The following interview with Gal Luft [1] was carried out in the context of an academic activity at Tsinghua University, Beijing, China, on November 7, 2013 by Patrick Renz and Frauke Heidemann. During his talk and the following Q&A session the main topics Luft focused on were his definition of energy security and the main challenges ahead, the shale gas production in the U.S. and U.S. energy strategy. All footnotes are remarks by Patrick Renz and Frauke Heidemann, aimed at giving some additional background knowledge and especially providing the links to the cited documents so that the reader can follow up on these issues easily.

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. Talk on Energy Security

I would like to start with a definition of energy security because we cannot talk about an issue without understanding what it is. Energy security traditionally has always been about the availability of energy resources, the main energy resources being oil, gas, nuclear, solar, wind, geo-thermal, and natural gas. Countries have always been very preoccupied with the question of how to make sure that supply is not interrupted, which is a good thing to worry about but it is not enough. You can have all the energy in the world at an unaffordable price, but not have energy security. So energy security is about availability of energy but also about affordability. [2] Because energy is not affordable to so many people around the world, there is also energy poverty. We have today about one and a half billion people in the world that don’t have energy at all, in other words that don’t have energy to cook a meal: they are energy poor. In India alone there are 400 million people, in Southeast Asia another 130 million. [3] We are talking about a very large population that if you ask what energy security means they say they don’t know. We always have to remember this and when we think about policies we have to make sure we address the two vectors of affordability and availability. Now, we also have to remember that there are two types of energy and we should not confuse between them. One type of energy is the energy that we use for electricity. In this space we talk primarily about coal, nuclear power, natural gas, hydro, and renewables. And I did not mention oil because you don’t use oil for power generation. It is very rare. That brings me to that type of energy that has everything to do with oil and that is transportation. Cars, trucks, ships, planes. For those, it is all about oil. So when we talk about energy we always have to keep in mind the types. Topics related to electricity production involve those diverse energy sources and topics related to transportation involve oil. I would like to focus my remarks on the second area, which is oil.

It is just interesting that this year we celebrated memorable anniversaries related to oil. First of all, the 40-year anniversary of the Arab oil embargo in 1973 when oil was used as a weapon to advance political objectives. [5] They quadrupled the price of oil and punished the U.S. for its support of Israel during the Yom Kippur war. Oil was used as a weapon. Let us remember that oil has a very long history of being part of geopolitical affairs around the world. It’s only useful to remember that even the history of China has much to do with the pursuit of oil, given that one of the worst things that happened to China was the invasion by Japan in 1937 of Manchuria and later on the outbreak of the Second World War in which Japan took over large parts of China. Many millions of Chinese were killed and suffered as a result. One of the reasons for Japan’s expansionist policy was the need for oil, the need for natural resources, the need for rubber. If you want to build an army, you need tires, if you want tires you need oil. So that was one of the areas in which we are seeing the link between the need for natural resources and how it affects the behavior of people.

The second anniversary is also interesting. It is the 10th anniversary of the Iraq war. It reminds us of two things. One is that when there is instability or wars in the Middle East, the entire world suffers economically as a result, because when the price of oil goes up, countries around the world go into economic recessions. The second thing the Iraq war did and that is very important to remember – it changed the balance of power between Sunnis and Shiites (Shia). Iraq used to be a Sunni controlled country, the majority of the people are Shiites but the regime of Sadam Hussein was Sunni. Came the Iraq war, this changed the balance of power and all of the sudden, Shiites took over. That sort of unleashed the kind of war and instability we see today in the Middle East. There is a conflict between Sunnis and Shiites at the place where most of the world’s potential oil reserves are known to exist. So I think that will be a very important factor in the future of oil. Sunnis are led by Saudi Arabia and Shiites are led by Iran – those two countries as you follow the news, are very much at odds with each other. And this instability will have an impact on the price of oil for many years to come.

