World Energy Outlook 2007

SPOTLIGHT
Do China’s and India’s Equity Oil Acquisitions
Improve Energy Security?
For both China and India, acquisitions of equity oil overseas by state
companies have formed a central plank of energy-security policy for
several years. Yet it is far from obvious that the availability of equity oil
would, in practice, enhance either country’s physical oil supply or protect
them from the effects of higher prices in the event of a supply crisis.
Though the emphasis by Chinese and Indian policy makers is waning,
they have long argued that equity oil enhances security because it cannot
be taken for granted that the international market would make sufficient
oil available in a supply crisis, as other countries might intervene to divert
the physical flow of oil. US resistance to the attempt by the Chinese
company, CNOOC, to buy the American company Unocal in 2005
reinforced that perception. Chinese and Indian concerns about securing
supply in an emergency are understandable. But today, oil – including
most of China’s and India’s equity oil – is traded openly on the
international market and any disruption to physical supplies quickly
leads to an increase in international prices and adjustments to regional
price differentials, which have the effect of redirecting supplies. The
scope for governments to intervene in trade flows is extremely limited. In
addition, if equity oil were shipped to domestic markets, it would face
the same transportation risks as oil bought by Chinese and Indian oil
importers on the spot market. For example, equity oil from the Middle
East (assuming it were available) would be of no use in alleviating any
blockage in the flow of oil to either country through the Straits of
Hormuz. Transportation costs would also be higher than if the equity oil
were sold onto the world market. In addition, the amount of equity oil
available remains small relative to both countries’ needs (though it is set
to grow) and reliance on a single source, as history shows, can deny
countries the flexibility of the international market.
Another argument is that equity oil provides protection against a price
hike. The government could intervene to cap the prices of equity oil,
while obliging the national companies to divert that oil entirely to the
domestic market – assuming there is no transportation constraint. Such
a policy would, to some degree, insulate the domestic market from
international price fluctuations. But equity oil could only cover part of
each country’s needs. More importantly, holding prices below market
levels would remove incentives to use oil more efficiently. It would
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