Peak Oil News: Is China Preparing for War?

Thursday, February 16, 2006

Is China Preparing for War?

Infoshop News

An Analysis of Recent Moves By China Which May Signal Intentions To Invade Russia

By Mark W. Hughes

This analysis will first look at recent developments concerning the Chinese economic and energy policies. This will be followed by an analysis of data concerning global oil consumption and peak oil. Finally, the data concerning China and the data concerning global energy and peak oil will be utilized to examine the possibility that China is preparing to launch a war against Russia to seize Russian far-east oil reserves.

The Chinese central bank holds foreign currency reserves that have reached $819 billion, a foreign currency reserve second only to Japan and expected to exceed that nation's reserves this year. China has invested about three-quarters of this reserve in U.S. Treasury bills and other dollar-dominated assets. China's purchase of Treasury bills, in additions to similar purchasing by Japan and other nations (predominantly OPEC members) is responsible for much of the value of the U.S. dollar, and China uses the purchases to keep its own currency -- the yuan -- undervalued, thus maintaining a balance of trade that vastly favors cheap Chinese manufacturing goods. This also has the effect of holding U.S. interest rates at low levels, besides keeping the dollar at a high value worldwide. Chinese currency reserves are growing at an average rate of $15 billion each month.

However, China is now poised to move much of its currency reserves away from dollars and into other currencies, including the euro, and into commodities purchases -- predominantly oil. China's State Administration of Foreign Exchange has said they will "actively explore more efficient use of our foreign exchange reserves." This followed statements from one of China's central bank monetary policy committee's economist that "The general trend for the U.S. dollar is continually weakening." The economist, Yu Yongding, continued, "Countries with huge foreign-exchange reserves will have their assets shrunken." Finally, in July of 2005 China adjusted its own currency evaluation and increased the yuan by 2-percent against the dollar, and stated that rather than keeping with the system of the yuan's value automatically shifting in accord with the U.S. dollar, the yuan would now fluctuate based upon numerous other currencies such as the euro and the Japanese yen.

These moves in China's economy could signal significant dangers to the U.S. economy. A decreased need for dollars in China, and an increased reliance on other currencies, the value of the dollar will plummet and interest rates will rise. A sell-off by China of U .S. Treasury bills will likewise cause the value of those dollar-dominated assets to plummet, and could trigger a sell-off by other nations including Japan and OPEC members. The dollar last year recovered from a slow decline in value over the preceeding years, a drop partly triggered by the rise in value of the euro and the amassing of euros in central banks in several nations, including OPEC members Venezuela, Iran, and Iraq (which had shifted all of it's Oil For Food funds at the U.N. -- roughly $10 billion -- from dollars to euros, and had broke from the OPEC standard of accepting only U.S. dollars for oil transactions).

In addition to the huge foreign currency reserves, China's global trade surplus amazingly tripled in 2005, reaching $102 billion. This trade surplus is expected to expand even more in 2006, since Chinese industry is producing at a rate that China cannot internally absorb and thus cutting the need for imports while enhancing the need to export the excess production.

South African Petroleum Company has agreed to allow Cnooc Limited, China's state energy company, to purchase a 45-percent stake in a Nigerian offshore oil field that has proven reserves in excess of 620 million barrels and almost 4 trillion cubic feet of natural gas. The field is expected to provide in excess of 150,000 barrels of oil per day by the year 2008, 45-percent of which would translate into a 20-percent increase in total production for Cnooc. The deal cost China $2.27 billion. China, through China National Petroleum Corporation, is already the largest member of a partnership extracting oil in Sudan, and has built a major amount of the oil infrastructure in that nation.

The deal with Nigeria comes on the heels of China National Petroleum's 2005 attempt to buy Unocal Corporation, a U.S. oil company, for $18.5 billion. That attempt failed after considerable opposition in the U.S. Congress said the purchase would be a danger to the national security interests of the U.S. China has been spending vast sums of money in recent years for oil and natural gas all over the world, and these purchases have sometimes been called significant overpayments. Venezuela, Angola, Indonesia, Australia, Kazakhstan, and Iran have all signed lucrative oil and natural gas deals with China in the last couple of years, and when the Nigeria deal is factored in the price for these seven deals could total nearly $100 billion. Additionally, China is engaged in a struggle with Japan over a pipeline from Siberia, to bring oil from rich Russian oil fields in that region.

These deals are a reflection of several realities in China's need for energy. Currently, China is importing 20-percent of its oil needs from the Middle East. As China's economy continues to grow at double-digit rates; as its manufacturing sector likewise expands; as Chinese citizens increasingly seek personal vehicles for transportation; and as the Chinese military expands, China's energy consumption is expected to skyrocket. While three-fifths of Persian Gulf oil is now consumed in Europe, by 2017 China will consume the equivalent of three-fourths of Persian Gulf oil. And the U.S. is responsible for about one-quarter of global oil consumption. With such statistics in mind, and as the U.S. occupation of Iraq continues to face difficulties and Iran is threatened with U.N. sanctions, China is under intense pressure to find sources of energy outside the Persian Gulf.