The third anniversary that I want to mention is the twentieth anniversary of the point when China became a net oil importer. It happened in 1993, China became a net oil importer and 20 years later it became the world’s largest importer. [6] So in only 20 years China moved from becoming an importer to the largest importer. Just think what is going to happen 20 years from now if the same pace of consumption continues. This is something that we as Chinese and non-Chinese are likely to think about. The automobile market of China grows with a consistent pace of 12 percent a year, China today has 90 million cars and if this pace continues by the end of the decade over 200 million cars, which is about the size of the fleet of the U.S. Move to 2030 and we are talking about anywhere between 300 and 400 million cars. That is double the number of cars that the U.S. has today. A fuel fleet of that size is going to be a major challenge. Not only because it will expose China to major strategic vulnerabilities and growing dependency on the Middle East, also because the burning of petroleum fuels is choking people in the cities. We happen to have a nice day today but you probably know that there are some days that you cannot see the other side of the street and this pollutions is getting to a point that is seriously affecting the quality of life and life in general. And then you ask yourself what happens when you have twice or three times as many cars as today. These are gigantic challenges and I just started with a few anniversary statistics to maybe identify the problems China is facing with oil, oil security, and transportation in general.

As the Chinese economy is an export economy you also have to remember, that this means moving goods from one place to another. How do you move things from one place to another? Either on a truck, a ship or a plane. These are all platforms that today require nothing but petroleum fuel. So what we have is a monopoly of oil in the global transportation sector. My mission in life is to break this monopoly, to ease the strategic importance of oil and the way to do it is not by conventional means. I thought a lot about how to do it and the best way to explain how I view oil is to invoke the title of one of my books called “Turning Oil into Salt”. [7] In this book my co-author and I argue that oil has the same strategic status that salt had for most of human history, in which salt was the only way that human beings could preserve food. So just like oil today has a monopoly over transportation fuels, salt had a monopoly over food preservation. If you wanted to survive the winter you had to preserve enough food and if you read the history of the world you see that salt was a source of wars, colonies were built around who has salt, the earliest recorded war over salt was actually in China under the Yellow Emperor so that was true in China as well. In the early 19th century canning and refrigeration were invented. These two inventions stripped salt off its strategic status. We still use a lot of salt today, we import a lot of salt, but I guess no one cares about the source of their salt supply, about whether or not they are dependent on other countries that control the supply of salt. It no longer has a monopoly over a sector that is critical to human affairs.

We need to do the same with oil. We need to eliminate the strategic importance of oil, to strip it off its strategic status by introducing competition; competition so that energy commodities other than oil can compete against oil and it looses its strategic status. In monopolies, if you control the price, you control the supply. But if you know that you have to compete against other forces, different commodities, it is like a coffee and tea situation. If all of us can only drink tea, then the one, two, three countries that have tea will dictate prices. But if we also have coffee there is competition over coffee and tea drinking and we have some sort of equilibrium and know that in case the price of tea goes too high more people drink coffee. That is pretty much what we want to achieve when it comes to oil. Now we know that we can make fuels from natural gas, coal, and biomass. We can also run cars on electricity. So there are solutions, fuels that can compete against oil. But we need cars that can run on those fuels. And one of our biggest problems is that the auto makers of the world are forcing us to use oil because when you’re buying a car and you read the warranty it says you can only use petroleum. The car companies are essentially forcing us to use one fuel that is often very expensive and not the one that would be preferred had there been a choice of fuels. I think that what we need to do is to encourage policies that open the fuel market for competition, which helps other fuels to compete more easily.

I want to give you one example of a country that has done this quite successfully and that is Brazil. In Brazil most of the cars are flexible fuel cars, they have flexible fuel engines, which enable consumers to switch on the flight between gasoline and ethanol. [8] Ethanol is made from sugarcane but that is because they have the climate for it. The idea is that if the price of oil becomes very expensive, the consumer can shift to a cheaper fuel without any problem. There are not two separate fuel systems; it is all the same fuel line, the same nozzle, just the blend changes. Like when you blend coffee and milk, you decide how much milk you put in your coffee. So the result is that a country like Brazil is much better equipped to deal with fluctuations in oil prices and the economy is much more protected from supply shocks. We in the U.S. are in a very fortunate position that we have a lot of natural gas, which is very cheap. You can make liquid fuels from natural gas. One liquid fuel that can be made from natural gas is methanol. Interestingly enough, in China methanol has already been deployed in many provinces, it is primarily made from coal, but as I said it can also be made from natural gas and from biomass. One of the things we recommend to do is to create an alliance between the U.S., Brazil and China. Those three countries also happen to control about 50 percent of the world’s auto manufacturing capacity and they can dictate what type of cars will be sold around the world. In the very least, we would like to see those cars certified and warrantied to run on those fuels, so that if consumers decide to have their cars run on cheaper fuels, they could do it.

