Although China has backpedaled on proposed tariffs on U.S. crude imports, the move is indicative of its need to diversify sources and steps may now be taken to enable China to play the oil card in the future – including imports from Iran despite sanctions, and drawing closer to Russia.
A reshuffle of crude oil exports to Asia
Asian oil refiners have been rushing to secure crude supplies in anticipation of an escalating trade war between the United States and China. Last week, Dongming Petrochemical, an independent Chinese refiner, said it has halted crude purchases from the U.S. and turned to Iranian imports amid escalating trade tensions between Beijing and Washington. U.S. crude oil exports to China reached 400,000 barrels per day (bpd) at the beginning of this July, but Beijing has recently threatened a 25 percent duty on imports of U.S. crude as part of its retaliation for Trump’s latest round of tariffs on US$34 billion worth of Chinese goods. In addition, Iran’s foreign minister said on 3 August that China was “pivotal” to salvaging a multilateral nuclear agreement for the Middle Eastern country after the United States pulled out. A reshuffle of crude oil exports to Asia is possible, with China vacuuming up much of the Iranian oil that other nations won’t buy because of the threat of U.S. sanctions.
China, India, Japan and South Korea together account for almost 65 percent of the 2.7 million barrels a day that Iran exported in May. The U.S. has been lobbying these countries and other multinational oil giants to cut crude purchases from Iran to zero by November, the deadline for re-imposition of the secondary sanctions. In view of the current trade disputes with the U.S., China has reacted defiantly to U.S. sanctions banning business ties with the Islamic republic. This could be the determining factor in helping Tehran withstand the sanctions on its vital energy industry. Related: Crude-By-Rail Could Save The Permian Boom
With China turning to Iran, U.S. oil would start flowing in greater amounts to other leading importers in the region, such as Japan and South Korea. In Japan, the oil industry has yet to respond to this issue publicly. The Petroleum Association of Japan previously warned refiners that they will have to stop loading Iranian crude oil from October onward if Tokyo doesn’t win an exemption on U.S.-Iran sanctions. However, this past weekend, South Korea’s embassy in Iran rejected media reports that the country had suspended oil purchases from Iran under pressure from the U.S. Whether Japan and South Korea would seek more crude imports from the U.S. remains to be seen.
China may have Russia on its side
The sanctions imposed on Russia from the West, as well as the trade tensions between China and the U.S., may provide even more room for energy cooperation between China and Russia. Russia’s sour relationship with the West forces it to look for new trade and investment partners, which could include China and countries in the Middle East. Russia has already become Beijing’s single largest crude oil supplier, exporting crude oil worth US$23.7 billion to China in 2017. Now with Beijing possibly cutting imports from the U.S., Russia may seek to export even more crude oil to China.
On 19 July, China received the first ever liquefied LNG cargo from Russian natural gas producer Novatek via the Northern Sea Route (NSR) alongside the Arctic coast. The $27 billion Yamal project is the world’s largest Arctic LNG project and the first large-scale energy cooperation project to be implemented in Russia after the “Belt and Road” initiative. China’s National Energy Administration said China National Petroleum Corp (CNPC) will start lifting at least 3 million tonnes of LNG from Yamal starting in 2019. Therefore, it’s highly possible that China and Russia will deepen their cooperation in liquefied natural gas (LNG) trade despite U.S. sanctions.
In addition, according to an anonymous Russian government official, Russia is ready to invest US$50 billion in Iran’s oil and gas sector amid mounting pressure from the U.S. to economically and diplomatically isolate Tehran. Russia’s energy minister Alexander Novak said that Moscow was interested in developing an oil-for-goods program that would allow Iranian companies to buy Russian products in exchange for oil contracts to be sold to third world countries. This was evidence of Russia’s consistent strategy of using its strong oil and gas industry to meddle in Middle East issues. Under the current situation, even though China may somehow reach an agreement with the U.S. promising that it will cut oil imports if the U.S. is willing to reduce the trade tariffs, in the short-term China is still likely to get Russia on its side in defiance of the U.S. oil campaign.
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Russia has now emerged as the world’s largest supplier of oil to China. It already has a contract to provide 38 billion cubic metres a year (bcm/y) of Russian natural gas to China for the next 30 years. This could be increased to 61bcm/y if Putin decides to cut the shipment of natural gas to Europe in favour of China. Also on 19 July, China received the first ever LNG cargo from Russian gas producer Novatek via the Northern Sea Route (NSR) alongside the Arctic coast. The $27 billion Yamal project is the world’s largest Arctic LNG project and the first large-scale energy cooperation project to be implemented in Russia as part of China's “Belt and Road” initiative. Moreover, the Power of Siberia pipeline which will transport Russian gas to China is now fully operational.
If it is true that Henry Kissinger has advised President Trump to work with Russia to contain China, then he may be underestimating the strength of the Chinese-Russian strategic alliance.
Such a grand design has many flaws. First the world has changed drastically since the Cold War. Second, China with the world’s largest economy on the basis of purchasing power parity (PPP) has got so deeply involved in the international economic and political system that it will not be encircled or isolated by anyone. Third, the world is no longer unipolar with the United Sates as the ‘indispensable superpower’. A new multipolar order made up of China, Russia and the United States is emerging. Fourth, President Putin will never sacrifice his strategic partnership with China for the West.
Both Russia and China rank their ties as the “peak” in mutual history. This can be judged by two analytical frameworks: their converging visions of the future world order and their harmonized national interests.
The Chinese view on the world order at this historical juncture is shared by Putin’s Russia. Both sides hold the view that Washington’s alienation from both Beijing and Moscow is reflected by the deeply rooted fear of the US losing hegemonic status as the “only indispensable superpower”. The indications of the US fear are plenty. From Beijing’s point of view, the US decision to restart a Cold War containment strategy and escalate a trade war with China were driven by misguided fear. From Moscow’s perspective, the Western alliance took advantage of post-Soviet chaos to push the Western sphere of influence towards the Russian border.
In sharp contrast to mutual suspicion and deteriorating relationship between Washington and Beijing, the Chinese-Russian tie has proved to be a stable strategic partnership built on mutual understanding, respect and national interests.
In view of the above, Putin will never sacrifice China for the West whom he doesn’t trust. He and China know that their strategic partnership is a healthy check on Washington’s “unipolar folly”.
China which is being subjected to intrusive US tariffs and Russia which has been battling US sanctions since 2014 will ensure the failure of US sanctions against Iran as a sort of retaliation against US tariffs and sanctions against them. The US would be making a huge mistake were it to underestimate the power of the Russian-Chinese strategic partnership which has led to the successful launching of China’s crude oil future contract (the petro-yuan).
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
There's no bigger meddler in the middle east or anywhere else besides the US. What would you call US regime change that killed millions in Afghanistan, Iraq, Libya, and Syria, and set off a major refugee crisis in Europe?