Chinese takeaway is going nowhere

China's biggest state-owned oil company, China Petroleum Corporation, this week offered to pay $4.1bn (£2.2bn) for a Canadian oil company with big reserves in Kazakhstan.

In purchasing PetroKazakhstan, China National Petroleum outbid another state-owned company from another rising power: Oil and Natural Gas of India. China National Petroleum is paying a steep price though, a 21.1% premium.

The deal was China's largest foreign acquisition yet, following on the heels of the unsuccessful bid by another state-owned oil firm from China, China National Offshore Oil Corporation (CNOOC), for the US firm Unocal.

CNOOC withdrew its $18.5bn offer after vocal objections from Capitol Hill, where congressmen insisted that the deal posed security threats to the US.

Whatever the merits of that argument, China's booming economy undoubtedly craves oil and it is a thirst that affects us all. It is partly because of high demand for oil from China that crude oil prices have gone from one record high to another.

Crude oil is now selling for $67 a barrel, with higher prices in prospect, so it is no wonder there are predictions that Britons will soon be paying £1 for a litre of petrol.

And US strategists and thinktanks for whom the impact on British consumers' wallets is not of great concern are also preoccupied with China's oil needs.

A net oil exporter in the 70s and 80s, China became a net importer in the 90s and is increasingly dependent on foreign oil. China currently imports 32% of its oil and the figure is expected to double between now and 2010, says the Institute of for the Analysis of Global Security, a Washington thinktank.

In its report last year, the US-China economic and security review commission, a group created by Congress, drew ominous conclusions from China's energy requirements.

"China's growing energy needs, linked to its rapidly expanding economy, are creating economic and security concerns for the US," the report said.

That was why Congress raised such a stink over the Unocal deal and congressmen will no doubt see the PetroKazakhstan acquisition as further evidence of China's determination to secure access to energy sources.

So far, Beijing has struck deals in Latin America, Canada, and also in countries unfriendly to the US, notably Iran and Sudan.

But concerns about China's energy deals are overblown. It is immaterial who owns oil reserves as sooner or later the oil ends up on the world market. If China decides to hoard oil from one of its foreign reserves, say in Kazakhstan or Sudan, it frees up a barrel of Saudi oil for the world market.

Owning reserves does not change the price either. If the price of oil goes to $100 a barrel, and China owns a field in Sudan, the price for that barrel from Sudan is still $100. If China hoards that oil from Sudan for its own use, it would miss the chance to sell it at the higher price. That oil from Sudan would effectively cost the Chinese the same as if they bought oil on the open market.

There are other reasons why China may be on to a hiding for nothing. First, China's oil concessions abroad will not yield anything like enough for its energy needs in the next two decades. Second, most of the oil produced in China's foreign concessions will not physically enter China because of transport and logistical costs.

The oil will most likely be sold on the international market or swapped for oil that will enter China. Consequently, China will remain reliant on the security of sea lanes. Who has the world's most powerful navy? The US of course.

Even if China's foreign energy policy is doomed to fail, the potential for conflict over energy nevertheless exists. One of the main reasons why Japan went to war in 1941 was the fear that the US would deprive it of access to oil. Thankfully, we are nowhere near that point when it comes to the US and China.