However, despite this conventional wisdom about China's obvious economic expansion and the inherent need for increased energy sources, China stunned the energy markets on Friday, January 13, 2006, by claiming their crude oil imports rose only 1.2-percent while their oil products imports actually fell 34-percent, and that total oil demand dropped by 0.3-percent. With an economy growing at double-digit rates, China is behind only the U.S. in terms of its energy consumption, consumption which rose by 15-percent in 2004. Deutsche Bank and International Energy Agency (IAE) figures on Chinese oil consumption suggest an eleven month rise in demand that is at or greater than 3-percent.

The fallout from China's announcement was mostly skepticism. Energy analysts pointed to the Deutsche Bank and IEA statistics to suggest China is for some reason providing misleading data abut their energy consumption and oil import needs. A planned OPEC increase in production capacity, in response to sharply rising global oil demands (and China's own 15-percent rise in consumption), could be postponed if China's data are accepted as accurate. The data might also help stem the rise of crude oil futures, which stand at over $60 per barrel, and which are rising in response to increased global tensions over Iran's nuclear program and due to recent attacks on oil infrastructure in Nigeria. Another announcement by China of a significant rise in oil consumption, s imilar to that in 2004, might have sparked a more rapid rise in crude oil futures. For these reasons or perhaps others, China could be attempting to disguise its actual oil demand and consumption, according to some energy analysts.

These facts about China's currency reserves, trade surplus, oil consumption, major purchases of foreign oil outside of the Middle East, and data concerning Chinese oil demand and consumption, may signal a disturbing trend when viewed in conjunction with data about overall global energy reserves. The data regarding global oil consumption and exploration is troubling itself; but viewed alongside the information about China, it could all signal imminent conflict between two nuclear powers in the most populous region in the world. While there are several ways to interpret all of this data, and several scenarios which may occur, one such scenario that appears increasingly likely is the outbreak of war between China and Russia.
To continue this analysis, it is necessary to first look at facts regarding global energy reserves, and the role of the U.S. in the Persian Gulf, to better put the information about China into the proper context. This information will then be applied directly to China and their potential decision to wage war against Russia.

According to the U.S. Geological Survey, annual oil discoveries around the world have steadily declined since 1965. For the past five years, the world consumed 27 billion barrels of oil per year. However, the oil industry only discovered about 3 billion barrels in each of those years, meaning that for every barrel found nine barrels were consumed. The U.S. Department of Energy, in a 2005 analysis, stated that peak oil (the point at which global oil production will reach its zenith and then begin to plummet) could be reached as early as 2016. This analysis also stated that the U.S. will face a "severe liquid fuels problem" if the nation does not begin planning a post-petroleum economy prior to peak oil. Further, the D.O.E. said that if such planning starts ten years prior to the peak, the U.S. will still face a decade of "hardship". If peak oil is reached in 2016, then the time to prepare a post-petroleum economy without "hardship" has already passed.

Even the retired head of Saudi Arabia's oil exploration and production, Dr. Sadad al Husseini, says that peak oil will come by 2015. He also insists that Saudi Arabia's recent claims that they could soon increase production to 20 million barrels per day are "unrealistic" and, in a warning to U.S. energy policy makers, "a dangerous basis for policy." Saudi Arabia already pumps water into their oil fields, a method used to keep oil flowing easily and a sign that a field is facing decreased production capacity.

Indeed, many experts insist that peak oil will occur much sooner than the D.O.E. or Dr. al Husseini anticipate, with some saying the peak is already here or perhaps already occurred. There is much evidence to support these contentions. Many supposedly new oil discoveries are in fact simply the result of seepage -- as oil is pumped out of a field, remaining oil moves into the empty spaces but is reported as additional oil discoveries. A major problem with calculating remaining oil reserves is that several OPEC nations simply falsify their data.

In 1982, OPEC oil ministers set new quotas on each member nation, based upon the size of that nation's oil reserves, to help regulate oil production to maintain a healthy global price for oil. The response might have been expected -- many nations simply recalculated the amount of their oil reserves to show a huge increase and thus avoid decreasing their production. Global reserve estimates shot up by several hundred billion barrels between 1985 and 1990. In 1985, Kuwait was the first nation to adjust their reserve estimates to avoid decreasing their production, so that Kuwaitis went to bed with stated reserves of 65 billion barrels of oil and awoke the next morning with 90 billion barrels. In 1988, Abu Dhabi followed suit and adjusted their reserves from 31 billion to 92 billion barrels. Iran and Iraq raised theirs as well, and Saudi Arabia adjusted their estimates in 1990 from 170 billion barrels to 258 billion barrels. In total, the Middle East raised their proven reserve figures from oilfields already identified by 300 billion barrels between 1985 and 1990. That these new estimates are for fields already identified is significant, because it means that the countries were not claiming to have discovered new oil fields, they were claiming 300 billion new barrels of oil in pre-existing fields. In addition, most major oil producing states -- especially in the Middle East and South America -- are now adding water into their reserves, as already mentioned with regard to Saudi Arabia.

