óitrtnri;'South Asia lionitor 98, Washington, DC: Center for Strategic and

lnterñátional Studies, 7 September 2006, http:www.heritage.grglRgsearct¡/Asi-

aan6ttrepacinc/upload/bg-200d.pdf; and Tanvi Madan, India,The Brookings In¡1i1t|-

;ñ; Foreign 'policy-Studiås, Energy Security Series, November 2006,

htþ://www.brookings.edtr/reports/2006/ I I india.aspx.

fg ö;the inærnationaÏ activitiès of Chinese NECs, see United States Department of-- ñ;rgy, Energt Poticy Act 2005, Section 1387; Eurasia Gloup,.China's Overseas

inu"íí^tntt il O¡t oid Got Production, Report to the US-China Economic and

Sr.*¡ty Review Commission, t6 October 2006, http://www.uscc.gov/researchpa-

pr"lZó'OO¡oil_gas.pdf; Peter Parry, Eric Spie_gll, E{111d_Tse, John McCreery, and

hd¡un del Mãstro, :'The Roariñg Dragoñ: Únocal Bid Just a Minor Bump in the

nou¿," Washington, DC: Booz Ãllen Hamilton, 2006, http://www.boozallen'com/

media/file/l53aa3.pdf;Xin Ma and Philip Andrews-Spee9, lhlOverseas Activities ofCnioà,t National öit'Co^pories: Ratioiale and Outlook, Peijing: C-hina Institute ofInternational Studies, 2006; Xiaojie Xu, "Chinese NOCs' Overseas Strategies: Back-

g¡ñ¡; ó;Àparison, and h,emaiks" in the Baker Institute Energy Forum.on "The

Resource mercantilísn and milìtarìzatíon 237

Changing Role of National Oil Companies in lnternational Energy I'Íarkets," March

ZOOZ, trttpylwww.rice.eddenergy/publications/docsNOCs/Papers/ChineseNOCs-Xu.pdf; and Rosen and Houser, China Energt On the international activities of Indian

ÑECs, see Madan, India; and United Staæs Energy Information Administration,

Country Anølysis Brief: India, January 2007.Since China fiecame á net oil importer in 1992, the portion of its oil supplies corning

from abroad has risen steadily. China currently uses roughly 6.6 million banels per

day (mmM) of orude oil; almost half of this figure - just over 3mmbd - is provided

by imports. India's dependence on foreign oil is of longer standing and deeper than^

ihina;s. India currentiy uses at least 2.5mmbd of crude oil; more than two'thirds ofthis figure - roughly l.? million mmM - are provided by imports.

Worklng from estimates of China's oil demand by the Intemational Energy 4e9ncy(lEA), tle Un¡ted States Energy Information Administration (EIA), and the lnstitute

òf Energy Economics, Japan, and from estimates of China's domestic oil production

by the iãme agencies as well as by Chinese NECs, one cal project that Chjna's

irirport dependence for oil will reach óÞ80 percent of its total consumption in 2020.

Evän moie dramatically, both the IEA and the Indian government estimate that

India's import-dependence for crude oil could exceed 90 percent by 2020; see Inter-

national Energa Agency, lllorld Energt Outlook 2004, Pans: International Energy

Agency, 2004,-http:/ tww.iea.org/textbase/nppdf/freel2004lweo200a.qdf; and Integ'^

,ited Er"rgt Policy, Report of the Expert Committee, New Delhi: Government oftndia State

-Planning Commission, August 2006, http: / lplanningcommission.nic.it/

reports/genrep/rep-intengy. pdf.22 In contrast todomestic oil production, for which the best that the Chinese and lndian

energy industries might do is to delay the moment at which production ltarts jodecline, and ameliorite the steepness of that decline, both China and India have the

potential to increase domestic gas production in coming years. Nevertheless, by 2020,

both countries will, in all likelihood, have to import well over half of the natural gas

they consume. In this regard, analyses by the IEA, EIA, and Chinese NECs project

thai, by 2020, China may have to import as much as 70 percent of the natural gas itconsumes. The IEA projects that, by 2}2ù,lndiawill become at least as dependent on

imports for its natural-gas supplies as China.23 Today,88 percent of Japan's oil imports and 8l percent of Korea's are sourced from

ttre tvti¿Cle East - signlficantly higher figures than the percentage of Chinese and

