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With his nylon socks and cigarette pinched between index finger and thumb, Liu looks like any other small-fry entrepreneur in China's hinterland. Yet he is different for two reasons. First, his business is oil. Second, he's running from the police. Liu, who declines to give his real name, changes his cell phone number weekly, won't pass two nights in the same bed and meets strangers only through trusted intermediaries. Far from being alone, however, Liu's fugitive life is shared by dozens of other wildcat oilmen in Shaanxi province in northern China, where independent drillers are fighting to be compensated for their lost businesses after the central government seized their wells and started arresting anyone who complained.

With oil prices exceeding $60 a barrel, similar struggles over access to valuable reserves are playing out across the economic spectrum in China. In the most obvious example, oil-and-gas giant CNOOC has bid $18.5 billion to acquire California-based Unocal, despite strident protests from U.S. politicians who view the deal as a threat to domestic energy supplies. On home soil, Beijing is battling with its own citizens: 10,000 drillers and investors, mostly peasants who more than 10 years ago contracted for oil concessions in Shaanxi Province and developed producing wells, only to see their holdings nationalized over the past several years. They characterize the government's strategy as "confiscate now, compensate later," and although some have been paid, they claim they have not been paid enough. In May and June, police arrested nine investors for protesting, and a Beijing-based lawyer was detained after filing a lawsuit against the Shaanxi provincial government on investors' behalf. Those who remain free are testing the Communist Party's stated goal of governing through rule of law. "We have not launched a political movement," insists a sunburned peasant prospector named Zhao Suiling, who says he was compensated at 20 cents on the dollar for his oil wells. "We only want to protect our businesses."

Zhao's home, the Yellow Earth Plateau, has produced tough peasants for millennia. China's first emperor forced its inhabitants to construct the Great Wall two thousand years ago, and in the last century Mao Zedong conquered the nation from his cave in a nearby revolutionary base in 1949. The current dispute over resources in an arid and impoverished part of Shaanxi province was born of good intentions. In 1994, when China produced far more oil than it consumed, Beijing allowed county governments in Shaanxi to drill for oil in an effort to alleviate chronic poverty. The counties sold drilling rights to ordinary citizens for around $10,000 per square km. Soon the "pump worms," as derricks are known in the local dialect, yielded oil from two kilometers down. "I saw people building new houses, hiring teachers for their children," says Liu. In 1999 he collected fifteen people to buy drilling rights at three wells. At least 10,000 people in all, including whole villages, pooled their money to drill 6,000 wells.

Shaanxi officials say they regretted transferring the rights almost immediately, and not just because they hadn't expected so much oil to emerge. Reports of fires and engineering disasters circulated. "We made a beautiful mistake," explains Wang Dengji, mayor of Yulin in the center of the oil-bearing area. "Workers in pig slaughterhouses became oil-company bosses. They caused serious pollution and serious waste." There was another problem, too. Since Beijing deems oil a national resource, Wang and other mayors had no right to transfer the mineral rights to private investors. When Beijing caught wind of the deals, the State Council—the cabinet office under Premier Wen Jiabao—issued an order in late 1999 that set the stage for the conflicts that followed: "Document No. 38" declared the independent oil wells "illegal" and ordered a "rectification."

Over the next several years, the wildcat wells were steadily taken over by the government. Complaints about inadequate compensation grew until 2003, when the dispute prompted tens of thousands of people to demonstrate in front of town halls throughout Shaanxi. At first, officials negotiated with peasant representatives. When talks stalled, local officials cracked down. In Ansai county in 2003, protesters say, police rounded up scores of demonstrators, shaved their heads, trussed their arms with twine, and marched them into the courtyard of a government building to be harangued by officials.

The peasants' plight turned into a civil-rights cause in Beijing after an underground DVD depicting the Ansai county crackdown began circulating in the capital. Zhu Jiuhu, one of China's most prominent defense attorneys, took up the cause in May when he tried to lodge a lawsuit against the Shaanxi government on behalf of drillers and investors. The suit was rejected by a provincial court on grounds that the evidence presented was "not objective." About two months ago, when Zhu visited the province to meet with peasants to prepare an appeal, police arrested him for "disturbing social order." As with nine former well owners detained in May and June on the same charges, police have denied Zhu access to counsel.

Senior officials in Shaanxi downplay the dispute. Governor Chen Deming told foreign reporters in May that the peasants were fairly compensated based on their oil income, which he suggests they under-reported to escape taxes. "They say they earned more, and we say prove it—and pay the tax on it," he asserts, adding that only 10% of investors rejected the government's compensation offer. Yulin mayor Wang denies that anybody is complaining about anything these days. "There was no conflict with private oil enterprises," says Wang, because "most were happy with the compensation." The city's Communist Party vice secretary told TIME that the reclaimed wells now provide one-third of the town's revenue. Liu, the former driller now in hiding, says his only hope is for top-level intervention: "If leaders in Beijing knew our side, maybe they would help us."

Although dozens of other peasants involved in protests have since gone into hiding and Zhu is in jail indefinitely, the aggrieved have one last hope. Guo Haiyan, a senior party member, travels the country lecturing top provincial cadres on the latest political campaigns introduced by President Hu Jintao. She visited Yulin last November, was troubled by what she found, and has lobbied on the peasants' behalf ever since. Her success has been limited. China's media is barred from covering the case, and a conference she organized on the issue in May at Beijing's Friendship Hotel brought few participants after the bosses of state-run work units warned employees not to attend. Guo says most peasants have by now accepted belated offers of compensation, which she says are 20% of the value of their investments. She has vowed to fight on. "We party members cannot allow this bandit behavior," she says.

• Matthew Forney | Yulin
• Wildcat drillers in China are battling Beijing after their oil wells were seized