Who's Winning the Great Energy Rat Race?

China just passed the United States as the world's leading oil importer. America should be happy to be No. 2.

DUBAI — It is a shift as momentous as the U.S. eclipse of Britain's Royal Navy or the American economy's surpassing of the British economy in the late 19th century.

According to preliminary figures reported this week, China has overtaken the United States as the world's largest net oil importer. Nearly 6 million barrels per day flowed into the United States in December -- the lowest figure since February 1992 -- while Chinese imports jumped to 6.12 million barrels per day. The United States had held the top spot since 1972, just before the oil crises and stagflation of the 1970s.

The exact figure is not so important: Monthly estimates are volatile, Chinese imports peak during the winter, and the United States is still a much bigger gross importer of crude oil (it exports ever larger amounts of refined products). But China will clearly move into a consistent lead during this year, or next.

Americans may not like to be second in anything, but this news actually affirms the superiority of the U.S. energy model over China's. The United States is consistently employing new technology to produce more energy in ways that are increasingly environmentally friendly. Beijing's growing weight in world oil markets, meanwhile, should not be a matter of pride, but of concern. China's rising dependency on energy imports doesn't make the country stronger -- it makes China more vulnerable to forces beyond the country's control.

Nevertheless, this is the latest in a series of milestones that illustrate the economic rise of the Middle Kingdom. In 2006, it passed the United States as the world's largest carbon dioxide emitter. In 2010, it became the world's leading energy user. Its ravenous appetite for resources makes it the biggest consumer of coal, iron ore, aluminum, copper, gold, wheat, rice, meat, and many other commodities. In the next few years, China will overtake the United States as the world's largest economy -- if it has not already done so.

China's growth has been the largest single factor in the record oil prices over the last decade. That has led to a host of geopolitical consequences: the economic boom in the Persian Gulf, the empowering of authoritarian leaders from Russia's Vladimir Putin to Venezuela's late Hugo Chávez, economic stress in developed countries, rising food and fuel prices, and a new push for breakthrough energy technologies such as shale oil and gas, as well as wind and solar power.

The United States is setting energy milestones of its own. Its drop in imports is partly due to an anemic economy, which has resulted in dwindling consumption, tighter mileage standards, and an incentive for efficiency spurred by high prices. More important, however, is the U.S. boom in production, driven by the breakthrough in hydraulic fracturing, which has unlocked oil from shale deposits in North Dakota and south Texas -- with Louisiana, California, Ohio, and others to come -- and revived production from oil fields.

The Wall Street Journal also contended this week that the United States moved ahead of a different kingdom: The newspaper said the country became the world's largest liquid-fuel producer in November, surpassing Saudi Arabia. The calculation is a bit dubious, as it depends on throwing everything -- crude oil, biofuels, propane, other extracts from natural gas, gains from refinery processing -- into the bucket. Beyond the hype, however, the United States is set to become the world's biggest oil producer by 2017 and will begin exporting large quantities of liquefied natural gas (LNG).

North America, with Canada supplying the United States, might be a net oil exporter as early as 2020, according to Citigroup's veteran oil watcher, Ed Morse -- though that seems optimistic. Renewable energy has also boomed, and greenhouse gas emissions have dropped.

China's strategic purchases have, with rare exceptions, not improved its energy security. They have also landed it in political trouble abroad. After financing and arming Khartoum during Sudan's civil war, China suffered a backlash when the pipeline from newly independent South Sudan -- where most of its fields lie -- was cut over border and transit-fee disputes. Now Chinese state companies are buying stakes in American shale projects, which the United States should welcome despite some attempts to raise spurious national security concerns.

At the same time, China has tussled over speculatively oil-rich islands in the East China and South China seas with Japan, the Philippines, Vietnam, and others, encouraging its neighbors to turn to the United States for protection. Beijing also continues to worry over long energy supply lines from the Persian Gulf and West Africa. However it solves this problem, it also must heed the fact that pollution is increasingly a hot-button political issue. In the city of Guangzhou, for example, the lungs of people in their 40s have turned black from coal smoke.

Can China repeat the United States' success? It is thought to have massive shale gas resources of its own and probably shale oil too. It also plans to use natural gas vehicles to cut oil consumption, has tougher mileage standards than the United States, and is working on electric vehicles, synthetic fuels, and renewable energy. But Beijing still has a long way to go. It does not even have a real energy ministry -- though a "super-ministry" is said to be in the works -- meaning policy responsibility is scattered across the government.

In the face of political, social, and environmental threats, Beijing has to keep the economic juggernaut rolling. Economic slowdown could not only lead to severe domestic unrest in China, but it could upset all the calculations of the world's energy companies and oil exporters.

There are dangers too for the United States in this new situation. Given that the country has spent much of the last few decades talking of "jawboning OPEC" to increase production and complaining about Russia's gas monopoly, it would be monumentally hypocritical of the United States to continue its ban on crude-oil exports or put major restrictions on LNG projects. To do so would undermine its relations with key allies such as Japan and South Korea, which are critical partners in balancing China's growing power in East Asia.

Whatever happens, the improving U.S. energy position will not cause it to abandon the Middle East. The U.S. Navy's 5th Fleet will not pull up its anchors in the Persian Gulf tomorrow. American oil imports from the Middle East have not yet fallen much -- Africa has borne the brunt of the decline. And even an energy self-sufficient United States would be exposed to world oil prices -- its key allies in Europe and East Asia even more so.

Washington also has other reasons -- Israel, Iran, terrorism -- to remain engaged in the Middle East. Indeed, it is booming U.S. oil production -- along with that of Iraq and Saudi Arabia -- that has allowed such stringent sanctions on Iran without triggering another great oil shock. Both producers and customers well remember how energy crises swiftly followed the end of previous Gulf security orders, such as the withdrawal of British forces from the small Gulf states in 1971 and the fall of the shah of Iran in 1979.

