Not just the Straits of Malacca, MV. China is also eyeing Canada's Tar Sands in Alberta. Check out this Forbes article

"The Alberta Energy and Utilities Board estimates that some 1.6 trillion barrels of crude oil lie in the tar sands. Of this, approximately 11% (some 175 billion barrels) are recoverable under current high oil prices. These reserves were officially recognised in 2003, dramatically raising Canada's proven reserves from approximately 5 billion to some 180 billion barrels (positioning it second only to Saudi Arabia at 265 billion barrels)....

Total exports of Canadian crude oil were approximately 1.5 million barrels per day in 2002 and 2003. In 2004, crude oil exports increased by almost 7%. Estimates from Canada's National Energy Board suggest that, by 2015, exports will have almost doubled to 2.8 million b/d. This projection assumes that oil prices remain above (U.S.) $35 dollars per barrel....

....During Martin's visit last month to Asia, Canada and China signed framework agreements to facilitate Chinese investment in Canada's oil sands. China's two largest oil groups, Sinopec and the China National Petroleum Corporation, are considering purchasing significant shares in several Canadian oil firms with licenses to operate in Alberta's tar sands, including UTS Energy and Canadian Oil Sands Trust. Chinese firms are also considering investments in related infrastructure. A Chinese firm is considering a 49% stake in a $2 billion, 720-mile pipeline planned between northern Alberta and the northwest coast of British Columbia. These and other possible deals are valued at some $2 billion to $3 billion dollars....

Moreover, other key challenges remain. For example, China's interest in Canada's tar sands has caused some consternation in Washington. Canada is the largest supplier of crude oil to the United States, and in 2001 the U.S. National Energy Policy report cited the development of the tar sands as a key component of Washington's strategy to ensure a secure supply of energy....

Also, in spite of recent technological advances, extracting oil from the tar sands remains a slow process.... Another key concern is the lack of refinery capacity available in Canada to absorb the increased production expected over the next ten to 15 years. The number of refineries has declined over the last two decades. As a result, refining capacity is now approximately 2 million b/d and, in 2002 and 2003, refineries operated at just over 90% of their capacity--leaving little room for increased production. While Canada is able to export unrefined crude to the United States and other locations, the lack of refining capacity within the country will limit the ability of Canadian oil firms to demand premium prices."

In 1996 I spent approximately 4 months in China (primarily in Beijing) as part of a Clean Coal Technology partnership with the US Dept. of Energy and various private consortiums. I am CERTAINLY no expert on China, but these are my observations from living there at that time:

1. China has a serious internal problem with upwardly mobile urban people, most of them young, who depend on foreign investment for their jobs and expect/demand a continuos rising standard of living (as well they should). At the same time, there is a lot of "illegal" internal immigration from the countryside (people without permits to live in Beijing or Shanghai, etc) that are essentially homeless. Even so they hope to break out of the horrible rural poverty that afflicts the Western parts of China. Tiananmen casts a long shadow internally, and the authorities do a lot to prevent any serious challenges to internal authority.

2. China at that time was a country with serious bottlenecks in internal mobility. Most people traveled from city to city by trains, which were over-crowded and poorly maintained (air travel is very expensive). Inside cities people got around by bicycle, buses, or motor scooters. Ports and freight railways are horribly crowded, it took bribes for joint project facilities to get equipment like multimillion GE gas turbines in from customs, and bribes for manufactured goods for export out on time.

3. State owned enterprises are a disaster. They can't operate on anything approaching the black, yet can't be closed down since they are the largest employers and due to the weird system of Chinese social services operate China's social welfare system, everything from schools to pensions and hospitals. Many of the joint ventures with SOE are money pits, other listed private companies have hidden obligations with SOEs that will suck profits, profitability, and innovation out of them like GE and it's massive pension obligations.

4. China has a MASSIVE power gap. Most of the nation is "dark" i.e. no electric power (or sanitation btw) with all that goes with it. Western China in particular lacks any major power generation plants (at the time) and this is one major factor in holding back development where it's needed. The other is the disconnected nature of the national power grid, which doesn't connect region to region and mostly goes from favored coastal power plants to favored coastal cities, and is under the control of party bosses.

5. Road, Rail, and Air links run mostly North-South from Beijing down to Hong Kong. West-East from say Shanghai to Xianxing is pretty spotty, even by Chinese standards. Much of the West of China is effectively cut off and isolated from the rest of the country, it's one giant Appalachia.