The resulting statistics for total global oil reserves can be found as the BP Statistical Review of World Energy, a data source used as a standard for energy information by analysts and researchers around the globe. But BP itself notes that the data does not meet U.S. Securities and Exchange Commission guidelines for proven reserves, or even BP's own views and data on the true amount of global oil reserves. Looking at this set of data, which as already noted contains 300 billion barrels of oil that simply cannot really exist, another problem becomes immediately obvious -- since 1988, the estimates for both the Middle East and for oil reserves in the rest of the world have remained virtually unchanged. In other words, after 17 years of consumption, the last five years of which saw only one new barrel discovered for every nine consumed, total global oil reserves have remained unadjusted in this already severely doctored data. From this information, we can reasonably conclude that the claim that there are still 1.1 trillion barrels of oil reserves remaining is simply false, a figure off by at least 300 billion barrels even if we do not also adjust the figure to factor in consumption for the past 17 years.

Matthew Simmons is the chairperson and chief executive of Simmons and Company International, an energy-oriented investment bank in Houston. He is also a member of the National Petroleum Council, as well as a member of the Council on Foreign Relations, and he acts as an adviser to President Bush on oil issues and policy. According to Simmons, Saudi Arabia may have reached its peak sustainable volume of oil production 25 years ago. If not, he says, then that nation is now at or on the very edge of reaching such a peak, and their oil production will start an irreversible decline. Simmons states further that Iran, Iraq, Venezuela, Kuwait, and Indonesia have all passed their peak sustainable volumes of production. The problem is that such peaks are not evident immediately, and can usually only be seen in hindsight. The U.S. reached its peak oil production in the early 1970s, and has been declining ever since. Simmons also states his belief that sometime in the next three to five years, Saudi oil production may collapse by 30-40%.

A.M. Samsam Bakhtiari, from the National Iranian Oil Company, says that the 92 billion barrels of oil the BP Statistical Review of World Energy attributes to Iran is likely far too high a number. He agrees with NIOC's retired expert Dr. Ali Muhammed Saidi, who puts Iran's oil reserves at the much lower figure of 37 billion barrels.

Global oil discoveries peaked around 1965, then dropped fairly steadily for roughly ten years. Then there was another sudden peak, which was about 15 billion barrels less than the 1965 peak, followed by another steady decline for around fifteen years. Another peak then occurred, this one 20 billion barrels less than the previous peak (or 35 billion barrels less than the 1965 peak), and discoveries declined for five mo re years. The last peak of discoveries took place around the year 2000, and that peak was 5 billion barrels less than the prior peak (or 40 billion less than the 1965 peak). Since then, discoveries have once again plummeted. So even accounting for these occasional peaks in discoveries, each peak is increasingly smaller and overall discoveries keep declining. No major oil field discoveries have taken place since the 1970's, and it has been over 25 years since more oil was discovered than was used globally. As consumption progressively and rapidly rises, new discoveries fall at an increasing rate.

To put the issue of new oil field discoveries versus modern consumption into the proper perspective, think about the following comparison. The largest oil field ever discovered is the Saudi Ghawar field, found in 1948. That field held 87.5 billion barrels. Consider that this is the largest oil discovery ever made, yet at today's consumption rate of over 80 million barrels per day, every drop of oil in the Saudi Ghawar field would last less than three years. Current oil production is around 84 billion barrels per day, barely keeping pace with consumption.

Several expected major sources of new oil fields have turned out to be very disappointing, perhaps most notably the Caspian Sea Basin. There, as in several other suspected large sources of oil reserves, it was discovered that rather than the one large oil field expected, there were several small pockets of oil and the total amount was drastically lower than original estimates. In other places, supposedly large oil fields lie in areas such as tar-sands, where it is extremely difficult and sometimes impossible to extract the oil. Suspected large oil reserves also lie at the bottom of the ocean; but again, the time and energy, the cost and difficulty, of extraction makes it doubtful that these fields will be of any benefit in the foreseeable future. Some oil fields that are promoted as import ant in fact contain relatively insignificant reserves, such as in Alaska.

Global demand for oil is increasing sharply, fueled by China's large and energy-hungry economy and the growing demand for oil in developing countries. With the U.S. consuming 25-percent of global oil, with Europe accounting for three-fifths of consumption of Persian Gulf oil, and with China expected to consume the equivalent of three-quarters of Persian Gulf oil by 2017, it is obvious that simply these three economies are on a collision course even if current oil production rates could be maintained indefinitely. In a situation where energy reserves are actually decreasing, the emergency seems clear. One only need look to a recent statement from Chevron, to see how serious the situation is: "It took us 125 years to use the first trillion barrels [of global oil]. We'll use the next trillion in 30 [years]." Unfortunately, as already noted, it would be foolish to assume there is 1 trillion barrels of oil remaining.