Indian oil imports sourced from the region.24 Onthis point in the Chinese case, see Friedemann Müller, "China's Energy Policies -^

Geopoliiical Repercussions," in Gudrun Wacker, ed, China's Rise: The ReUrn ofGeopotitics?. Berlin: Stiftung Wissenschaft und Politik, February 200ó, htþ://www.-swp-berlin.org/de/common/get-document.php?id= I 666-

25 Foi further dßcussion of the regionalization of oil and gas supply relationships, see

Mäller, Energt Security.26 Chinese and tndian etiies are by no means alone in their concem about volume risk in

global energy markets. A survey conducted in 2005-6 under the auspices of the

World Economic Forum's Energy Industry Partnership Program indicates that uncer-

tainties about se¡urity of supply from the Middle East in the near term, and adequate

growth in supply globally in the longer term, are the leading concerns of chief execu'

i=íve ofñcers bî iniernationat energy companies; see "Energy Community Survey" in

World Economic Forum, Energt Vision Updale, Spring 200ó, p.6.

27 See Leverett and Bader, "Managing China-US Energy Competition."

28 The .OPEC Five" control the world's five largest national holdings of proven

r€serves ofconventional crude oil. Iran and Qatar hold the second- and third-largest

reserves of natural gas in the world, respectively (after Russia)'

29 Of course, these eiternal energy strategies are parts of broader energy policies that

also include measures aimed at managing demand and increasing the energy

t;

I

20

2t

238 F. Leverett

efficiency of tho Chinese and Indian economies. It is beyond the scope of thi¡ chapter

to consider these other dimensions of Chinese and Indian energy policies. However,

in both the Chinese and the Indian cases, policy'makers have generally put more

effort into poticies aimed at increasing the availability of energy supplies rather than

poticies aimed at reducing demand and increasing efficiency.See Downs, China,p,14.See Müller, Energt SecuritY,Personal communication with the author'

This document, Hydrocarbon Visìon 2025, was released in February 2000. For dis-

cussion, see Translating Indìa's Hydrocarbon Vision into Reality, Strategy Repo{,

tndia Oil and Gas Industry, New Delhi: Emst and Young India, 2004, pp. 3l-32'Jrans latin g-lndia' s-Hydrocarbon-

ndia' s-Hydrocarbon-Strategy-Report.pdf.34

ùtratggy-lsgPu¡ uaD¡¡19/ I ll¡arùla¡l¡llË'-¡tluro ù-¡ ¡Ju¡ws¡ w¡¡-sf¡ srvÞr-¡wrv¡ v'rÞ¡'

tn anãddreis to a global energy conference in New Delhi in January 2005' Singh

lI

303l3233

acknowledged, "l fi;d China ahead of us in planning for the future in the ñeld ofenergy secúrity." Given this state of affairs, Singh argued, 'We.can no longer be

comþiacent and must learn to think strategically, to think ahead, a1$ to act swiftly and

deciåively... . We need to strengthen our oil companies in launching them as global

firms." Sie Keith Bradsher, "lndia Finds ltself Trailing in Fight for Global Energy

Deals," Internationol Herald Tribune, l? January 2005, http://www.ihtcom/art-¡cley'iOOS/Ol/l6lbusiness/rupee.php; and "lndia Must Catch Up with China on