6. China has a very massive sense of inferiority, coupled with aggrieved nationalism. Anti-Japanese sentiment even then was high, yet Japanese products were in demand. Anti-American sentiment was also high, with America perceived as "holding China back" particularly with Three Gorges Dam.

7. There are very many bright people in China working on the power generation issue. They were big on Solar and Wind as being "small" enough to supply the isolated Western China without the massive investments in capital that coal or gas or oil fired plants would require. Yet just like here, the costs were 12 cents per kwh, versus something like 4 for coal. However, I would not be surprised to see that happen (power through solar/wind in the West) since the Govt. is committed to developing that area (rightly so, it's horribly poor) and even expensive power is better than none at all.

8. China has a LOT of coal, I was very peripherally involved in one joint venture between a SOE and GE for a cement and co generation power plant. To the extent that China can substitute clean(er) Coal for oil/gas in power generation things would be a lot better for them and us. Then a lot of power was/is generated by various local authorities setting up their own wildcat diesel generators. Outside of Beijing and Shanghai power is spotty so you can see why this happens. As oil gets too expensive you'll see local factories shut down because there simply won't be any power, and the authorities will have to face what they've avoided so far: either large investments in co-ordinated power development, or a loss of high(er) paying manufacturing, particularly in "boom" areas like Shenzen.

Sorry for the novel, these are my own first hand observations.

Jim, those personal observations from China were great!

...M. Simon over at Power and Control has more information on Chinese activities in Canada's Tar Sands.

Excellent posting and comments! Most people fail to look at the man behind the curtain, where China is concerned. Like the Soviet Union before it, China thinks the path to world power is through bypassing sound economic development while rapidly building military capability.

Meanwhile the interior rots.

Thanks for this very good discourse. I would be particularly interested in Jim Rockford's view on social structure in China, does he find an increasingly egalitarian attitude, or is there still a somewhat elitist domination of the 'higher' occupations and education?

The key indicator? Watch where Chinese magnates invest their money. If Chinese magnates begin to invest their money in the West, specifically in the United States, it should be taken as an indication that they feel their money will have greater return on investment in the US markets, or conversely, that they have little or no faith in their domestic markets.

LAS VEGAS - A former Bank of China manager, convicted here of federal racketeering charges stemming from the embezzlement of $485 million from the Bank, was returned to China today after being sentenced to 144 months imprisonment and three years supervised release, announced Daniel G. Bogden, United States Attorney for the District of Nevada. ZHEN DONG YU, age 41, a citizen of the People's Republic of China (PRC), was flown from Las Vegas, Nevada, to Beijing, China, pursuant to the terms of a plea agreement. He was escorted by Special Agents of the Federal Bureau of Investigation and U.S. Immigration and Customs Enforcement.

China's domestic oil consumption last year was 6.5 million bpd. Unrealistic straightline extrapolations of demand increase place China's demand near the 13 million bpd realm in 2010, with more than 10% of that coming through two access points from Russia. Presumably, oil flow through the Straights of Malacca would remain in the 70 to 80% range, if not actually increasing, in that time.

China's consumption of oil is rising per dollar of GDP increase created.

Dave, I was unaware of this. Do you have any links? Is this because of pricing problems?

Sure. I'm stealing my own thunder again but it's in the links in my post on China's time bombs: the environment. Actually, it stands to reason. China's rising GDP is due to more manufacturing and manufacturing typically uses a lot more energy than services.

China's domestic energy distribution problem is emblematic of its political problems. Them that rule the rural areas are not responsive to local needs. Their interests are (a) retaining power, which means not getting their superiors irked at them, (b) moving to some more desirable area and © ripping off as much money as possible without impairing (a) or (b).

Providing local services does not enter the picture. They're not answerable to below.

So local power needs get no attention save as a source of money to steal.

Jim Rockford (#2), thanks for the observations.

Is the "GE" you refer to General Electric?

It would be great to use your 1996 comments as a "benchmark" for the observations of engineers who have visited very recently. I wonder how things have changed for the better and worse in 8 or 9 years.

Great original post and subsequent discussion: we seem to have periodic economic 'tigers' (Asian and Celtic have been and gone) and the latest in the Chinese, according to media fad. Weblog discussion of the underlying factors seems far more advanced than in paper or broadcast media. In 5-10 years time I suspect that factors partly discussed above and others as yet unseen will have led to a stagnating Chinese economy. Oil prices are bound to rise as reserves pass their peak and middle east and - stan countries become less stable. Good stuff. I'll be back.

