Issue Analysis: Has the China -Saudi Oil Relations Impacted on the Economy of both Countries?
Summary
China has an exceedingly high population, standing at over 1.3 billion people, and this has led to a huge demand of oil for energy production in the country to serve this exceedingly high population. The huge size of the Chinese economy, the second economy in the world in terms of size at the moment, requires billions of barrels of oil to fire it (Al-Tamimi, 2012). The IMF, in 2012 projected that China will become the largest economy in the world by the year 2017, at the earliest opportunity. Saudi Arabia has extensive oil wells harboring billions of barrels of oil, which got China salivating at them to quench its ever increasing thirst for oil.
History of the issue
China had achieved self-sufficiency in its energy needs up until 1993. However, three decades of exponential economic expansion has made the country turn abroad so as to fulfill its energy needs. The economic boom has necessitated the country to source for energy supplies from other countries.
Current status of the issue
Currently, the economy of China is booming, and the ramifications of this are an ever increasing demand for energy, specifically oil. China leads the pack among other countries in the world in the need of petroleum (Al-Tamimi, 2012). The country has a huge consumption of energy accounting for 21.3 percent of the total energy consumed in the world (British Petroleum, June 2012), and at the same time, the largest producer of energy to match the exceedingly high demand. At the moment, China holds the tag of being the second largest country in terms of oil consumption just behind the United States. The country is entirely a net importer of petroleum, exporting none of its own to other countries. The United States leads the pack in oil importation.
Issue Definition
The Saudi Arabian Kingdom is currently the leading oil exporter in the world, supported by its extensive oil wells containing billions of barrels of oil. On the hand, the People’s Republic of China has marshaled its way up to become the second largest importer of oil in the entire world (Al-Tamimi, 2012). These countries have over the years been working to fast-consolidate their relationship; oil being the main asset in this relationship. The continued dominance of Saudi Arabia in the global oil market has caused China to focus its entire attention increasingly on this Middle East country as most reliable partner in matters energy. Against this backdrop, it becomes necessary to ask: Has the Sino-Saudi oil relations impacted on the economy of both countries?
Background and Analysis
History of the issue: elaboration
The ever growing appetite for petroleum by China is due to the nation’s economic boom that has been there for more than thirty years. The progressive economic growth has resulted in expansion of the country’s external trade, and incomes of its people have been rising. The favorable economic conditions have led to the growth in the population of the country and urbanization has increased incredibly. In the period 2001-2011, the GDP of China expanded by about 5.5 times from a $1.32 trillion economy in 2001 to $7.29 trillion economy at the close of 2011. During the same period, the oil consumption of the country doubled. Consequently, the country has grown into the largest consumer of energy accounting for 21.3 percent of the total energy consumed in the world (British Petroleum, June 2012), and at the same time, the largest producer of energy to match the exceedingly high demand. In the International Energy Agency report in 2012, the demand of oil by this country reached 9.5 million oil barrels a day (International Energy Agency, May 2012). Out of this, the amount produced in China was a mere 44 percent of the petroleum consumed. This indicates that 56 percent was imported, more than half of the importation being solicited from the Middle East. Statistically, about 20 percent of the oil China imported from the Middle East came from the Saudi Arabian Kingdom alone. It is projected that China will get past the United States in the amounts of oil imported light years after 2020. Moreover, China will graduate into the largest consumer of petroleum in the entire world by the year 2030. The consumption by year 2035 (15 millions barrels of oil per day) will be double the level registered in 2009 (International Energy Agency, April 2011). The foreseen situation is an exceedingly increased interdependence in economic matters between Middle East and China; Saudi Arabia particularly taking the lion’s share of this interdependence.
Analysis
The Saudi relations with China based on oil have got China looking at Saudi Arabia as a very important economic partner. The reasons for the interest of China in Saudi Arabia are plenty and factual. Firstly, Saudi Arabian Kingdom has a history of reliability with all nations it has traded petroleum with, assuring China of no existence of instances of default in delivering on oil purchase contracts the two nations enter into. Secondly, the Kingdom leads in the world as the largest exporter of oil, and their current petroleum production capacity peaking at 12 million barrels a day (Al-Tamimi, 2012). This will ensure a continuous supply of petroleum to the Chinese economy. The third reason is that Saudi Arabia has huge amounts oil, essentially deep oil wells, that can sustain China’s appetite for far long. This is true owing to the fact that 17 percent of world oil reserves that have been proven are found in the Kingdom (British Petroleum, 2012).
Additionally, the Middle East is home to about 50 percent of petroleum reserves that have been proven. Moreover, the Saudi Kingdom leads as the largest economy in the Middle East and among all countries inhabited by Arabs. Due to this, the country has membership in the Twenty Finance Ministers and Central Bank Governors Group, shortened to G20. This significance of this is that, China and the Kingdom will be able to ink petroleum contracts easily and without frictions that result from a feeling of manipulation or unfair pricing. The last reason is the recognition China has over Saudi Arabia as a front row member of the Organisation of Petroleum Exporting Countries (OPEC) who is essentially in the lead (Al-Tamimi, 2012). China envisages that this leadership role will be replicated in Saudi Arabia continuing to play an important role in fulfilling world energy demands for many years to come.