Energy, Singh Says," Bloomberg 16 January 2005. _

35 On ðtr¡na'J relations with Saudi Arabia, see Leverett and Bader, "Managing

China-US Energy Competition"; John Calabrese, "Saudi Arabia and China Extend

Ties beyond Oilj' Jømèstown Foundatíon China Brief 5/20,27 September 2005'

http//www j amestown.orglpublications-detai ls.php?yolumejd=408&issue-id=3474Aart¡cle-¡O=2370272; palid m¿elman,'îhe Sino'Saudi Connection," Forbes, 17

npril 2006, http://members.forbes.com/globaU2006/0417/0l8.html; and Javid Hassan,..Saudi-Sino Rèlations Poised for Further Expansion," Arab News,6 December 2006,

http://www.arabnews.com/?page=15&section=O&article=89621&d=17&nr- lt&y=2Nl.Ori tt¡e AMallah and Hu vlsis in 2006, see "China, Saudi Arabia Forge Closer Rela-

tionship," china Daily, 24 January 2006, http://uryw.9hinadaiþ.neveqitrydoc/20bb:41/24lconæni_515060.htm; "China, Saudi Arabia Extend Energy Ties,"

Asia Times, 25 January 2006, http://www.atimes.com/atimes/Middle-East/[IB23Ak03.html; Jianjun îun, "The Strategic Considerations of the Sino-Saudi

Oil Deal," Jamestown Foundation China Brie.f 614, 15 February 2006,

h6p/ vwwjamestown.orglpublications-details.php?volume-id=415&issue-id=3621Aart¡cte-¡¿=2370779; and r'Energy, Defense Deals tnked as China President Visits

Saudi,"/gerce France Presse, Apnl22,2006. On China's relations with lran, see

Leverett ãnd Bader, "Managing China-US Energy Competition"; Sharif Shtll.,Warming Sino-lranian Relaiions: Will China Trade Nuclear Technology for Oil?,"

Jamesøvln Foundation Chìna Brief 614, 23 July 2005, http://wwwjamestown.org/publications-details.php?volume-id=415&issue-id=3621&article-id=2370779;bario Cristiini,'Chína and lran Strengthen Their Bilateral Relationship," Power and

Interest News Report, 6 October 2006, htp://www.pinr.com/reportp¡p?ac=

view-report&reportjd=566&language-id=l; and John Garyçr, China and lran:

AncieniPartneis in a Post-lmperial World, Seattle: University of'Wæhington Press,

2007.36 On China's expanding ties to GCC, see Julian Madsen, "China's Policy in the Gulf

Region: From ÑegleCt to Necessityi ,P9wer and Interest News Re¡9$_27 October

20õ6, http//www.pinr.com/report.php?ac=view-report&report-id:575&langu,age-id=t. the dCC ¡ncludes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United

Arab Emirates.37 On Beijing's forgiveness of lraqi debt as part of an effort to re-establish and expand

Resource mercantilísm and mílítarization 239

Chinesælraqi energy ties from the Saddam era' see ChrisÛopher Bodeen, "China

nlrees to Röduce íiaqi Debt by 'Large Margin','l^ls¡ocjatellress, 2l June 2007,

trfr /www.uofaweb.uålberta.calchinainstituteTnav03.cfin?nav03=6 17 97 &nav02=57 5

98i?.nav0l=57272; Samuel Ciszuk, "lraq Woos Chinese Oil investments Amid

Increasing lraqi Frustration with Lack of Piogressi' Globa! Insíght Daily /ryaly1tlt!!iunr iOO7, httþ://www.uofaweb.ualbert¡.ca/chinainstitute/nav03.cfm?nav03=61792&nav02=57598&nav0l=5?272; and Shai Oster, "lraq Tums to China for Help in

