While American leaders view high gasoline prices as a political liability, the Chinese Communist Party sees energy instability as a threat to its rule. Beijing is in a panic over the growing financial burden arising from soaring energy use, and panic does not make for good policy.

Resident Fellow Dan Blumenthal

Resident Scholar Phillip L. Swagel

Inexperienced in global commodity markets and suspicious of the United States, China's policy makers are vainly seeking to insulate themselves from the global energy market by locking up energy supplies. To do this, Beijing has supported regimes that promote geopolitical instability, overpaid for energy assets and invested in expensive infrastructure projects as alternatives to transporting oil by sea. China is also developing the capability to project its military power into the sea lanes used by oil tankers. It has every right to waste resources in this way, but its clumsy approach harms others by raising international tensions and oil prices.

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China has accounted for 40% of the rise in demand for oil over the past four years. Petroleum use has grown in tandem with the Chinese economy, thanks, in part, to the increasing numbers of newly wealthy Chinese families buying automobiles. Subsidized gasoline prices and energy-inefficient factories have also increased China's oil demand. With environmental reasons precluding the increased use of coal, Beijing has needed to venture into the global market to purchase oil.

China's rush to acquire existing energy supplies and explore for new ones has prompted state-owned oil companies to invest in murky economies, from Iran to Sudan and Nigeria. China claims the moral high ground of "not interfering in the internal affairs" of others, but in practice it does precisely that by propping up problematic governments with money and arms. Beijing should realize that siding with repressive regimes offers no protection against the forces of terror, as evidenced by recent warnings from Nigerian militants for "the Chinese government and its oil companies to steer well clear of the Niger Delta."

To be sure, China's investments boost the global supply of oil and help relieve upward price pressures. But these added drops in the global oil bucket are outweighed by the price of increased geopolitical instability.

Iran offers the most acute example of this dilemma. Regardless of any negotiations, Washington will not allow a despotic Tehran that exports terror and threatens its neighbors to become a nuclear power. Backing up the demands of the international community with a genuine threat of financial sanctions represents not a path to war, but instead the best hope of dealing with the Iranian menace without resorting to force. Beijing's opposition to sanctions actually increases the likelihood of a conflict--a judgment reflected in rising crude oil prices.

A military conflict with Iran is not in China's interests, since the resulting energy price spike and world economic downturn would severely dent China's export-driven growth. This, in turn, would threaten China's ability to create enough jobs for its graduates, as well as for the migrant workers who flood into China's major cities from rural areas every year. A conflict in Iran would thus put at risk the Chinese social contract under which its people endure political repression in exchange for rising material prosperity.

The irony in China's attempts to build its own energy infrastructure is that Beijing benefits immensely from U.S. protection of the present global energy system. The ability of countries in the Middle East to produce and export crude oil depends heavily on America's commitment to keep the region secure. The oil that fuels the Porsche Cayenne SUVs roaming Shanghai's streets is conveyed along sea lanes from the Persian Gulf through the Straits of Malacca, which is patrolled by the U.S. Navy.

Yet Beijing seems unhappy with this arrangement, and is developing alternative oil delivery routes meant to circumvent the U.S. military shield. China has bankrolled more than 80% of a $248 million project to develop a deep-sea port in Gwadar, Pakistan. This would lessen China's reliance on sea transport by allowing oil to be transported overland through Pakistan to Western China. Chinese military strategists openly debate how best to protect their energy sources, with some calling for construction of a blue-water navy which can reach well beyond China's immediate shores. Although officially described as a commercial project, many believe that Gwadar will eventually become a base the Chinese navy can use to protect its own tankers--or even threaten those of other nations.

China's oil policy is driven by the mistaken belief that locking up energy sources will insulate Beijing from the vicissitudes of global energy markets. That belief has prompted Chinese companies to vastly overpay for oil, as the largest state-owned oil company, China National Petroleum Corporation (Sinopec), did last August when it paid $4.18 billion for PetroKazakhstan's oilfields in Central Asia--a 21% premium over that company's share price at the time. The Wall Street Journal reported this week that Citic Group, another Chinese state-owned conglomerate, is negotiating to buy Nations Energy, a Canadian company whose main asset is an oil field in Kazakhstan.

Such purchases betray a profound lack of understanding that the $70 per barrel price of oil represents not just the amount that a buyer must pay, but also the tradeoff between consuming one's own oil and using the $70 for another purpose. Even if China owned all its own energy, the global price of oil would still indicate how much Beijing gives up by not selling its oil to others. China should purchase oil assets if the terms are financially attractive. But overpaying for oil wastes China's financial resources without providing security against price spikes.

If Beijing does not respond to price signals and simply puts some energy sources off-limits to others, energy price volatility will increase: a given change in oil supply (say, turmoil in Nigeria) or demand would lead to larger price movements when the flexible part of the market is smaller.

The U.S. and other nations have much to gain if China participates constructively in the global energy market. So too does China, which--once it learns how better to respect intellectual-property rights--could cooperate with other nations on developing new energy sources such as hydrogen and nuclear fusion. However, such cooperative efforts will be fruitless if China, motivated by the troubling mixture of fear and great-power ambition, continues to try to create an alternative structure for energy security by locking up its own energy sources, propping up troublesome regimes, and developing a global military reach that threatens others.

While investing in new oil sources can have positive effects for the world as a whole, that is outweighed by the risk of increased geopolitical instability as a result of China's blundering quest for energy.

Dan Blumenthal is a resident fellow at AEI. Phillip L. Swagel is a resident scholar at AEI.