The dragon and the elephant in a contest for oil

India cannot beat China in a battle of the big wallets. But this does not mean Indians are doomed to run short of oil.

The elephant appears to be trailing the dragon through the jungles of the oil world. The state-owned Indian Oil Corporation is in talks to acquire Gulfsands Petroleum, a UK company active in Syria. It was only last August that Sinochem, China's fourth-largest oil company, bought Emerald Energy, Gulfsands's partner in Syria. Is this a battle India can win? Is it a battle India should even be fighting?

China's oil deals have attracted a lot of attention, particularly in Washington. Three of its leading players, China National Offshore Oil Corporation, PetroChina and Sinopec, have recently been buying assets in Argentina, Canada and West Africa, and featuring prominently in the Iraqi oil auctions. China also took advantage of other countries' financial struggles and a general shortage of capital to lend US$45 billion (Dh165.26bn) to Kazakhstan, Russia, Angola, Venezuela and Brazil in return for guaranteed future oil supplies.

By comparison, India has been much lower-key. The leading state company Oil and Natural Gas Corporation bought the UK-listed Imperial Energy for $2.1bn early last year to gain access to West Siberia. Otherwise, the Indian companies have mainly concentrated on picking up exploration acreage and negotiating with governments. India has to be realistic about its ability to compete with China. In 2006, the two countries signed a deal to avoid competing for oil acquisitions. They sealed the pact with a joint purchase of Syrian assets. This came after deals in which Chinese companies outbid the Indians in Kazakhstan and Angola.

New Delhi's financial resources are much less than Beijing's. The Chinese economy, almost four times the size of India's, runs a large trade surplus, while India has a deficit. India needs large amounts of domestic capital to improve its inadequate infrastructure, while China has embarked on a huge construction programme and is in danger of over-investing at home. Chinese oil companies are much larger than their Indian counterparts and operate big domestic fields.

India cannot therefore beat China in a battle of the big wallets. But this does not mean Indians are doomed to run short of oil. Merely owning interests in foreign oilfields does not guarantee a supply of fuel. Oil is traded in world markets. Chinese oil production in Angola or Colombia does not entitle the Chinese to special prices. And Japan and South Korea have become wealthy without major oil investments.

If wars are ever fought over resources, as some gloomy futurists predict, having commercial stakes in oilfields will be useless. The control of that oil will be determined by military force. Dutch ownership of Indonesian fields did not stop the Japanese takeover in the Second World War. In this regard, India is better placed than China. India is much closer to the Middle East, and the tanker route does not pass through the narrow waterways of South East Asia.

India is also well sited for overland routes from Central Asia and Iran. It is 3,000km from the main Kazakh fields to New Delhi, but more than 5,000km to Beijing. Yet the Chinese have succeeded in opening oil and gas pipelines from the Caspian to western China. Meanwhile, Iranian controversy, Afghan instability and, above all, the troubled relationship with Pakistan have prevented India from capitalising on its geographic advantages. Reducing tensions with Pakistan could lay the foundation for greater Indian energy security.

As many as 6 million Indians live and work in the GCC. India also has a large Muslim population and long historic and cultural links with the Gulf. At a time when OPEC states are worrying about security of western demand, India can become a key partner. As a democracy, India should build on its moral authority. Supporting unstable or unsavoury regimes, as China is often alleged to do in Sudan, Zimbabwe and Burma, should not be an option for India. Relying on pariah states is hardly a recipe for energy security, and in any case, without a UN Security Council veto, India has less to offer such countries diplomatically.

Less able than China to externalise its energy policy, India needs to look domestically. Recent encouragement of exploration has yielded big discoveries in Rajasthan and the eastern offshore. With pipelines from Turkmenistan and Iran less emphasised, India should continue to expand its purchases of liquefied natural gas. Abundant coal resources can also yield gas, but India has made little progress on plants to convert coal to oil, unlike China and South Africa, or on trapping carbon dioxide emissions for underground disposal.

Progress in renewable energy, particularly wind, and the 2008 deal with the US on nuclear power opens up the prospect of clean, non-fossil-fuel energy. The key actions, though, are less on energy supply and more on demand. The increase in fuel prices in the latest budget should be just the first step. There are better ways to protect the poor than wasteful oil subsidies. India's immense railway network and the excellent Delhi Metro show the way to extensive public transport. Compressed natural gas, cheaper and cleaner than oil, is popular for Delhi taxis and buses. Gas should become the fuel of choice in power generation and industry.

Above all, energy needs to be open to private-sector investment and to be freed of bureaucracy and waste. India is in the early stages of its growth, and it has the chance to build an energy-efficient economy from the bottom up. India should not imitate Chinese energy strategy, designed for a very different country and circumstances, and then fret that it is losing the race. New Delhi also needs to be cautious about listening to empire-building chief executives and loud energy nationalists.

The Indian elephant ought to use its own strengths in the search for energy security. Robin Mills is an energy economist based in Dubai and author of The Myth of the Oil Crisis