Our recommendation is: an open fuel standard in which cars can run on alternative liquid fuels. Leading to a competition over market share among energy commodities, which will lead to competition over price. If we don’t do this what we will face is a world in which all of the cars run on petroleum at the same time that producers of petroleum become more and more unstable. Some of them will have nuclear weapons, we could see more and more instability and disruptions in supply as well as price shocks. What we learn from the history is that if there is an increase in the price of oil, a few months later you have a recession. When we have a recession, China has a recession because we don’t have the money to buy what China makes. This is going to be a global problem. Our economic stability depends on our ability to control the price of oil. I would argue here that one of the problems that pushes the price of oil higher and higher is the fact that the OPEC countries are dependent on higher and higher oil prices. They don’t have sufficient diversification in their economy and depend on petroleum sales for their economic wellbeing. Because their populations are growing very fast and they need more and more money to feed more and more people, to take care of more and more people, they will need to generate an ever growing amount of money to keep the system stable and they will exert this money from us. They will charge us higher and higher prices.

Just take the case of Saudi Arabia, a country of 28 million people, where most people work for the government, in the public sector, women are not part of the workforce, people don’t pay taxes. [9] There is no income tax in Saudi Arabia. The burden of taking care of an ever-growing population is solely the responsibility of the government and that means if all the money they can generate from the sale of petroleum they will need to increase the break-even price of oil because they don’t want to end up like Mubarak or other leaders of countries in the Middle East. That is how they buy their stability and we end up paying the price. That’s why we need to address the issue of price through diversification.

I think China is in a very good position to lead the way in this, as China is today the major manufacturer of vehicles in the world. China produces 90 million cars a year, almost twice as many as we in the U.S. So China is in the position to dictate what type of cars are going to be made in the world as no automaker could give up on the Chinese market. If China decides that cars must be made to run on methanol fuel that is going to be the world standard. I identify here a unique opportunity in which China can redefine what type of cars will be made. If China continues to allow cars to run only on petroleum, China will be the most dependent country in the world, which it already is. However if China opens the vehicle platform to competition, it will be the biggest beneficiary. So the reason I spend a lot of my time in China is because the solution to the world petroleum problem can be found in China. The U.S. is increasing its production of petroleum and it is no longer the major manufacturer of automobiles. I hope that this message will sink in because every year that we don’t do it is another year that we put 85 million cars on the road, which are certified to run on nothing but petroleum. We are digging ourselves deeper and deeper in the hole at a time that every petroleum analyst looking into the future will tell you that the future of petroleum is not very rosy. This is why I think we have to have a very serious conversation about China’s future oil dependency and what the solutions are, that would fit most to the Chinese system. Not every solution is good for China. A lot of people talk about electric vehicles, but they are not a solution for China. First, as most electricity is made from coal, driving an electric vehicle in China means driving your car on coal and thereby just shifting the problem. Second, even recharging the car at home is in China challenging, because most Chinese live in big apartment buildings, and not in private homes with their garage and charging spots. China will have to define what are the solutions most relevant to its unique architecture and push them, push them hard. Not doing it means that China will face a very serious problem along the road.

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Shale Gas

How do you think that the so-called shale gas revolution in the U.S. is impacting the decision-making process in China?

