China May Spend Surplus on Strategic Energy Reserves

The People’s Republic of China has a huge trade surplus with the US and most of the rest of the world. It’s now sitting on about US$1 trillion in foreign currency reserves. Recycling that kind of cash is a difficult trick. However, it also means that China can do something about its energy future and incur no real additional cost.

Vice-Premier Zeng Peiyan told the standing committee of the Chinese parliament, that China should “take advantage of the fact we have quite large foreign exchange reserves to enhance our national strategic energy reserves.” This means buying oil on the open market to store in Chinese tanks, much as the Americans have already done for themselves. Establishment of a coal reserve is also in the works. Further research into alternative energy can readily find funding out of the $1 trillion.

The impact this will have on the rest of the world will be significant. First, the creation of any reserve means moving future demand into the present. Stockpiling of any commodity against future consumption drives up prices in the immediate future. If the Chinese go ahead with this idea, it will serve to support oil, natural gas and coal prices.

Second, it will demand that China buy drilling rights in parts of the world where China has been, at best, a marginal actor on the world stage. Africa is waiting for Chinese money to open its energy reserves wider. The BBC reports, “Earlier this year, Beijing hosted a summit of African leaders, at which access to Africa's natural resources was discussed in return for Chinese investment in Africa's roads and railways.” Central Asia, Russia and the ‘Stans may well side with China in future for the oil money it can spend. Political influence follows the yuan as well as the flag.

For the US, Europe and the developing or developed economies of Asia, the Chinese move to greater energy security may create shortages, or at least, energy instability. Competition for resources probably won’t turn into shooting wars, but it could well generate frictions where none existed before. This is one of the hidden costs of America’s trade deficit.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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