Nevertheless, Washington is battling a fiscal crisis, and it's searching for ways to reduce its military commitments. That has led some to wonder whether others should share more of the burden of guaranteeing energy security. The Arab Gulf states, looking nervously at America's oil boom, worry they might be left to the tender mercies of Iran. As a result, they have begun to deepen relations with their Asian customers, though predominantly with Japan and South Korea rather than China. At the moment, however, they are not worried enough about the big threat: a slump in oil prices colliding with bloated budgets.

Energy windfalls can be a blessing and a curse: An oil boom allowed Soviet leader Leonid Brezhnev's regime to coast through the 1970s and avoid vital reform. Without drawing a false analogy between the United States and the Soviet Union, Americans should still be wary of allowing swelling oil and gas revenues to divert them from addressing deep domestic economic, environmental, and political problems, or tempt them into reckless overseas adventures. Beijing, meanwhile, may find that it is energy that compels deep changes in how it engages with its own people and the rest of the world.

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Why Is This Man Smiling?

How the Iranian regime used the Kazakhstan talks as pre-election propaganda.

Last week in Almaty, Kazakhstan, Iran discussed its nuclear program with representatives from the five permanent members of the U.N. Security Council plus Germany -- the so-called P5+1. Supreme Leader Ayatollah Ali Khamenei has no doubt been smiling ever since, and not just because the unproductive talks bought Iran yet more time to advance its nuclear program. Khamenei is likely smiling because in the longstanding game of diplomacy, economic warfare, and clandestine operations between the Iran and the West, Iran won the week.

Iran's primary victory out of Kazakhstan was in obtaining an offer from the P5+1 to ease the economic sanctions that have been battering the Iranian economy as an interim step, rather than as a part of a comprehensive deal. Widely referred to as "sanctions relief," the Almaty proposal was leaked before talks even began, and described by the P5+1 as a "confidence-building step."

"Sanctions relief" can indeed be seen as a confidence-builder, but not in the way its proponents intended. In reality, the Kazakhstan offer simply allowed Iranian officials to effectively convey competence and the hope of improved economic conditions to their own people, just as the June 2013 presidential election approaches. At a time when Iran has suffered from worsening economic conditions including hyperinflation and an 80 percent currency devaluation, this is exactly what the regime was hoping to achieve.

To be sure, the upcoming election will be illegitimate and result in Khamenei's hand-picked candidate assuming power. But even with that ultimate result determined, the regime is taking every step possible to ensure that the election proceeds smoothly and is not a repeat of 2009 -- when hundreds of thousands of Iranians took to the streets in protest -- particularly given the lessons of the nearby Arab uprisings.

In January, Khamenei made rare public comments demanding that Iranians honor the results of this year's election, stating that "[a]ll people should be careful that their remarks do not serve this desire of the enemy." That followed numerous statements by President Mahmoud Ahmadinejad and others blaming Western sanctions for the deterioration of the Iranian economy. The ayatollah and his cronies are taking great pains to fight the narrative that their own incompetence, both in domestic policy and foreign policy, is responsible for the nation's current economic troubles.

Unintentionally, the P5+1 played right in this propaganda effort with its offer of "sanctions relief." While nothing was accomplished in Kazakhstan diplomatically, Tehran held up the P5+1's offer as evidence that sanctions would soon be eased. Subsequently, the Iranian rial, which was recently trading at an all-time (semi-official) low of 40,000 to one dollar, rose in value to 33,000 to 1. Regime officials spoke effusively of the meeting, with spokesman Ramin Mehmanparast stating that "[a] positive atmosphere was created in the talks," and that "if this atmosphere prevails, an acceptable outcome for both parties may be reached."

The value of an unstable currency like the rial is about confidence, and the regime rather gamely used the talks to manipulate the rial and reassure its populace at a key political time. The P5+1 must learn from this manipulation and avoid complicity in further domestic victories by the regime.

"Sanctions relief" as a bargaining chip -- rather than as a key component of a comprehensive deal -- is also tremendously unhelpful to the effort to pressure corporations and other countries to pull out of Iran. Over the last five years, my NGO, United Against Nuclear Iran, has sought to compel companies around the world to end their Iran business. And while hundreds have cooperated and pulled out, some have only done so after considerable public pressure. A number continue to operate in Iran with impunity today.

In the most difficult cases, we have had success appealing to a company's bottom line, and explaining that because of escalating sanctions, doing business in Iran is financially risky and will result in considerable losses. Unfortunately, developments such as what just happened in Kazakhstan give these companies less incentive to leave Iran, as they calculate that they can just wait the sanctions out.

Rather than making half-baked offers of "sanctions relief," the P5+1 must make clear that absent substantive negotiations resulting in a comprehensive solution, sanctions will increase, and culminate in a full economic blockade of Iran that will cripple its economy.

Unless meaningful progress occurs, the negotiators ought to say, there will be no "relief" -- only escalation. In other words, if the regime continues to pursue a nuclear weapon, then it will be doing so at the expense of its economy -- and perhaps its grip on power over its people. And in the case that Iran continues using P5+1 talks to just stall for more time, like-minded countries should join Barack Obama in fulfilling Vice President Joe Biden's recent promise that "big nations cannot bluff" when it comes to the military option.

At this point, the only side that is benefitting from the current negotiating process is Iran. That doesn't mean diplomacy shouldn't continue, but it does mean that future negotiations need to be based on substantive progress with real outcomes. It's time to recognize this, and never again repeat the great mistake of Almaty.

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