First of all I think it is good for China that the U.S. is becoming more independent. Let us face it, the more prosperous the U.S. is, the more buying power we have and that means more economic prosperity for China. That should not be viewed as a negative thing. It is in the interest of China that there be prosperity around the world as it moves the engines of China’s growth. Of course, the U.S. developing its own energy resources is not only good for this reason but the U.S. also needs to get less oil from the Middle East, Africa and other places. China also needs to develop its own resources but when it comes to shale gas it is very difficult. It will require some innovation here because the geology in China is very different. It is deeper located and there are water issues. Chinese innovation will eventually find solutions but this is unconventional energy. China has much to do when it comes to conventional gas in the meanwhile. It is surrounded by countries that are very rich in natural gas. One of them is Russia, another Turkmenistan. Those two countries already are willing and eager to supply China with natural gas, it is just a matter of infrastructure. China could also import natural gas in the form of LNG. China can also develop some of its own domestic natural gas, on-shore and off-shore. The shale gas discussion has sucked a lot of oxygen out of the air, it is very sexy, intriguing, but let us not forget that we have a lot more to do with conventionals than with unconventionals. Let us make sure that we pick all the low-hanging fruits while working on the technical solutions required for non-conventional energy. China has a lot to do in this respect. One thing where I believe that China is a little timid about is the notion of importing energy and that is something that I try to tell Chinese officials: don’t be so concerned about importing. It should not be viewed as a sign of weakness or vulnerability. People in China get very nervous about the fact that China is an importer. Yes, if your energy supply is well diversified, who is going to block the energy supply to China? If you block China, China blocks you. We live in an interdependent world, we import and export from one another. If we begin to block each other, everybody is going to lose. The notion of energy independence and energy self-sufficiency is silly. It is a worthless goal. That is like saying let’s become food-independent, let us grow all of our own food. We don’t talk about food independence, why should we talk about energy independence. I am quite opposed to the concept of energy self-sufficiency, because I think it is not a productive approach. This is why I think that China should not be worried at all about importing energy. The most important thing is to get energy in all forms, to lift more and more people from poverty, to increase the prosperity of the people of those 1.2 billion that don’t have energy at all – some of them in China – and to develop sources of energy that so far have not been developed sufficiently. When it comes to your question: in the electricity sector there is an imbalance in China and too much dependence on coal. That needs to be diversified to look a little bit more like in the U.S. where you have coal, natural gas. nuclear and renewables, more or less a nice portfolio of sources and not a situation in which one is overly dependent on one of them. That however would require to develop the nuclear sector. I know some countries have decided that this is not a good solution for them, but I think they are wrong. In fact, I think they are terribly wrong. I think that for China nuclear power is a must. Additionally, I believe every province will have its own unique mix based on its own unique situation. We cannot look at China as sort of one country. China is 31 countries. Each one of them has its own unique circumstances. Here you have 31 energy policies. Just like in the U.S., every state has its own portfolio and it looks very different. Every state has its own energy policy based on its own unique situation. I think to look at China as sort of one country that needs an identical portfolio – it’s not going to happen. What I do know is that it would require a lot of investment, a lot of money. My provocative comment is that China also has to be very reasonable when you talk about what the world is expecting from China in the context of greenhouse gas emission. I am very concerned about some countries in the West trying to push China in directions that are not conducive to its prosperity. Particularly when it comes to the mounting pressure on China to reduce greenhouse gas emissions in ways that would curtail economic growth. I am opposed to that. I think that with all due respect to global warming, China has environmental problems that are much more urgent. People need to breath and people need to drink clean water. When I talk about the environment, my only concern is clean air and clean water. What happens to the atmosphere and to the temperatures – that for some people is the most pressing concern – but not for China and not in the developing world. For them the number one priority is economic growth and I think we need to respect this and realize that in the West we have reached a level of development that enabled us to stop and think about planetary concerns. But don’t be paternalistic and from the height of a 60’000 or 80’000 per capita GDP expect other people to follow the same example. We are at a different level of economic development and in the end it will be good for the world if China reaches prosperity because only when you reach prosperity – your food, shelter, security, everything – than you begin to think about the planet. Short of that, it is a bit naïve and unrealistic to expect China and certainly India to follow the same set of policies.

Do you think the shale gas revolution in the U.S. is truly revolutionary? Do you think the U.S. will export shale gas to China? And do you think the U.S. could reduce its oil imports from the Middle East – what are the strategic implications for U.S. foreign policy?

