Financial and energy security analysis of China's loan-for-oil deals | LBJ School of Public Affairs | The University of Texas at Austin
Article, Refereed Journal

Financial and energy security analysis of China's loan-for-oil deals

Energy Research & Social Science
Umul AwanEhud Ronn

As China’s dependence on imported oil has soared in recent years, Chinese concerns about energy security have naturally increased. The Chinese government has encouraged China’s National Oil Companies to expand their investments around the world. Some of the high profile cases of state support for these international deals have taken the form of “loan-for-oil” agreements in which Chinese state development banks lend billions of dollars to oil-producing countries at below-market interest rates in exchange for the producers’ agreements to sell oil to Chinese oil companies (at future market prices rather than at a fixed price). Some analysts consider the Chinese investments to be an energy security policy. Using standard financial analysis, we show that these agreements cannot reasonably be considered profit-seeking investments by the Chinese. Separately, we also show that only a few of the projects connected to loan-for-oil deals could ameliorate China’s fear of future political-military supply interruptions, and even in those cases, China could achieve the same energy security benefit through simpler mechanisms. The loan-for-oil deals implicitly suggest that China does not expect future conflict that might block Chinese access to oil imports.

Research Topic: 
Energy Policy
International Finance and Money
Energy and Environmental Economics
Security Studies
Foreign Affairs