An (Oil Price) Shocking Global Recession?

At the end of the day, you’ve got two very large consumers [the United States and China] competing over the same sandbox.

—Gal Luft, Institute for the Analysis of Global Security

Any discussion of China’s growing thirst for oil must first acknowledge that the biggest guzzler of global oil is the United States. With less than 5% of the world’s population, the United States annually consumes about 25% of the world’s oil production. In comparison, with fully 20% of the world’s population, China currently consumes only about 7% of the world’s oil. However, as China’s economy continues to grow rapidly, so, too, will its oil consumption and share of the world oil market—even as the U.S. share of that market falls. The most salient facts are these:

• China is the world’s second-largest petroleum consumer behind only the United States, and its oil demand is projected to triple by 2030.

• China is already heavily dependent on oil imports, importing more than 40% of its needs, and its oil import dependence is projected to reach 60% by 2020.

Because of surging oil demand in China and other emerging economies, such as India, the International Monetary Fund is now warning of a highly inflationary “permanent oil price shock” and a possible sustained global recession over the next several decades induced by this price shock. While the developed nations of the world such as the United States, Germany, and Japan will be hurt by these oil price shocks, it will be the poverty-stricken developing countries—from Bangladesh and Cambodia to Haiti and Mexico—that will be hurt even more.

Despite the serious economic impacts of inflation and recession that may result from China’s increasing participation in world oil markets, it is China’s highly provocative energy security strategies and their far-ranging geopolitical effects that may ultimately prove to be most dangerous to global economic and political stability. To understand these effects, it is first useful to understand China’s deepest oil-security fear: the threat of a U.S. oil embargo or other type of oil-supply disruption.