The shale gas revolution is too new and there are so many things unknown so I would feel uncomfortable to call it a revolution so quickly because we may soon see that it is a mere footnote. Some people call it a retirement party. I would wait before we jump into conclusions about shale. There are many things we don’t know about it. We don’t have enough data to know the rate of depletion of the wells, what we have seen so far is that the depletion of some is very good. We don’t have enough information about methane leakage. We don’t have enough information on the water issues. We are in a very, very initial phase of this. These kinds of things need at least five more years to collect data to allow us to know whether it really is a revolution. I would not make predictions right now. We don’t have the data. What we do know is that it certainly increased the gas supply to the U.S. and we know this gas will be exported. I would say that almost all of it would go to Asia, which destination however, that is a different question. Whether it will go to Korea, Japan or China that will depend on the bilateral agreement signed with the suppliers. There is no destination requirement for U.S. shale gas exports. In theory, China could be a receiver of some of this gas. Even if it is not, it doesn’t matter because even if it goes to Japan, that would free gas to go to China. So overall it will bring down the price of gas for everybody because as you know, the prices in Asia are way too high today. Either way China will benefit, whether directly or indirectly is not as important.

The second question is interesting: what will that do to the U.S. position in the Middle East. First I have to say that the U.S. has never really been dependent on Middle Eastern oil. That is a myth. Today only 9% of our oil comes from the Middle East and the most it has ever been was 14%. We are not dependent on the Middle East. What we import from the Middle East is not so much oil itself, what we import from the Middle East is the price of oil, in the sense of whatever happens in the Middle East, we end up paying the global price. Oil is one of several areas of interest of the U.S in the Middle East. Not the most primary one though, I can guarantee you this. We are in the Middle East for a variety of reasons, we started our presence in the Middle East as part of the Cold War, that was an area that I would call the “test bed of weapons” and part of the competition with the Soviets. There are several other areas of interest. We are concerned with the security of Israel, we are concerned about the security of allies in the region, we are also concerned about the proliferation of nuclear weapons and non-conventional weapons as well as terrorism. And don’t forget weapons because our number one export sector is weapons. We like to be close to our customers. So for all of these reasons we are in the Middle East, we will continue to be in the Middle East even if our imports from the Middle East go to zero. We stay in the Middle East because the U.S. today is the only country that has the military power to provide security for oil in the Middle East. What I would ask in return is another question as an American taxpayer: why should we be the only country that shoulders the burden of defending this, even if China consumes more oil from the Middle East? The U.S. is getting a little bit tired of spending and spending and providing security everywhere. I think that as Japan, China, Korea, the Europeans – all of them import more oil from the Middle East and I don’t see why not sharing the financial burden that comes with those deals. China should be more involved in the protection or at least the burden should be divided. U.S. policymakers are schizophrenic because on the one hand they complain that the U.S. has to do it alone and take on this burden of going to war and on the other hand they say the Chinese should not be involved there. There is a paradox. But if you ask me, Gal Luft, my position is that there should be more of a burden sharing. Certainly the big powers of Asia should be more involved in the protection and the security related to the supply of oil.

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U.S. Energy Strategy

Question of Chinese Bachelor Student: How do you evaluate the U.S. energy strategy in Central Asia? Do you think there will be confrontation with China?

We don’t have a strategy. I don’t’ think so. Look, the U.S. is now entering a period in which it will have to make decisions. I say what I think should happen. My personal opinion is that the U.S. needs to trim down its global responsibilities. It cannot be everywhere, it cannot be the world policeman anymore because it costs a lot of money and we are running out of money. And quite frankly, the only way that we can continue to do this is if we continue to borrow money from China. So we might as well borrow less money and involve the Chinese in this job because our defense expenditures are almost 700 billion USD a year. That is too much money. So I think we have to get out of Korea. Korea should be the Chinese responsibility. We have 30’000 troops on Okinawa, we should pull out of Japan. Let the Japanese deal with themselves, why should the U.S. protect Japan? I don’t see it – as an American I don’t think it is my responsibility anymore. We have done it for 60 years. Let them take care of their own security. To your question on Central Asia: I don’t think the U.S. has strategic interests in Central Asia, I really don’t. I don’t mean the U.S. should not be involved at all but I see Central Asia as the backyard of China. That’s my position. But again, this is me and not the Obama administration. I do not represent the consensus position in the U.S. I have a lot of criticism about a lot of things the U.S. government is doing. Sometimes they accept it, sometimes they don’t.