Furthermore, these impeccable Sino-Saudi relations that are founded on oil have continued between these two countries and flourished across many directions and channels. During the disastrous earthquake that hit China in May 2008, Saudi Arabia came knocking with a handsome donation, a $60 million kitty to help restore the infrastructure of the stricken areas and those affected in this severe earthquake. This arguably became the largest donation made to the government of China; positively boosting the bilateral relations between the two countries
The oil relations between Saudi Arabia and China resulted in enhanced diplomatic ties. The talks held between President Hu Jintao and King Abdullah in February 2009, led to the signing into agreement more cooperation deals in five areas encompassing health, energy, culture, transportation and quarantine. The ambitious single-rail project of Makkah was among these agreements. The other agreements involved are those touching on gas and mining, cooperation in petroleum matters, one in the health sector, and another on standardization and quality inspection of services and goods emanating from both countries. Additionally, an MOU to establish King Aziz Public Library in Beijing was reached (Al-Tamimi, 2012). From these agreements, it is noticeable that oil relations impacted cooperation in economic areas, encompassing transport infrastructure, health, and education.
Moreover, China’s Premier, Wen Jiabao, visited Saudi Arabia in January 15, 2012, and witnessed the signing of agreement between Aramco, an oil company run by the Saudi Arabian state, with Sinopec, a Chinese company, to build an oil refinery in a place called Yanbu of the Saudi Arabian Kingdom (Al-Tamimi, 2012). Essentially, this foreign direct investment became the initial, largest one to be executed by the Chinese government in the rich Saudi petroleum sector. This oil refinery was intended to start operating in the year 2014. The envisaged capacity of this mega plant is to process 400,000 barrels each day when it is finally completed.
The investments done by China in Saudi Arabia have been expanding significantly. The ferocious investment and trade ties are meant to send signals to Saudi Arabia that Beijing will be a desirable customer for oil exports of the Kingdom’s for the long-term (Al-Tamimi, 2012). The Sino-Saudi energy relations are proposed to be the single-most important relations in the global energy dynamics. It is envisaged that the relations are a force to reckon when it comes to oil prices moderation and sufficient supply of oil to major global markets. China’s high demand of energy makes it more sensitive to volatile oil supply and fluctuating pricesthus the promising oil supply stability by Saudi Arabia is very enticing. It is viewed that Saudi Arabia has a higher level of influence over both non-OPEC and OPEC petroleum producers. Notably, Saudi Arabia has the rare ability to give a calming effect to the global oil markets in periods when supplies dwindle. Therefore, the economy of China will be cushioned from the frequent shocks that result from oil supply fluctuations by the virtue that it will have assured the supply of oil from Saudi Arabia.
Moreover, China is focused on forging an economic relationship with Saudi Arabia, which is free from any concerns of image and consequences on the political landscape as compared to Iranian-China relations. China views stable Saudi Arabian relations as the most wonderful approach to avoid being hedged from crucial resources of oil in the event that American-Sino relationship takes a beating or grows sour. Furthermore, by pursuing fruitful relations with Saudi Arabia, China is positioning itself to avoid energy shutdown in events of political turmoil in oil producing regions like Middle East and North Africa. The ramifications of the Libyan political strife in 2011 and Iran oil sanctions comes to the fore which caused turbulence in the international petroleum market (Al-Tamimi, 2012). The high appetite of Saudi Arabian oil by China has resulted in the country boosting its production levels of crude oil. The enhanced production means more money being injected into the economy from the sale of oil products; boosting the economic expansion of Saudi Arabia. In July 2011, the production peaked at 10million barrels a day; a high ever reached in thirty years. To explain this, Saudi Arabia last pumped such level of oil in the beginning of 1981, when it was necessary to replace the oil production that had been lost due to the emergence of the Iraq-Iran war and the disruptive Iranian revolution.
Saudi Arabia’s economy is largest among the Arabian countries. Its GDP is roughly over 40 percent of the Gulf Cooperation Council (GCC) countries GDP combined. Moreover, the Saudi Arabian country’s GDP is 20 percent of that of Middle East and North Africa (MENA) region, and 25 percent the combined GDP of Arab countries. This is in accordance with the most current IMF figures (IMF, April 2012). Therefore, Saudi Arabia is undoubtedly the Middle East region’s economic powerhouse or engine, thus logically a member of the G20 countries that will continue to wield influence. This context presents China with a chance to leverage on the agreed oil pacts by expanding its trade and volume of exports to Saudi Arabia riding on the established oil agreements.