Don't assume that energy will forever be derived from petroleum. Nanotechnology will provide cheaper and more plentiful energy.
Also, China will solve its short-term energy needs by taking Siberia from Russia within 50 years. Russian demographic trends are such that its population is expected to drop to about 60 m before the end of this century, so China's population will dwarf Russia's by more than an order of magnitude.
More at PacRim Jim's site.

It's been a long, long time since World War I. The age when military capability relied on a large population to mobilize into conscript infantry is over. Sure, the Chinese can swamp a front with infantry divisions... but the Russians can swamp a front with nuclear weapons, and China can't afford to challenge Russia with nukes. Even the crumbling remains of the Soviet military still has enough nukes to turn China into a radioactive lump.

China's real problem is that, even though it's big and should be powerful because of its size, a lot of it is rural non-industrial and doesn't add much in the way of economic clout. This gets better as the country develops and becomes more urban, but then the vulnerability shifts to a dependence on foreign trade and energy sources. China's new economy simply won't function without the ability to import oil and export goods.

However, China cannot do either in the face of US opposition; the opening hours of any military confrontation between the countries would see every pipeline broken, and oil supplies by sea cut off completely. Not to put it too bluntly, but China cannot cause a tanker to float if the US wants it to sink. The same is true for exports - the goods cannot reach their markets in the face of a hostile US Navy.

This puts China in a terrible strategic position, because the US has the initiative; in any conflict, if the US decides to blockade the Chinese from oil and to seize its exports, the situation immediately becomes a mortal threat to the Chinese economy without involving all that much in the way of danger to the US. The Chinese really don't have a good option except to launch nukes, which is tantamount to a Mexican standoff between a man with a zip gun and a man with a shotgun. (Of course, this means that the US has to be leery about such escalation - it's very easy to back Beijing against the wall!)

This explains a lot of Chinese diplomacy as well. Their best chance in a conflict is to drive a wedge between the US and Europe, in hopes that the latter's opposition to US interference with trade will prevent the US from staging a blockade.

First, I'd just like to thank Joe Katzman for posting the article I wrote... and for prompting me into the clean-up necessary to turn it from an e-mail into an article.

And thanks, all who read it and commented.

My response to a few select issues:

Joe, Rockford Jim, and PacRim Jim, on Canadian shale , alternate energy and nanotechnology, respectively: Some of this I was aware of, some of it I was not. I also know (and I believe it's been reported here) that China has been interested in nanotech-based coal-liquefaction techniques, as well.

These are all interesting, and as an engineer, I'm endlessly fascinated by the possibilities. In the short term, though, these technologies all seem heavily dependent on global oil prices; below a (fairly high) price per barrel, they lose their attraction. And so to my mind, a question arises that will become a theme: Will the Chinese economy snap before these technologies can come into play? Or can the economy win that race?

Twin that with, if the Chinese economy snaps and relieves the pressure on global oil prices, will those alternate energy sources remain economically viable? Probably not.

If I were a Chinese strategic thinker, I'd be pessimistic, myself. If I were a Chinese strategic thinker, I'd be investing quite heavily in nuclear power. And lo, the Chinese are investing in nuclear power.

Also, Rockford Jim, your other observations match a lot of what I've read about the Chinese social and economic situation, but I'm hardly an expert. I've certainly never been there. I appreciate the eye-witness account.

What I didn't know, in particular, was that large areas of the country were dark. I wonder how difficult it would be to superimpose a night time satellite shot of China (of the sort where N. Korea is conspicuous by its darkness) against a population density map?

American farm productivity shot up with the advent of rural electrification.

Rural electification is difficult without extending the power grid.

The failure of the Chinese to extend their electrical grid beyond their coastal regions is a defacto decision to oursource at least a portion of their food production. This adds another choke point to their military power projection problem.

Wind power without storage or a grid is not a reliable way to add to their electrical production capacity. In addition China requires 6X as much energy for each added unit of production compared to America.

I have also read reports of riots in the Chinese hinterland due to local corruption.

On top of that Taiwan supplies China with a significant portion of foreign capital.

The Chinese miracle in my estimation is politically unsustainable.

Didn't some one say that the thing to look for in Cinese economics was a flow of capital out of China?

Perhaps we are too concentrated on oil sands and not enough on dollars. Perhaps the oil is a cover for the export of capital.

One of the things the Chinese official who was involved with the oil sands investment said that one of his major criteria for such investment was stability. Perhaps it was not the stability of the Persian Gulf he had in mind.

Supposedly the process can extract oil at a cost of $12 a bbl. Add in transportation and profit and you have a selling price of around $18 - $20 a bbl.

Not a high value investment if oil prices tank. Risky. Yet they are on a spending spree. They want to make deals.