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China’s Energy Strategy

Looking at recent publications in China, there is a lot of anxiety about the straits issues, about the sea lines of communication. In the U.S. most analysts seem to think that any blockade scenarios are highly unlikely even in worst-case scenarios. What would you tell someone in China who is worried about the U.S. blocking the straits to ensure him that something like that is unlikely?

I would say take a pill. It is completely ridiculous. Have you ever been to the Strait of Malacca? You need a telescope to see the other side. How can you block the Strait of Malacca? It is a made-up fear. The notion that a country fears that it can be blocked – forgive me – to me is a sign of insecurity. If you want to be a superpower, you cannot think like a weakling. And who is going to block China? Who is going to be crazy enough to block China? If you block China, China blocks you. China will not supply you with raw materials, China is still the number one producer of so many products and minerals and once you go down this road, you go nowhere. So I think this is a very unreasonable concern on the practical side of it. I used to once think like this but was completely transformed when I went to the Strait of Malacca. It is completely unrealistic and should not be a concern for China. It comes from a sense of China not having grown to view itself as a superpower. Edward Luttwak, one of the great strategic thinkers, once said something I fully agree with: superpowers don’t have vital interests. If you have vital interests, you are not a superpower by definition. Once you are so strong you no longer have vital interests, you are a true superpower. So I think that the notion, the fear of being blocked or cut off is blown out of proportion and unfortunately it steers China towards policies that are more like self-sufficiency which are not always the best policy options for China. If you think about so many things in which the world is almost 100% dependent on China, China could retaliate. For example China is a producer of almost 100% of the world’s rare earth minerals, which goes into the manufacturing of anything from laptops to windmills, automobiles and everything. If you block China, China blocks you from the supply of rare earth elements. Where do you end? So I think we need a different type of conversation about those issues. We need to realize that in a globalized economy nobody can be self-sufficient anymore. The U.S. imports a lot of oil but it also exports refined petroleum products. So we import only to export gasoline. If you cut us off, we will not be able to export gasoline. This cellphone for an example: if you begin to trace the supply chain of every element you realize that you cannot make this cellphone from scratch in China. The magnet might come from one place but the elements needed to make the magnet come from another place, such as the rare earth elements came from a third place. This is true for everything. So where do you end? It is not a productive way to think.

When you say there is not really a risk for the SLOC how do you fit the pipeline buildup of China into this rationale? When it comes to cost-efficiency or the security of those pipelines they don’t seem to be the best choice according to many experts, so how do you make sense of the pipelines in Kazakhstan, Myanmar, Russia etc.?

Pipelines are ways for countries to trade energy. When you build a pipeline it is like going into a marriage contract for 20 years. In the history of Germany and all of Europe when you wanted to secure bilateral relations, you gave your daughter to a king and the two countries were okay for the next generation because of their ties. So pipelines are the 21st century of royal marriages and they are a source of stability because they can ensure an interdependency among countries that otherwise might not be there. Overall, pipelines should be viewed as a way to tie economies on a long-term basis and this doesn’t mean that they are not vulnerable. They could be blown up but if someone blows it up you fix it and you are back to business. But I think that in the case of China for example I can’t see why a part of China’s gas should not be coming from Russia. After all, they have so much gas. Why not create a northern conduit of gas to feed some of the northern provinces. Concerning the new pipelines in Myanmar, they are good as new provinces can enjoy natural gas in the southwest of China. This is a very positive development in my view. Now, if Myanmar sees that they don’t get any benefit out of this, they might get angry and blow up the pipeline and cause troubles. Thereby, China has an interest in Myanmar all of the sudden because it understands that its energy comes from this country so maybe we’ll see more development projects, more investment, more contributions to security there. I see it as a positive development over all.

