China’s Iran-Oil Import Angst. Part I: U.S.-Saudi Cooperation

Thus far, Beijing has found little wiggle room to resist the U.S.-E.U.-Saudi common vision that severe sanctions be used to shut down the bulk of Iran’s oil exports by June.

US Treasury Sec Geithner in Beijing with Vice Premier Wang Qishan. NYT Photo Andy Wong

The reality being revealed in this confrontation is that China has much less ability to maneuver independently in the global oil system—whether in the market or in diplomatic and military matters—than most analysts would lead us to believe.

Preface: What are Washington v. Beijing´s strategic objectives here ?

In my assessment, there are clear underlying energy’market security reasons why the U.S. is pursuing this geopolitical path.  The U.S. aim is to prevent Iran from projecting greater influence over key Gulf oil-market players Saudi Arabia, Iraq, the UAE, Kuwait and etc. as the U.S. withdraws from its over-extended presence in Iraq and Afghanistan.  This draw-down is very important for U.S. strategy globally; but Washington will not accept Iran gaining greater influence over other local OPEC producers and thereby the global oil market (aka, The Global Barrel) as it steps back.

Stopping any Iranian nuclear program is of course a significant part of this; but really, for Washington, the more general issue is that if sanctions were lifted, Iran would soon become the oil powerhouse it is ultimately destined to be, its income would grow rapidly and its conventional military capacity along with it.  Nuclear weapon or no, Iran would increase its regional weight, and, considering the region, gain a level of world oil-market clout the U.S. and its allies (whether local or European) deem unacceptable.

As for China, its oil policy is essentially hostage to this conflict.  It can clearly not project significant power in the Gulf region to avert the conflict, nor its basic outcome.  It also cannot now risk a major worsening of its relations with the U.S. and its allies.  So, Beijing has to defend its energy security interests, which now include both short- and long-term oil relationships with Iran, but yet find a way to “go along, get along” with the U.S. and its allies on this issue.

Let’s look at Beijing’s initial responses to date, and consider what they imply about the oil-market and geopolitical realities it now faces:

Saudis help Beijing respond to U.S. demands

As I mentioned in a previous post, U.S. Treasury Secretary Geithner went to Beijing early in the year, on January 9, after Obama signed the new U.S. sanctions law late in December.  He went to “urge” Beijing to stop buying Iranian oil.  This included an ultimatum. Beijing was told to stop buying oil from Iran (in stages would be fine), or else Chinese banks found to be making payments to any Iranian bank for that oil, including to Iran’s central bank, will be barred from doing business with U.S. banks. And, the EU has since passed its own sanctions which basically do the same.

And, then, within days of Geithner’s visit to Beijing, China’s Premier Wen Jiabao went on a five-day visit to Saudi Arabia and its allies in the Persian Gulf. This trip is quite interesting as it´s the first time in over 20 years that a Chinese premier has gone to see the Saudis.

But, the second interesting thing about this trip is that, even though China is estimated to have made some $120 billion in investments in oil and gas projects in Iran just since 2009, nevertheless, the premier skipped visiting Iran while he was in the Gulf region. [In Talks With the Chinese, Geithner Faces an Uphill Climb, by Michael Wines, NYT, 11 Jan 2012.]

Just for some sense of comparison here: in Venezuela, PDVSA and the state under Hugo Chavez have accepted about $36 billion in loans from China. Even if one assumes say, another $10-to-20 billion Chinese investments in Venezuelan oil fields, Iran’s $120 billion investments–only since 2009–are immense by comparison. Premier Wen’s visit to the Gulf, yet skipping Iran, should be seen in this light.

And, what did the premier have to say as his visit progressed? This also was quite out-of-the-usual for Beijing:

“Mr. Wen’s comments on Iran were unusually pointed for Chinese diplomacy. In Doha, Qatar’s capital, he said China “adamantly opposes Iran developing and possessing nuclear weapons.” He also explicitly warned Iran not to close the Strait of Hormuz, the Persian Gulf bottleneck through which roughly a fifth of the crude oil traded worldwide passes, saying that such action would be regarded as aggression against most of the world’s nations. Iran had earlier threatened to shut down the strait should the United States strengthen sanctions against Tehran.”