In fact, Chevron's remarks raise another important point. Their statement presumes a global oil supply of two-trillion recoverable barrels. This distinction is important, because not all oil in an oil field can be recovered and used, and it is important to determine whether there are actually two-trillion recoverable barrels or a world-wide total of two-trillion barrels. If out of that two-trillion there is only one-trillion left of total global oil reserves, then not all of it will be recoverable and thus the recoverable amount of oil will be used-up much sooner than in 30 years. In an oil field, there is a point at which it costs more money and energy to extract the remaining oil than can be gained from that oil. It is presumed that maximum oil production capacity is reached when 50-percent of an oil field has been extracted, and after that point less oil is extracted and not all of the remaining 50-percent can be efficiently removed. The point at which the totality of global oil reserves reach the 50-percent point describes peak oil.

If, then, there are a total of two-trillion barrels of oil as Chevron says, and if as they said we have indeed used the first trillion, then we have reached peak oil. The available evidence indicates that if we have not yet achieved that point, then we are extremely close to it. And the dangers facing a petroleum-based society will arise much sooner than many people expect, since the impact of dwindling oil supplies will hit the world far in advance of the last drop of recoverable oil dripping from the last oil well. As oil supplies decrease in tandem with rising demand, prices will rise dramatically (although at first the price increase will start slow until momentum is built as governments and financial markets recognize precisely what is happening). But who will actually get the increasingly limited supplies of oil? Those who can afford it, and those who can control the gl obal energy supplies.

It is impossible to overstate the importance of peak oil to the entire world. The need for oil to fuel cars, planes, trains, motorcycles, boats, military vehicles and planes, is all rather obvious. But to this list we must add electricity for our homes and offices, refrigeration of foods, telecommunications, hospital equipment, streetlights and stoplights, and every other use of electricity one can think of. Then we must add to the list all of the petroleum products we have become so accustomed to that we rarely even think about them: everything plastic, from computers to toys to shopping bags to phones to car parts to pens; pesticides used in agriculture, most of which are all petroleum based; health-care products and medication; tires on cars, on planes, on just about every vehicle one can think of; and then consider that the manufacture and transport of all of these items requires oil for electricity and to fuel the planes and trucks that ship them and that fuels the car or bus a person takes to go to the store and obtain these items.

Without oil we loose all of these things, all gas and plastics and petrol products. This in turn means we loose modern agriculture and food production, the ability to survive extreme cold or heat, the ability of militaries to fight. Suddenly it becomes enormously clear how much economic and social chaos will result when oil supplies begin to finally run out, and people begin to starve to death or freeze to death or be invaded by neighboring states desperate for food for themselves. It should, then, be equally clear to imagine what any nation would be willing to do to forestall this type of calamity.

These data are a significant factor in why the U.S. is currently placing its military in key strategic nations and locations around the globe -- most notably in the Middle East and Central Eurasia, and in Africa and the Caribbean Sea Basin (a shipping route for oil from Africa, and a potential staging area for military actions into South America, where anti-U.S. sentiments are led by major oil exporter Venezuela and where Bolivia's new president has promised to seize oil and gas reserves owned by international corporations). That the U.S. is preparing for the looming depletion of global energy reserves is no surprise, nor is it particularly a secret. Since U.S. President Jimmy Carter formalized the U.S. policy of intervention in the Middle East to protect U.S. national interests with regard to oil (and creating the Rapid Reaction Force, later expanded to become CENTCOM, with the express purpose of intervening militarily to defend U.S. access and hegemony in the Persian Gulf), the U.S. has made it clear that dominance in the global energy market, and with regard to access to reserves, is non-negotiable, and the rest of the world has by and large adhered to this demand.

Of secondary importance, but still a significant issue dictating policy, is OPEC's commitment to accept only U.S. currency for oil transactions. The petro-dollar provides serious strength to U.S. economic power, helping to fuel investment in the stock market and the purchase of U.S. Treasury bills. It has been estimated by many economists that as much as half the value of the dollar arises from its position as the global reserve currency, meaning that all nations' central banks must maintain a healthy supply of U.S. dollars for their oil purchases.

The danger posed to the petro-dollar by the euro is of grave importance to the future of the U.S. economy, and the fact that Iraq switched to euros for their oil transactions was not a minor factor in the U.S. decision to invade in 2003. The switch provided Iraq with a large profit, roughly 20-percent in just a couple of years, and other nations including members of OPEC took notice. Iran and Venezuela, both OPEC members, began to shift large amounts of their central bank's reserve currencies away from dollars and into euros. Russia did the same. And the U.S. took notice.

The danger that an increasingly strong euro might trigger a complete OPEC switch to euros was very real, and the damage to the U.S. economy would be catastrophic. A drop in the dollar's value by half, capital flight out of the stock market and away from Treasury bills, default on the national debt, and an economic crash worse than the Great Depression were possibilities. At the very least, a severe economic slump coupled with a weak dollar and loss of confidence in dollar-dominated assets would occur. Shoring up the petro-dollar became a top priority, and today we can see that the dollar regained most of its decreased value and the rise of the euro slowed.

This was only possible with a sizable U.S. military force literally sitting atop most of the Persian Gulf region's oil, and with military bases and personnel placed in strategic locations in Central Eurasia. This presence al so extends over to the Horn of Africa, and into Northern and Western Africa. Not only are the oil reserves themselves within a U.S. sphere of military protection and influence, but so to are major pipelines and shipping routes in the Mediterranean Sea and across into the Caribbean Basin. U.S. dominance of the Middle East and its energy reserves is indisputable, and no nation could realistically hope to challenge that control any time in the near future.