But why if not for security concerns should China build an oil pipeline from a port in Myanmar to a city in China where it is actually cheaper to ship the oil to the shores of China and transfer it through the pipeline system? The oil will be more expensive when it arrives by pipeline than when it would be shipped.

First of all, we need to see whether this is a non-economic decision. In the end it is a mixture of economics and political decisions. Sometimes particularly in a country like China where the energy decisions are not necessarily in the hands of private enterprises but of state-owned enterprises, they are also political decisions and political considerations play into them. I don’t know that this is the issue here but maybe you want to strengthen relations with Myanmar, maybe you want more leverage over the country. I said before that in America we import oil from Saudi Arabia. I guarantee you we could do without Saudi oil, we could import a little bit more from Canada, a little bit more from Mexico, a little bit more from South America. The reason we import oil from Saudi Arabia is because we want to keep this marriage going and I have the suspicion that this also has to do with the fact that we want them to buy our weapons. It may not be the most economic decision to bring the oil all the way over from Saudi Arabia but it has some other dimensions to it. I suspect some of this is true also for your question because China’s energy security strategy is all about diversification. In Africa, Latin America, North America, the Middle East – they try to get many sources of supply. That is reasonable. Additionally, do not underestimate the issue of domestic infrastructure because as I said before, China is 31 different small economies. So the fact that you bring the oil to one province doesn’t mean that the other province can benefit from it. You want to ask yourself where are the refineries and what type of refineries do you have. Refineries are built to meet specific types of crude. The fact that you bring the oil doesn’t mean that you can use it, as the refinery needs to be built to meet the specific type of crude. Arabian crude and Venezuelan crude and Nigerian crude and Libyan crude have very little compatibility between them. We tend to look at oil as one thing but there are so many types of oil. What is China going to do with Venezuelan crude? Venezuela would love to export crude to China because they want to get off the dependence from America but China would first have to build a major refinery that would be able to handle the heavy crude from Venezuela.[10] Now if the Chinese government decides that it has a strategic interest in having strong relations with Venezuela it may decide that it is a good investment to refine Venezuelan crude. But I don’t think they will make such a decision so quickly because that would be a provocative act against the U.S. and it may not be worth it to get oil from such a not so stable country.

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Thank you very much for the interview.

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[1] More about Gal Luft at: http://www.iags.org/galluft.htm.
[2] The same definition of energy security is also given by Daniel Yergin in his contribution “Ensuring Energy Security”, Foreign Affairs, Vol. 85 No. 2 (March/April 2006), pp. 69-82.
[3] More on energy poverty can be found at the website of the International Energy Agency (IEA): http://www.iea.org/topics/energypoverty/.
[4] A more detailed description of the Oil Crisis of 1973 is provided by the U.S. Department of State, Office of the Historian: http://history.state.gov/milestones/1969-1976/oil-embargo.
[5] For more insights about the Iraq war, please refer to the Encyclopedia Britannica: http://www.britannica.com/EBchecked/topic/870845/Iraq-War.
[6] You can find up to date information on oil imports at the website of the U.S. Energy Information Agency (EIA): http://www.eia.gov/todayinenergy/detail.cfm?id=12471.
[7] His book and more information about it can be found at: http://www.amazon.com/exec/obidos/ASIN/1439248478/iags-20.
[8] More on the flex fuel vehicles and the impact that comes with the use of sugarcane at: http://www.iea.org/media/bioenergyandbiofuels/06_arraes.pdf.
[9] However, individuals living in Saudi Arabia who are not Saudi Arabian or from the Gulf Cooperation Council are subject to a 20% flat income tax rate: http://www.expat.hsbc.com/1/PA_ES_Content_Mgmt/content/hsbc_expat/pdf/en/global_tax_navigator/going_to_saudi_arabia.pdf.
[10] A refinery which will process extra-heavy crude oil imported from Venezuela is expected to start operating at the end of 2014 in Guangzhou, China: http://news.xinhuanet.com/english/china/2012-04/27/c_131556834.htm.

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