Reviving Oil Industry," llall Slreet Journal, 20 June 2007 ' -38 Derek Sãnds, "AnaryJis: tndia and Middle East Cozy oyet-qryr_gJ," UPI Asia O/iye,iZ Uay ZOtí1, http://www.upiasiaonline.comÆconomics/2007/05121/analysis-india-and_míddle_east-ðory-over-enerryl'1607/. Indian officials have referred to the

peräan Gulf as part óI lndia's "eîtended neighborhood" for-most of the post'Cold

War feriod. Foriepresenative statements see M. H. Ansari (then-Indian'ambassador

to S.ud¡ Arabia), 'isecurity in the Persian Gutf: Evolution of a Concept,"- StryteSi2

Anãlysts 2216, {óptember i999, http://www.ciaonet.org/olj/sa/sa-99anm0l.html; and

Satyánaiayanþattanayah "Oit as a þactor in Indo-Gulf Relations," Stategic Analysis

ZS ß, lwõ 200 t, h$p:7/www.ciaonet.org/olj/sa/sajune0 I pasg2.html'

39 $;'SuUft.tt Kâpiú, "lndia-Saud¡ nrab¡ã: The Strategic Signiñcance of the Delhi

Declaration," paper 1734, South Asia Analysis Group,14 March 200ó' htþ://www'

saag.orglo/oSCpaperslSo/o5Cpaperl734.html.¿O in fOOfi primè tvtin¡ster Vajþayee traveted to lran to sign the Tehran Declaration with

lranian þresident tvtohamniåd-Khatami; this document committed both countries to

the development of closer economic and energy ties. In 2003, the Vajpayee ggve.nl-

ment took another step in building lndia's partnership wifh lral with the conclusion

oi a framewort agreorent for lndo-lranian energy relations during a visit to New

Delhi by President Khatami.4l See pram¡t Mita and Vibhuti Hate, "tndia-lran Relations: Changing the Tone,'CS/.S

South Asìa Monítor,8 March 2006, hap://www.csis.org/media/csis/pubs/sqf].n0ficf. K. Alan Kronstadt and Kenneth Katzman, "lndia-lran Relations and US Inter-

;;if C;gressional Research Service Report þ¡ _Congregs, 2 Algust 2006'

trttpøfpc.stãte.gov/documents/organization/l0Zgl.pAfl; $nt1^ Vakit, "lran: Ba-lqc-

int É.rt afainst West," Washingøn Quarterly 2914, Autuml 290.6,

htip://www.tw{.com/06autumn/docs/06autumn-vatil.pdf.; a$ C. - Christine Fair'

i.lndi" and lran New Delhi's Balancing Actl' llashington Quarterly 30/3, Summer

2007, http://www.twq.com/07summer/index.cfin?id=2ó5.42 ilndia,QiAr to Sign befence Agreemenl" Press Trust of India,-24 June2007.

¿3 ,iwo'cÑpc Unitíto Jointly griild Crude oil Pipeline in UAE," Dow Jones Chinese- Fínøi,ncial llire, 4 June 20-0?, http://www.uofaweb.ualberta.calchinainstitute/nav03.cfi n?navO3=61434&nav02=57598&nav0l=572'12.

44 S; 'sinopec-rcPc $5 Bitlion Refinery Gets Early Go-Ahead," Reuters, Jt July

ZWO, httpi//www.uofaweb.uatberta,calchinainstitute/navO3.cfm?navO3=48642&'nav02=43875&nav0l=43092.

45 For details see "China's Energy Investment Plans in lÍan," Reuters, 2l December

ZOOO, http://www.uofaweb.uil-berta.calchinainstitute/navO3.cfm?navO3=54769&nav02= 4387 3 &nav0 I =43 092.

46 See Vakil, "lran: Balancing East against West."

¿i See Osteç ..lraq Turns tJçhina for Help in Reviving Oil tndustry"; and "lraq to

Revive CNPC Deal," Upstream,25 June 2007.