But the near future is precisely the time in question, with regard to peak oil, and so any major oil consuming nation that wishes to forestall economic and social calamity and which cannot afford to accede to de facto U.S. control of global energy supplies, will simply have to identify and exploit some other option if it is not willing to militarily confront the U.S. in the Middle East. And these are precisely the decisions China now faces.

Keeping in mind the data concerning which nations use what amount of oil, and the staggering amount of oil China will need by the end of the next decade, it is obvious that the energy needs and interests of China cannot be met -- especially if they are to rely on the Persian Gulf for three-quarters of their oil needs, needs which conflict directly with the needs of the U.S. and Europe. China must find other ways of meeting its demand for oil, sources outside of the Persian Gulf states (with the possible exception of Iran, a point which will be addressed shortly). While the government in China has, as noted, spent large sums of money to secure deals with several oil producing states, these deals will not provide the majority of China's energy needs as the decade progresses.

This is why China is desperate to gain the pipeline from Siberia. Unfortunately, there is reason to believe that the real intent is not to simply purchase oil and natural gas from Russia. China may be in the process of securing the first stages of infrastructure to transport the energy resources from Siberia, in anticipation of an actual military seizure of that territory a few years from now. Faced with peak oil, China must either fight the U.S. to take control of the oil supplies in the Middle East, a battle they could not win for several reasons (including the fact that their major advantage -- numerical superiority -- is negated because of the distances involved and the lack of adequate supply and logistical support necessary for such a major action, not to mention the ultimate likely use of nuclear weapons in such a confrontation); or they must go take a major supply of oil from someplace else. It will not be feasible for them to simply purchase it, because in a global peak oil crisis the supply and price and control of oil will be too problematic and uncertain for China to risk not obtaining all the oil it needs. The only real option China can probably see is to use their power to seize the oil they will require to remain functioning while the world runs out of energy.

China has amassed a stockpile of U.S. dollars and Treasury bills for both short-term and long-term reasons. In the short-term, it keeps their exports cheap and increases their trade surplus, fueling their manufacturing base and helping them to also control and even to some extent intimidate financial markets in the U.S. It is in the long-term, however, where the real danger lies.

Now that China is diversifying their currency holdings into euros and other currencies, they can do significant damage to both the U.S. and Japan's economies. By dumping their dollars and Treasury bills, they can send the value of the dollar spiraling downward and seriously weaken confidence in Treasury bills and perhaps spur a dumping of those bills by other nations such as Japan and Saudi Arabia. Interest rates will shoot skyward, property values will soar, inflation will take hold, and the U.S. economy will screech to a halt, already stumbling along due to unemployment and low manufacturing statistics and high energy prices (not to mention a ballooning deficit and the war in Iraq). As goes the U.S. economy, so to goes Japan's financial markets. The combination of a bad economic downturn in the U.S. and Japan, coupled with China using all the amassed U.S. currency to purchase euros and send that currency skyrocketing, and finally added to Iran's already seriously strained relations with the U.S., could all tempt a handful of OPEC nations -- Iran and Venezuela, perhaps more -- to dump petro-dollars for euros. That could possibly be the straw that breaks the camel's back, and the U.S. might actually fall into a full-blown depression.

China, meanwhile, would see the value of their large currency reserves increase substantially in value as the euro rose even more in value once some OPEC states made the currency switch. By tying their own currency (the yuan) closer to the euro and away from dollars, China is ensuring that they are not in as much danger of losing their role as manufacturer of cheap imports. Even though a weakened dollar and U.S. economy would mean a serious decrease in imports from China, the increased imports into Europe due to the strength of the euro against the yuan could make up the difference -- and Europe has a population roughly 50-percent larger than the U.S. Any short-term negative impact against the yuan and Chinese exports would be negligible and not very long-lived, and the long-term gains would be potentially enormous. And in the context of peak oil, this part of China's strategy may be a gamble they have no choice but to take. For China to make a move against Siberia and secure the oil reserves they will need, the U.S. must be weakened and unable to respond either economically or militarily. The damage China could do using this scenario could achieve that result.

Japan would also be injured by this economic attack, and that also bodes well for China. Besides being China's biggest political and economic rival in Asia, Japan is also a rival for the pipeline to Siberia. China could force Japan out of the running for that deal, and secure the beginning infrastructure in the region they intend on invading. Additionally, a weak Japan means China might be able to exploit their position in the face of a weak U.S. and seize some valuable additional territory besides Siberia. A Chinese invasion of Taiwan, for example, would be much more possible if the U.S. lacked the economic ability to strike back from Japan and South Korea.

As a side note, this raises the question of whether China might possibly also persuade North Korea to launch a simultaneous invasion of South Korea, knowing the U.S. could not possibly respond to so many maneuvers. That North Korea's president was on a secret state visit to China recently could be viewed in this context as the beginnings of negotiations towards this very scenario. Or perhaps China is hoping to add North Korea's nuclear arsenal to their own, in terms of the nuclear threat brought into the theatre of war as a deterrent against a nuclear strike by Russia or the U.S. In the event, it's worth considering as a potential added danger to the scenario.

