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Libyan strife exposes China's risks in global quest for oil

The evacuation of Chinese workers in Libya highlights Beijing's vulnerabilities as it partners with oil-rich regimes. Upheaval in Africa and the Middle East could force China to weigh political risks more carefully.

March 09, 2011|By David Pierson, Los Angeles Times
  • The world's No. 2 petroleum user, China imports more than half of the 8.3 million barrels it consumes daily.
The world's No. 2 petroleum user, China imports more than half of the… (Reuters )

Reporting from Beijing — The Chinese construction workers and their families huddled inside their company's living compound in northeastern Libya, hiding from bands of rioters who were smashing cars and looting offices.

When the chaos subsided, the group of 930 migrants made a break for the open desert, starting a seven-day journey to the port of Benghazi, where a ship arranged by the Chinese government waited to take them home. As news of the exodus spread online, Chinese bloggers bestowed the nickname "Chinese Moses" on the plucky company manager who led the ragged group to safety.

"Locals offered food and water" along the way, said a spokesman for Huafeng Construction Co., which had been building apartments in the Libyan city of Ajdabiya. "But you can only imagine how scared they were being in a foreign land."

In all, China has evacuated an estimated 36,000 of its workers from war-torn Libya, chartering buses, sending jetliners, even dispatching its navy to escort civilian rescue vessels. Beijing state-controlled media have trumpeted the effort as a sign of China's strength. But China's deep involvement with the North African dictatorship has also exposed a vulnerability in the world's second-largest economy.

Thirsty for oil and other raw materials needed to fuel its breakneck development, China is funneling money and manpower into ever more volatile regions of the globe to lock up natural resources. Despite international pressure, Beijing has developed trade ties with energy-rich pariah states, including Iran and Sudan, carefully avoiding any criticism of those regimes.

In Libya, the world's 12th-largest oil exporter, China has emerged as a major investor and financial partner of strongman Moammar Kadafi. China is now the third-largest buyer of Libyan crude behind Italy and France. European and American oil firms have worked in Libya for years, but their governments have long sought to punish Kadafi for terrorist ties. Meanwhile, China has stuck to a hands-off policy it has dubbed "non-interventionism."

But that approach hasn't protected it in Libya, whose angry citizens attacked Chinese workers and infrastructure projects following the Kadafi regime's violent crackdown on civilian protesters.

Beijing's leaders "saw themselves as the leader of the Third World, the anti-imperialists, the anti-hegemonists. They felt that way right up until the time they had to evacuate everyone from Libya," said Amy Myers Jaffe, an energy analyst at Rice University's Baker Institute. "They have suddenly realized that there are political risks in energy equity markets and that they have to make much more sophisticated risk assessments."

Before the Libyan conflict erupted, about 75 Chinese firms reportedly were laboring on an estimated $18 billion worth of contracts there, including construction of rail lines, irrigation systems, and Internet and cellphone networks.

But China's primary interest is energy. State-owned China National Petroleum Corp. has partnered with Libya's national oil company to build hundreds of miles of pipeline and explore for oil and gas offshore.

The world's No. 2 petroleum user, China imports more than half of the 8.3 million barrels it consumes daily. It buys from nations including Saudi Arabia, Kuwait and Venezuela, which also supply the United States, the world's top oil consumer. Libyan oil accounts for only about 3% of China's imports, but it won't be easy to replace. That's because Libya is one of only a few producers of "light sweet" or low-sulfur crude, which is highly prized for making gasoline. Global competition for limited remaining sources of light sweet crude will put upward pressure on prices, particularly if China decides to stockpile.

"If China starts buying and hoarding oil …that means gasoline jumping above $4 a gallon" in the United States, said James DiGeorgia, editor of the Gold & Energy Advisor website. "You'd add another 30 cents to 40 cents a gallon to California. "

Beijing also faces pressure at home. It must now choose whether to force its national oil companies to absorb the higher costs or pass them along to consumers. It's a decision fraught with risk. China is already battling the worst inflation in more than two years. Rising prices for food and fuel are seen as major threats to social stability.

"I've been making the same salary for the last 10 years, but everything else gets more expensive," said Yu Liyong, a veteran Beijing taxi driver complaining about a recent price hike that pushed gasoline to $4.28 a gallon. "What am I going to do?" said Yu, who earns about $600 monthly. "I still have to drive."

China's maturing oil fields are no match for the nation's surging demand. The country was a net importer of crude as recently as two decades ago.

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