Hedging Against Oil Dependency: New Perspectives on China’s Energy Security Policy
| DOI | 10.1177/0047117809340543 |
| Author | Øystein Tunsjø |
| Date | 01 March 2010 |
| Published date | 01 March 2010 |
| Subject Matter | Articles |
HEDGING AGAINST OIL DEPENDENCY 25
Hedging Against Oil Dependency: New Perspectives on
China’s Energy Security Policy1
Øystein Tunsjø
Abstract
Analysts debate if China will address its increasing reliance on overseas oil supplies and
associated vulnerabilities through strategic steps that could lead to confl ict or through
accommodating market mechanisms. This article utilises on traditional ‘market’ and
‘strategic’ approaches, but adds to this analysis the concept of hedging, and links hedging
to risk management. It is argued that such an alternative approach provides a better explan-
ation and a more comprehensive understanding of China’s energy security behaviour. By
drawing on hedging and risk management, new perspectives on China’s strategies to access
energy resources in Sudan and Iran, and the importance of a Chinese state-owned tanker
fl eet in China’s energy security policy are presented. Hedging strategies also incorporate
more scope for limiting and managing risk than traditional strategies of diversifi cation
and a comprehensive approach that loosely mixes strategic and market approaches.
Keywords: China, Chinese tanker fl eet, energy security, hedging, Iran, risk management,
Sudan
Introduction
Today we are deluged with stories about China’s rapid emergence as a major force
in world energy markets. According to the International Energy Agency (IEA),
oil imports are projected to jump from 3.5 million barrels per day (mb/d) in 2006
to 13.1 mb/d in 2030, and the share of imported oil is forecast to rise from 50 per
cent to 80 per cent.2 Chinese authorities estimate that 60 per cent of China’s oil will
be imported by 2020.3 Despite diffi culties in predicting future energy supplies, the
question of reliable oil imports features prominently in China’s political and security
discourse, and infl uences China’s diplomatic and strategic calculations.4
This article introduces the concept of hedging and the theory of risk management
in order to provide a new perspective and a better understanding of China’s energy
security policy. By expanding on earlier theoretical approaches on energy security,
the objective is to capture more effectively some important aspects of the external
dimension of China’s rising reliance on oil imports. It is argued that China’s growing
oil imports do not represent a threat to China’s core national interests.5 Neither can
China eliminate the strategic vulnerability accompanying the increasing reliance
on imported oil by strengthening the capabilities of the Chinese People’s Liberation
Army’s (PLA) to safeguard important sea lines of communications (SLOC) and
pipelines, by supporting China’s national oil companies (NOCs) in their overseas
oil exploration and production, or by reinforcing the position of China’s NOCs in
© The Author(s), 2010. Reprints and permissions:
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[DOI: 10.1177/0047117809340543]
26 INTERNATIONAL RELATIONS 24(1)
the international oil market. Instead, the potential disruption of oil supplies will
remain a risk that China manages by hedging.
Two main perspectives are usually offered when analysing states’ energy security
policy: a ‘strategic’ and a ‘market’ approach. However, many experts reject a simplistic
dichotomised debate between these two approaches, pointing out that energy security
combines market and strategic aspects. Indeed most states, including China, mix
strategic and market strategies for securing energy supplies, often referred to as a
comprehensive approach. Nonetheless, loosely mixing market and strategic aspects
and pointing to a comprehensive approach is insuffi cient for analysing China’s energy
security policy. Consequently, this article contends that the concept of hedging needs
to be added to traditional approaches, and linked to risk management, in order to
provide a more rigorous theoretical framework for understanding energy security,
which enables researchers to explore the balance and the tension between market
and strategic aspects.
This is beyond semantics, or simply replacing the word ‘comprehensive’ with
‘hedging’. Instead, by broadening our analytical tools and incorporating hedging
into the analysis, we are able to capture more of the complexity facing states when
developing energy security policies, and address important nuances in China’s energy
security policy. Although hedging with future contracts in order to insure against
price risk and volatility has been normal practise in the oil market since the 1980s,
and some scholars have referred to China’s energy security policy as hedging, very
few analysts have elaborated on the meaning of hedging.6 There are few studies that
provide in-depth analysis of how hedging translates to security studies and how it
can be used to explain China’s energy security policy.
Accordingly, the rest of this article is divided into three main sections. The fi rst
part briefl y reviews traditional approaches to energy security. The second part seeks to
establish how hedging can enhance our understanding of states’ energy security policy
and provide a better explanation of China’s own energy security policy. The third part
empirically examines this theoretical framework by investigating China’s strategies
to gain access to sources of oil – in particular its policies towards Sudan and Iran –
and by examining China’s ambitions for a state-owned tanker fl eet.
Strategic and market approaches
Strategic considerations and the importance of market mechanisms have traditionally
been the main focus when states develop their energy security policy. According to
Andrews-Speed, the perceptions and priorities of the Chinese government underline
an adherence to the ‘strategic’ approach.7 ‘Most obvious is the case of China’, argue
the contributors to the CAEC Task Force Report on Asia–Europe energy cooperation,
when they describe China’s energy security in strategic terms. The report maintains
that the Chinese government favours:
a hands-on approach to energy security, be it in form of strong government
monopoly on indigenous production, on foreign investments and in enhancing
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