By being the very impetus for the rise of European currency and the strong position of the euro to take over as global reserve currency, China also mitigates the danger that the European Union would take any actions to support Russia militarily. The increased tensions between the U.S. and Russia, and between Russia and Europe over issues regarding former Soviet states in Eastern Europe, also decreases the likelihood of any outside interference favoring Russia.

Finally, again the nuclear deterrent must be noted. While estimates of China's nuclear capabilities vary, and there is certainly evidence that they lack adequate technical means to detect a nuclear launch against their own nation, no doubt China would prepare their missiles (most of which apparently require a liquid fueling process that takes several hours) for the fastest possible launch. So any attack against China and their military forces would certainly be met with a mutual launch against Russia. To this must again be added the nuclear capabilities of North Korea, which could be drawn into the conflict in several ways. Russian use of nuclear weapons against China would potentially require detonations against Chinese forces already inside Russian territory and would thus be less likely, especially since the territory in question harbors Russia's precious oil reserves. Would Russia use nuclear weapons in light of the risk of destruction of their own cities as well as their most valuable resources? Probably not. China might logically gamble that the chances of escalation into a nuclear conflict would be significantly lowered in light of these considerations.

The current political conflict between Iran and We stern nations is also relevant. China has a $70 billion oil deal with Iran. It is possible that China has been reluctantly agreeing to the U.S. and European attempts to apply pressure to Iran, simply because it is obvious that most of Iran's animosity is directed at the two Western players. Once the matter comes before the U.N., a situation that is delayed because first the International Atomic Energy Agency will first review and report on the matter to the U.N., China might choose to either abstain from a Security Council vote or actually side with Iran. The goal here for China would be for Iran to follow a course leading to an embargo against the Western allies, and China could step into the vacuum and secure an even more lucrative deal with Iran to purchase almost all of the nation's oil exports. Iran looses nothing, they strike a blow at the West, and China benefits from that as well as from increased access to Iranian oil. The danger for China is that the U.S. might take mili tary action against Iran, but if these events are properly timed by China then the economic maneuver of dumping dollars and Treasury bills and the switch to euros by Iran and other OPEC members could blunt any U.S. attempt to get into a costly military confrontation. Adding to the injury to the U.S. would be the overall increase in oil prices that would stem from an Iranian embargo targeting the West. Europe would have some protection against this since their currency value would substantially increase, thus constraining the impact of rising oil prices at least to some extent.

These conditions could easily prompt states that traditionally side with and support the U.S. in the Middle East to abandon that role, so that Saudi Arabia and Kuwait see costly consequences from remaining too aligned with the U.S. If other nations already harboring animosity to the U.S. decide to take advantage of the situation to strike an even harder blow at the U.S., Venezuela and other OPEC members might join Iran in switching to euros for transactions, and the rise of that currency would make it nearly impossible for other OPEC members to ignore. The profits they would stand to lose if they remained on the petro-dollar would likely force them to shift their transactions to euros as well. Coupled with all of the previously mentioned blows to the U.S. economy, such a move would be deadly. U.S. prestige around the world would suffer greatly, even more so if and when China invaded Russia and North Korea moved into South Korea. With the Iraq war already draining the U.S. economy, the further strain this scenario would create would make it almost impossible for the U.S. to launch military actions elsewhere on the necessary scale. Again, already shaky U.S. prestige and economic footing would degrade even more.

Prior to unveiling their plan by the launch of hostilities against Russia, China must work to keep oil prices low and to limit the realization of just how much energy they need. This is why China is downplaying their consumption of oil in their recent figures regarding consumption in 2005. They are trying to keep their own appetite for oil from driving up the costs, and they are trying to conceal how much their consumption is actually rising. One alternate theory might be that China in fact did reduce their oil consumption in 2005, keeping it modest most of the year and then drastically constraining consumption in December of that year (hence the discrepancies in relation to Deutsche Bank IEA figures) -- all for the purpose of building up a strategic reserve for the coming military campaign against Russia.

To sum up, China is using short-term tactics to disguise their true oil consumption and keep prices from rising too quickly; to build a bundle of reserve currency in U.S. dollars to keep their exports cheap and their currency undervalued; to develop multiple oil deals with nations outside of the Middle East; to secure an infrastructure deal in Siberia; and to swell their global trade surplus to amass as much hard currency as possible to finance their oil deals, manufacturing industry, and military. For the long-term, China seeks to shift their currency reserves from dollars to euros; to have a hand in convincing Iran to adopt an embargo against the West and send most of its oil into China; to cause a quick, mass devaluation of the dollar and instigate a pull-out of foreign investment in Treasury bills, to precipitate an economic crisis in the U.S. and Japan; to see OPEC drop the petro-dollar in favor of the euro, so that Europe's strong currency leads to a transfer of the Chinese export market from the U.S. to Europe; to draw North Korea closer to China politically, economically, and militarily, to advance the plan for North Korea to possibly invade South Korea and/or lend it's nuclear arsenal as leverage against Russia and the U.S.; to weaken the position of the U.S. in the Middle East and Central Eurasia in general, to head off any attempt by the U.S. to interfere in China's attempt to invade Russia and to also stymie any U.S. attempt to deal with Iran militarily; and finally, to succeed in securing the Siberian territory from Russia through armed conflict, thus taking possession of the oil and natural gas in that region.