4g i; uddition, Chinese ÑgCr hâue signed production contracts in several Middle- Eurtr* countries outside the Persian Gulf, iircluding Algeria, Libya, Morocco, Syria,

and Tunisia. See atso Lee and Shalmon, "searching for Oil.'' ,49 For further discussion see Madan,lndia,jô S.r Ámy Yee and Najmeh Bozorgmehr, "lran Close to tndia-Pakistan Gas Deal,"

Fínancial Times, 29 J¡¡ne 2007,

240 F. Leverett

5l petronet was created with Indian govemment encouragement in 1997 as a joint

venture to handle the import and marketing of LNG within India'

52 In addition to the positiòns developed.by Indian NECs in the Persian Gult Reliance

Industries - India;s largest privatê energy company - has developed positions. in

Oman and Yemen and established an overseas subsidiary based in Dubai. Indian

NECs have signed production agreements in Middle Eastem countries outside the

Persian Gult including Egypt, Libya, and Syria.

53 See peter Evans and È¡câ Downs, "Untangling China's Quest for Oil through State-

Backed Financial Deals," Brookings Institution Policy Brief, May 2006,

http://www.brookings. edu/papers/2006/05ch ina-evans. aspx.

54 For example, Sanam Vakil notes that

it was the Chinese that hetped the lranians build the Tehran metro system, and a

second transportation project is already underway. Additionally, the Chinese are

building lranian highwayi and airport runways, even as Ch-ina's own infrastruc-

ture deietopment moves at breakneck speed. Furthermote, China's Cherry Auto-

mobile Company burst onto the lranian scene in 2003 and now manufactures

30,000 annually. Today there are more than 100 different projects percolating on

the lranian{hinese stove.

See Vakil, "lran: Batancing East against West."55 In this conte*t, it should also be noted that Beijing's current efforts to expand diplo-

matic and economic ties to the Persian Gulf take place against a historical backdrop

of China's provision of arms and sensitive technologies_to ståtes in the region. See

Daniel Byman, China's Arms Sales: Motívations and Implicallors, Santa Monica,

ct ReÑD, z.oo0; and shirly Kan, "china and Proliferation of weapons of Mass

Destn¡ction and Missiles: Policy Issues," Congressional Research Service Report for

òongr.g, updated 22 October 2007, http://www.fas.org/sgp/crs/nuke/Rl3l555.pdf.In rãcent-yeärs it has been difficult to discern a consistent pattern of Chinese arms

sales to cóuntries with which China has substantial energy interests. Overall, arms

exports are probably less effective than the financial and political tools Beijing has.{itr'Oisposat'to faciíiøte closer ties to energy-producing states in the Persian Gutf,

because Chinese $reapons systems are generally not considered state-oÊthe'art by

potential buyers in the region56 bee Leverett and Badeç "Managing ChinpUS Energy Competition"; Vakil, "lran:

Balancing East against West"; ãnd Dengli Shen, "!ran's ^N_uclear

Ambitions Test

ôhinu'r íVisdom,; Wrashington Quarterly 2912, Spring 2006, http://www.twq.com/

06spring/docs/06spring-shen.pdf.52 Ovór thã course oittrã tqAOs, the management and production functions of the min--

istries of petroleum; coâ1, nuclear poier, and electric Po]v-er were transfened to

newly established state energy firms, including the three NECs. Thus, CNOOC lvasørmó¿ in 1982 out of the ilinistry of Petrolèum Industry to focus on developing

China's offshore oil and gas resources, Sinopec in 1983 out of the Ministry otÇlem-ical Industry to focus on-downsream sectofs, and CNPC ín 1988 out of the Ministry

of petroleuä Industry to focus on onshore exploration and production of oil and gas

resources.58 For additionat historical background and comparative discussion on the three NECs,

see Steven Lewis, "Chinese ÑOCs and World Energy Markets: CNPC, Sinopec and

CÑOOC,' in the'Baker Institute Energy Forum on "The Chalgi.ne Role of National

Oit Corþanies in International Energy Markets," March 2007,httpzllwww.rice.edt¡/

energy/püUications/docsNOCs/Papers/CNOoC-Lewis.pdf; and Rosen and Houser,

China Energ.59 For fr¡rtherîiscussion of how "marketization" and openness to foreign investment

reinforce hends toward the "corporatization" of Chinese NECs, see Lewis, "Chinese

NOCs and World EnergY Markets."

