China considers oil strategy

By Lisa Barron
CNN Correspondent

Once self reliant, China now depends heavily on daily crude oil deliveries from the Middle East

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HONG KONG, China (CNN) -- China is the only major economic power without strategic fuel reserves. Once self reliant, it has only a few days' supply of oil on hand and now depends heavily on daily crude deliveries from the Middle East.

"Oil has been produced there for many years," says JP Morgan Chase energy analyst David Johnson.

"They are finding stuff offshore but the onshore stuff is declining, so they've turned from being a large exporter of oil to being a large importer."

Last year China imported more than 60 million tonnes at a cost of nearly $12 billion.

Official estimates say that by 2005, 80 million tonnes will be imported, and that by 2010 it could have to import at least 120 million tonnes of oil.

A U.S.-led war with Iraq would make China highly vulnerable to a disruption in the supply of crude and higher global oil prices. It could also hurt mainland exports, a key engine of growth.

"If the oil price stayed high for long then that's going to bring down the world economy, and then the demand for Chinese goods would start to fade away," Credit Suisse First Boston chief economist Dong Tao told CNN.

Position on Iraq

Beijing's position on Iraq is that its sovereignty must be preserved and the United Nations must play a pivotal role in resolving any crisis, but it can't afford to risk its relationship with Washington.

"For the administration of President Jiang Zemin maintaining good ties with the United States is still a cornerstone of China's foreign policy," notes CNN senior China Analyst Willy Wo Lap Lam.

"In spite of the fact that Beijing wants to maintain good ties with the Middle East and Islamic countries, it doesn't look likely that they want a head on confrontation with the U.S.," he says.

Beijing has some delicate diplomacy ahead. And the tough task of devising an effective oil strategy -- starting a strategic reserve and tapping new sources of crude oil overseas or potentially face an energy crisis.

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