Questions obviously remain as to how China would actually proceed militarily against Russia. However, there are some points to consider about Russia. First, the Russian state is economically weak, and they are unable to adequately fund their military forces. Likewise, the caliber of those forces is in serious question, as events in Chechnya have made abundantly clear. Any significant military action would sap much needed funding from the Russian economy, something the state simply cannot afford. The distance that would have to be traveled, by both troops and the supplies necessary to keep them at fighting levels, is daunting -- Russia having by far the largest landmass of any nation on the planet, and Siberia being a rather inhospitable territory. In fact, China would have a much easier time invading through their own northern territories and into Siberia, than Russia would have trying to send and maintain a large fighting force there.
There is evidence that Russia sees the danger posed by China, especially if Russia has properly assessed the global situation with regard to oil and the coming drastic shortages the world is about to face. Serg Ivanov, the Deputy Prime Minister and the Minister of Defense of the Russian Federation, wrote a lengthy analysis (which was carried by the Wall Street Journal) of Russia's current and future military needs. He begins by stressing Russia's "firm commitment to the principle of pre-emption. We define pre-emption not only as the capability to deliver strikes on terrorist groups but as other measures designed to prevent a threat from emerging long before there is a nee d to confront it." He goes on to say, "We need to consider the implications of the so-called 'uncertainty factor'…By uncertainty we mean a political or military-political conflict or process that has a potential to pose a direct threat to Russia's security, or to change the geopolitical reality in a region of Russia's strategic interest."

Ivanov is discussing the need for Russia to be willing to act militarily to prevent or confront conflicts or political developments in areas of the world Russia considers important to their interests. No surprise there, really, since this is essentially the doctrine mentioned above with relation to President Carter and U.S. interests in the Middle East. What is noteworthy is that this comment is on the heals of Ivanov's statements about Russian willingness to launch pre-emptive military action to prevent threats that are emerging as opposed to already existing. He is declaring the willingness, and indeed the necessity, of Russia laun ching military actions in advance of potential developments (including political as opposed to military ones) that Russia deems harmful to their own interests. More importantly, he felt the need to declare it to the entire world, in writing.

In his analysis, Ivanov is saying that while Russia wishes no ill will against anyone, the best way to ensure peace is to prepare for war. He goes into detail about how the Russian military is being upgraded and new weapons systems and strategies are being developed and deployed. Regarding developing combat training, he makes perhaps the most revealing statement when he says, "…the number and level of large-scale exercises has grown to more than 50 this year. The most significant were tactical and theatre-level exercises in the Russian Far-East, Central Asia, China, and India…"

The exercises in question often involved joint training missions with forces from those other nations, but the point is that Ivanov identifies t he most significant as being in the East, relating to Asia. Joint exercises allow for the assessment of the other nation's forces; a bit of familiarity with how the other forces are organized, how they fight, and so on; and training of one's own troops for combat in those areas. All of Ivanov's comments about pre-emption, willingness to take military action in anticipation of a threat, the need to prepare for war and strengthen the Russian military, and this acknowledgement that most training and preparation involves locations to the East, are all geared to send a very distinct message: don't mess with Russia. The obvious recipients of that message are in the East.

Russia must be at least somewhat aware of how vulnerable their Siberian resources are, and that they are perceived as militarily weak and perhaps unable to adequately defend those resources. If Russia were not self-conscious about these things, then Ivanov would hardly feel it necessary to issue such public comments, particularly details about how Russia is building itself back militarily and can deal with any threat. Such comments, in fact, project precisely the opposite image, instead appearing to be the words of a nation afraid that its weakness are too obvious.

In fact, such a fear would be well-founded, and if Ivanov was attempting to send any messages to China, it is doubtful China took him seriously. The one really strong card that Russia has to play is its nuclear arsenal, and that is what China must ultimately come to terms with if they make a move against Siberia. Several reasons China might feel safe from a nuclear confrontation have already been noted above; however, there may be additional factors to consider as well.

One way China could almost assure itself that Russia would not launch a nuclear attack is if China is able to launch a 'decapitation strike' against Russia first, destroying the Russian government and most command-and-control over milita ry forces. Once Moscow was destroyed, any Chinese invasion of Siberia would almost surely succeed rather easily. Many analysts suspect that much of Russia's early warning defense system, which alerts them to any missile attacks against their country, is in a state of utter disrepair. It is known that on several occasions, this entire warning system has shut down completely. Taking into account China's proximity to Moscow, the fact that most of Russia's warning systems are built to detect a missile launch by NATO and the U.S., and the fact that once Chinese missiles were detected Russia would have precious little time to launch a retaliatory strike, it is possible that China could successfully strike Moscow without suffering a retaliatory strike.