Resource mercantíl¡sn and mílitarization 241

60 See Sumit Ganguly, "The ONGC: Charting a New Course?" in the Baker Institute

Enerry Forumónïhe Changing Role of Ñational Oil Companies in International

Eneró Markets, March 2007, ñry:llwww.rice.edr¡/energy/publications/docsNOCs/Papers/ONGC-Ganguly. Pdf

6l In addition, ONCC-anäiOC swapped l0 percent of their equity with each other in

2000.62 Originally, I I SOEs were designated, but two of these companies were subsequently

privatized.63 Personal communications with the author.

64 This point is amplified in Rosen and Houser, China Energt.

65 See grica Oowns, "The China Energy Security Debate," China Quarterly. 177,2004'

pp..2l*41; Chrisiian Constantin, "Õhina's Conception of Energy Sgcyrity:. Sources

äå¿ tnternât¡onal Impacs," working paper 43, University of British Columbia Centre

of lnternational Relations, March ZOõS, trttpy¡www.iir.ubc.calsite-template/working-papers/Consøntin-WP43.pdf; and Edward Cunningham,. "China's Energy Go19r-

i,ãü.r, perception and Räality,' MIT Center for lnternational Studies Audit of the

Conventional tfVisdom, March 2007.66 See Integrated Energ PolicY,67 See Nonian Valentiñe and Íom Ellacott, "Asian NOCs," Oil & Gas Investor, August

2006.68 See Xu Yihe, "Beijing lrked by lran Agreements," I)pstream,-S January,2007. _.úg eoot ¿ in Emma óraiam-Hari¡son, "S-iim Mideast Pickings Seen for Chinese Firms,"

È*116 News, 27 November 2006, http://www.uofaweb.ualberta.calchinainstitute/navO3.cfr n?navO3 =43 8 83 &nav 02:4309 6 &nav 0 I =427 92.

?0 Personal communications with the author.

7l tn this regard, an analyst with the ìilood Mackenzie consultancy.says flatly, "China

will neveibe able to satisff its oil demand through foreigr acquisitions"; quoted-in

Stakelbeck, .,Enerry Bringi Beijing and Tehran Closer Together." This point is also

made in Lee and Shalmon, "searching for Oil."72 Theauthor is grateful to Pierre Noël for this point.

73 personat comñunications with the author; see also Rosen and Houser, China EnergL

Z¿ W¡tfr regard to China, this point is also made in Lee and Shalmon, "searching for

oil."75 rbid.76 Daniel Yergin, "Energy's Chatlenges," Forbes,23 April 2097 ' -77 On the Saüdi.econoñy, see SAIúBA Financial Group, The Saudi Economy:. 2006

Þàr¡or^once, 2007 Fõiecast, Riyadh, February 2007, http:www.samba.com/invest-

ment/economywarch/pdf/sau¿L2'o0z-Forecast-en.pdf; 1yd ..idem, The sludiø"iioiyt iOOl Þerþrmance, 2005 Forecast, Ri.ya{h, February 20_05r

ñttp:l¡*it".samba.com/ínvestmenVeconomywatclt/pdf/Saudi,-lconomy-Feb-2005-E

"g.pOf. On the Gulf Arab economies collectively, see Brad Bourland, "The Middle

Bãst goom: How Big and How Long Will lt Last?," presentation to the Annual Con-

ference of the ArafBankers Association of North America, New York, 25 April

|OOO, hnp://www.arabbankers.org/download/123321-V12'1360-887&2lClicko/oZ0húeo/o20to%20download%20Mr.o/ol}Bourland'sTo20presentation.pdf. See also

rcito O. Boer and John Turner, "Beyond Oil: Reappraising the Gulf States"; Jaap

Kalkman, Laurent Nordin, and Ahmód Yahia, "Moving Energy-lntensive..lndushies

to the ódf'; and Hanó-Martin Stockmeier and Ozgur Tanrikulu, "Capluring

Opportunities in the Gulfls Financial Sector," all in a special issue of McKinsq

fiort rty, February 2007, http:llwww.mckinseyquarterly.com/Energy-Resources-Materials.

