Beijing's Tehran Temptation

Iran's recent invitation to Chinese oil companies and banks to invest $43 billion in Iran's oil industry was understandably dismaying to U.S. policymakers. After all, Tehran is attempting to trade access to its abundant oil and natural gas reserves for diplomatic support on its uranium enrichment program, and China's growing appetite for energy makes it vulnerable to such temptations.

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Iran, however, might find that taking diplomatic advantage of China's energy needs is easier said than done. Not only are China's national oil companies unable or unwilling to deliver the projects Iran is hoping for, but energy is just one of several competing interests that drive Beijing's stance toward Tehran. As a result, Washington still has an opportunity to influence China's Iran policy.

It might seem strange that a major oil producer needs this level of energy investment. But though Iran has the world's second-largest proven oil reserves, it imports as much as 40 percent of its gasoline because it lacks domestic refining capacity. Iran's current effort is aimed at getting the Chinese to bankroll the construction of refineries. If Iran can produce all the gasoline it needs at home, then the United States won't be able to follow through on its threat to cut off its supply. An agreement with China would allow Tehran to prove that U.S. efforts to isolate Iran aren't working.

Iran has good reasons to hope that its efforts to woo China's oil companies will be successful. First, Iran's underdeveloped oil and natural gas reserves are a grand prize for Chinese firms, whose late arrival to international exploration and production has made it difficult for them to acquire attractive investment opportunities abroad.

Second, Beijing has a proven track record of providing cash and infrastructure assistance to countries that supply it with oil. In the first half of 2009 alone, Chinese banks extended more than $45 billion in loans to countries including Brazil, Kazakhstan, Russia, and Venezuela, all major energy producers battered by the fall in oil prices.

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