To precipitate this, China would have to schedule a supposed 'missile test' from somewhere as close to their northern border as possible. By the time it became obvious that the missile was intended for Moscow (and China migh t even claim it is a mistake and that the missile has no warhead, to further confuse matters and delay any Russian response), it might be too late for Russia to launch a counter-attack. Or China might simply try to smuggle a nuclear weapon into Moscow and detonate it, an act which could be blamed on "terrorists" even after China invaded (an act which would be obviously opportunistic, but China would no doubt rather be blamed for opportunism than for a nuclear attack). There are no doubt other scenarios that China could employ if they wished to take this course of action. What is important to remember is that such an action would be of great benefit to any planned invasion of Siberia, and so the danger of such an attempted nuclear attack is real even if it is not highly probable.

Should China invade without a nuclear first-strike, then Russia would likely not respond with nuclear weapons, at least not initially. However, if nations armed with such weapons go to war, then the potential for a nuclear war always exists. Moreover, once one side sees that it is clearly loosing, and if the stakes are high for each nation, then there is a strong possibility that the losing side will attempt to gain some advantage by utilizing nuclear weapons on the battlefield. Once a war has gone nuclear, escalation is almost inevitable, as the other side retaliates, and the targets of the nuclear exchanges become more significant until a full-scale nuclear war in which populations of the largest cities will likely be targeted and killed.

The implications of even a small-scale nuclear exchange (to the extent a nuclear exchange can be small-scale) in Central Eurasia are staggering. The death toll would be in the millions and the region would be poisoned with radiation and fallout. Since China lacks the massive nuclear arsenal of Russia, even a full-scale nuclear exchange would not quite be the global doomsday scenario that would arise from a U.S.-Russian exchange, since the total number of nuclear detonations would be barely more than half of the doomsday scenario and would be restricted to a much more narrow targeting area. But the war would take place in the most populated part of the entire world, Central Eurasia, and where a huge amount of global resources are found. The radiation and fallout would affect other large parts of the world, and the death toll from the initial nuclear detonations combined with those suffering radiation sickness and long-term related illnesses would no doubt be in the hundreds of millions. And of course, the political and economic impacts would be earth-shattering, especially in light of the scenarios leading up to the war and if North Korea were enlisted to attack South Korea at the same time.

China would have to be willing to gamble that the war would not turn nuclear, unless they devised a way to take out Moscow without any danger of being detected. Most likely, China will bet on keeping the war conventional and hope that surprise and a quick victory will make the operation a success before events spiral out of control. They might also count on Europe and the U.S. pressuring Russia not to respond with nuclear weapons. Ultimately, the realities of peak oil and the survival of China's current government combine to leave China with little choice but to place their bets and face the risk of the conflict becoming nuclear.

Whether China will ultimately embark on such a risky venture is, obviously, to be seen. However, the recent developments in relation to China, Russia, and the Middle East, and the increasingly evident crisis regarding peak oil, all combine to suggest that the possibility of a Chinese invasion of Russian territory looks more plausible with each passing day.


At 2:25 PM, February 16, 2006, Anonymous Anonymous said...

I think it's a crazy idea to suggest that China will invade Russia, and even crazier to think that they would get away with it (that is, actually hold on to territory long enough to use it). The global reactions to such a move would be economic suicide to China.

At 4:20 PM, February 16, 2006, Anonymous Anonymous said...

What a croc of bull.

At 8:50 AM, February 18, 2006, Anonymous SqueakyRat said...

Siberia's a big place, and the major oil-producing regions in it are almost as far from China as the Middle East. Sakhalin, the main region that is (sort of) close to China is estimated to have only about 3.6 billion barrels in reserves. Do the arithmetic and you'll see that's hardly worth starting World War III over.

At 3:46 PM, February 21, 2006, Anonymous Oil Bull said...

Despite what the earlier "anonymous" stated, this is mostly logical, well reasoned analysis of the current world situation regarding oil depletion. Prices are already a lot higher now than a year ago, about 50% on the futures market. And we haven't even hit a point where demand is higher than supply. Currently oil production is high. That cannot continue indefinitely. When production falls below demand prices will skyrocket. $100 a barrel will seem cheap. Wait for $200. Other commentators may not want to believe in increased military and political conflict. They are just burying their proverbial heads in the sand. Our political structures are designed and created to maintain the status quo. To maintain and improve our economic well being we (whether "we" is China, the US, Russia, Japan or whoever)will need to fight other members of the world community to keep or maintain its share of the shrinking pie.

Did you forget about the Iraq War? Are we there to promote democracy? Oh come gives the US a bigger foothold in the Middle East to control Iraqi, Saudi and other countries' oil.
Do I pesonally support that? No, but I read the tea leaves. Within the next 10 - 20 years we are going to confront major crises in the world, probably depression and war at least on the scale of WW 2. If you care to dispute this provide a reasoned explanation of how we can avoid it. Simply saying "a croc of bull" shows no intelligence. What is our alternative to oil? There is nothing as powerful as oil.

Oil Bull


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