78 I have bonowed the concept of global energy architecture from Saad Rahim; the defi-

nition is my own.79 See pieneÑoë1, Les Etats-Unis et Ia Sécuritë Pétoliere mondial: Politique pëtrolière

242 F, Leverett

amëricaine et production d'un bìen collectd global, Paris: Le Centre Français sur les

Éøts-Unis, July 2004, http://www.ifri.org/files/CFE/PN-Us-securitePetroliere.pdf.80 See Flynt Leverett, "Btack is the New Green," 'lhe National,lnterest, January-

February 2008.8l The idea of a Saudi "hedging" strategy is elaborated in Flynt Leverett, "Reengaging

Riyadh," in idem, ed., The Road Ahead: Middle Eøst Polícy in the Bush Administra-tion's Second Term, Washington, DC: The Brookings lnstitution Press,2005; see atso

Chas Freeman, "The Arabs Take a Chinese Wife: Sino-Arab Relations in the Decade

to Come," remarks to the World Affairs Council of Northern California, Asilomar, 7

May 2006, http://www. mepc.org/whats/SinoArabRelations. asp; and'National Secur-ity Issues and the Saudi-US Relationship: A Conversation with Jean-François

Seznec," Saudi-US Inþrmatìon Service, 12 March 2007, http://www.saudi-us-relations.org/articles/2007/interviews/070312-seatec-interview.html. .

82 See Vakil, "lran: Balancing East against West." Russia also occupies an importantplace in lranian versions of the "Eastern option." See M. K. Bhadrakumar, "US'Allies' Keep lran Options Open," Asia Times, 6 June 2006,http://www.atimes.com/atimes/Middle-EaslHF06Ak02.html; and Flynt Leverett,

"The Race for lran," New York Tímes, 20 June 2006, http://www.nytimes.com/20061 06120/ opinion/20leverett.html?-F t &oreFslogin.

83 See LeveretÇ "Black ls the New Green.84 See Leverett, "lllusion and Reality," Amerìcan Prospect, September 2006.

85 Pape introduced the concept of soft balancing in "The World Pushes Back," BostonGlobe,23 March 2003. He elaborated his thesis in "Soft Balancing against the UnitedStates," Internatíonal Security 30/1, Summer 2005. See also Stephen Walt, "Keepingthe World 'Off Balance': Self-Restraint and US Foreign Policy," in G. John lken-berry, ed., America Unrivaled: The Future of the Balance of Power,lthaca, NY:Comell University Press, 2002; the contribution by Josef Joffe in "Exchanges &Retums: Is the World Pushing Back?," Bosîon Globe,2 April 2003; Josef Joffe, "'Gulliver Unbound': Can America Rule the World?," Twentieth Annual John

Boynton Lecture, Centre for Independent Studies, Sydney, 5 August 2003,http://www.aicgs.org/documents/csi.pdf; T. V. Paul, "Soft Balancing in the Age ofUS Primacy," International Security 30/1, Summer 2005; and Stephen Walt, TamíngAmerican Power: The Global Response to US Primacy, New York Norton,2006.

86 The author is grateful to Øystein Noreng for this point.87 For further discussion, see Leverett, "Black Is the New Green."88 Yuan-Kang Wang China's Grand Strategt and US Primacy: Is China Balancing

American Power?, Washington, DC: Brookings lnstitution, July 2006,http://www.brookings.edu/paperV2006/07china-wang.aspx.