Additionally, the GCC countries are rich in capital but lack labor, thus provide excellent market for China to export contract labor to. The diplomatic ties between China and the Middle East in general and with Saudi Arabia in particular, have enabled the country to be minutely exposed to escalating petroleum prices than before the relations came into effect. China has ultimately become OPEC’s rising trade expenditure primary beneficiary (Al-Tamimi, 2012). For example, research indicates that for every dollar spent by the United States on importing petroleum from the OPEC countries, only 34 cents return back through its exports to these countries. This hedging of United States in terms of trade relations has been of benefit to China. For every dollar Beijing spent in importing petroleum from OPEC countries, 64 cents, or about 66 percent came back to China thanks to the expanded exportation of its goods to these countries. Noticeably, the Sino-Saudi diplomatic relations that centered on oil have had a trickle down effect in expansion of China’s export markets.
Furthermore, the leadership of Saudi Arabia is favoring oil partnerships with China because the proceeds will be fundamental in shoring up education in the country and enabling economic diversification effect in other economic interest specifically expansion of trade.
The China and Saudi Arabia energy relations have necessitated the diversification of Saudi Arabia’s economy. Saudi Arabia is a leading supplier of petroleum and petrochemical products such as fertilizers and industrial chemicals. This reality provides a chance the country with a chance to position itself in becoming a world energy and economic power. Saudi Arabia has plunged deep in the petrochemicals sector, with a rough valuation of $63 billion as at 2012 (Al-Tamimi, 2012). Much of these petrochemicals are exported to Asia; China is accounting for the biggest market for these products. From the foregoing, it is noticeable that China offers excellent advantages to Saudi Arabia’s downstream products like plastics and petro-chemicals by providing an extensive market.
Related Issues-Secondary Issues
A related issue to this Saudi- China oil relation is the declining of relations between United States and Saudi Arabia. Of note, Saudi Arabia has been in the process of shutting its eyes to the West and nurturing a policy of ‘Looking East.” To Saudi Arabia, China is definitely a leading strategic market for its exports, specifically petroleum. The devastating September 11, 2001 terrorist attacks in the United States did cause Saudi Arabia to seek the rebalancing of the relations it creates with major powers of the globe (Al-Tamimi, 2012). The terrorist attacks caused strife and deterioration of the Saudi’s relations with the United States. Against this backdrop, the Saudi Arabian Kingdom has been seeking to sideline the United States in its economic relations, and ultimately develop more mutual, robust and beneficial relationships with economic powerhouses in Asia, particularly China.
Moreover, the thriving oil relations between Saudi Arabia have led to a shift in the global oil supply and demand geopolitical landscape. The 2011 uprisings that were experienced in Arab countries resulted in far reaching implications in the foreign affairs of the Saudi Arabia Kingdom. This “Arab Spring” led to leaders of countries such as Egypt and Tunisia to be forcefully overthrown by the disillusioned public of these countries. The rare political developments led to a shift in the world’s oil supply and demand geopolitical landscape, the reason why Saudi Arabia has opted to turn around its focus and concentrate on trading with the Asian continent, particularly China, (Al-Tamimi, 2012).
Additionally, the partnerships between Saudi Arabia and China espoused in crude oil, petrochemicals, and politics have been important in heightening efforts of the Saudi Arabian Kingdom to curtail the political influence of Iran (Al-Tamimi, 2012). Saudi Arabia feels that the military growth of Iran, notably its nuclear program, will destabilize the region in areas of security and overall stability, and cause it to lose the importance it holds in the region. China offers a nuclear option to Saudi Arabia to counter the Iran’s nuclear ambitions. The Iran threat makes Saudi Arabia want to decide to acquire nuclear weapons in the country. China is positioned to play a crucial role to Saudi Arabia whether it decides to start and develop its nuclear program or purchase atomic weapons ready made in Pakistan. China has the financial capability to finance them in exchange of oil.
Conclusion
The answer to the question of whether Sino-Saudi relations have had an impact on the economic well-being of both countries is an emphatic yes. The huge oil appetite of China has been quenched by the steady oil supplies from Saudi Kingdom. China has been able to expand its export trade to Saudi Arabia thus shoring up its economy using the proceeds. On the other hand, Saudi Arabia has benefited from direct foreign investments in oil and gas sector, road infrastructure, healthcare, and education that China has been channeling to it. Moreover, the benefits of China having a huge population have trickled to Saudi kingdom in the form of imported labour which has been crucial in building of the Kingdom’s economy. Also, China has provided a huge market for the Kingdom’s petrochemicals, which form alternative sources of foreign currency for Saudi Arabia.
References
Al-Tamimi, N. (2012, June 27). China-Saudi Arabia Relations: Economic Partnership or Strategic Alliance? Retrieved December 13, 2014, from http://dro.dur.ac.uk/9683/1/9683.pdf
Petroleum, B. (2012, June). Statistical review of world energy 2012. London. embp. com/statistical review.
International Energy Agency. (2012, May 12). Oil Market Report. Retrieved December 13, 2014, from http://omrpublic.iea.org/currentissues/full.pdf
International Energy Agency. (2011, November). World Energy Outlook 2011. Paris: IEA
International Monetary Fund. (2012, April). World Economic Outlook 2011. Washington DC: IMF.