Yes, this is quite an unusually assertive stance for China, normally so wedded to its political “non-interference” policy as its businesses acquire basic commodities across the Middle East, Africa and Latin America.  But, the full message still had the distinctive mercantilist bent:

“But throughout his visit, Mr. Wen repeated that China’s business deals with Iran — its No. 3 supplier — were separate from diplomatic questions and that sanctions threatened global trade more than any individual nation.” [China Leader Warns Iran Not to Make Nuclear Arms,” by Michael Wines, NYT, 20 Jan. 2012.]

Along these lines, the key aspect of the visit is that Premier Wen was also assured by the Saudis that they would make up for the Iranian oil imports China would lose if it gets on board U.S. sanctions [There was a good lead on this in Petroleum Intelligence World: “Saudis Play Silent Role in Iran Sanctions” PIW, Vol. LI, No. 4, 30 Jan 2012], and the Saudi’s had some interesting business deals to offer.

Beijing gets the Saudi-U.S. ¨Good Cop-Bad Cop¨ Treatment

So, basically, Beijing was treated to a coordinated “good cop, bad cop” routine by the Royals and the Obama administration. Washington played the ‘bad cop,” with Geithner delivering the demand to start cutting its Iranian imports.  But, immediately, the Saudi’s played the “good cop” role, offering Beijing a way out for its two big concerns:

First, they offered a new, significant stream of oil imports from the Saudi’s presently ample surplus capacity. Outside PIW and some industry-insiders, the fact that this is a relatively advantageous time, from a market perspective, for the U.S. to push for sanctions on Iran, has not been stressed.  World demand is down and the Saudi’s have a significant surplus production capacity, probably about 2.5 million barrels that they can use to wean Beijing from its Iran dependency.

The exact volume promised is not clear, but one should not assume it was only Saudi oil that was offered.  (For example: In order to get the Chinese to vote at the UN for the previous instance of sanctions [Security Council Resolution 1929 of 9 June 2010], the Obama administration had pressed the Saudis beforehand to provide the Chinese with increased exports.  These started to flow from the UAE after Secretary Clinton personally met with the King and pressed him on this.  [I confirmed this in side discussions with other U.S. analysts during a dinner we were invited to with Pres. Ahmadinejad in NYC in Sept. 2010] )

Second, besides substituting for lost Iranian oil imports, Primer Wen also was offered new opportunities for joint investments in oil development projects:

“The arrangements included a plan by China’s Sinopec Group to build a $10 billion, 400,000-barrel-a-day refinery on the Saudis’ Red Sea coast. While Mr. Wen was in Qatar, the China National Petroleum Corporation unveiled plans to build a refinery at Taizhou, on China’s Pacific coast, in a venture with Qatar Petroleum International and Royal Dutch Shell. “ [Ibid, NYT 20 Jan 2012]

Interpreting China´s Response Thus Far

The last time the Obama Administration wanted new sanctions on Iran, in 2010, Beijing started out rather loudly opposed, even threatening to block the sanctions at the U.N. …

Part II:   TO BE CONTINUED Wednesday, 15 Feb 2012

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4 responses to “China’s Iran-Oil Import Angst. Part I: U.S.-Saudi Cooperation

  1. Fascinating as usual. You think that these geopolitics have affected the US’s changing position on the Keystone pipeline? If Keystone doesn’t happen, more Canadian oil goes to China — and Canada, of course, is even more in the US pocket than Saudi Arabia.

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    • Gracias, Setty
      I don’t think the Keystone and the present Iran sanction are linked that directly vis-a-vis U.S. diplomacy towards China. However, more generally, the U.S. attitude to China’s increased role in the W. Hemisphere oil sector has been basically very welcoming. That’s consistent with U.S. interest in getting more oil online generally from more diverse sources. A complaint from the US side about China, however, is that with Venezuela and anywhere else possible, China tries to make these as bi-lateral, state-to-state, mercantilest tie ups avoiding oil-market participation, market pricing, etc. The U.S.(and most everyone else) sees this as market-distorting. However, with China’s new opportunities with Keystone’s possible failure, and with China’s big new investments in Alberta oil fields, China is forced to participate in the market just like everyone else–which only consolidates it into the “one global barrel” system, where the US is the mover-and-shaker/protector. The U.S. really quite strictly seems to want China to feel taken care of fairly in the oil sector (vis-a-vis Iran or the W. Hemisphere), and be drawn into dependence/reliance on the global market system.

      Like

  2. Pingback: China’s Iran-Oil Import Angst – Part II: 2012 Following 2010 Script | The Global Barrel

  3. Pingback: Oil Prices: Saudi Pumping Surge & US-EU Iran Strategy | The Global Barrel

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