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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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China’s Influence In Oil Markets Grows With BRICS Expansion

  • China continues to work to shape a new global market order in oil markets.
  • With the addition of all three new members, the BRICS group would control around 41 percent of all global oil production.
  • Moving away from the petrodollar and replacing it by the renminbi has been a priority for Chinese President Xi.
China Crude

Piece by piece, China continues to build alternatives to each of the key building blocks of the West’s world order, including - crucially - a new global oil market order, as analysed in full in my new book of the very same name. The latest building block is the invitation to three of the world’s biggest oil and gas powers – Saudi Arabia, Iran, and the UAE – to join the BRICS political and economic grouping, comprised of Brazil Russia, India, China, and South Africa. This can be considered as a developing world alternative to the U.S.-dominated Group of Eight (G8) major industrialised nations from which Russia was suspended indefinitely in March 2014 following its annexation of Ukraine’s Crimea. As it stands, Iran and the UAE said that they will accept the invitation, while Saudi Arabia stated that it is considering the proposal. With the addition of all three new members, the BRICS group would control around 41 percent of all global oil production, according to International Energy Agency estimates. In practical terms, though, it is irrelevant whether Saudi Arabia formally joins or not, as all three countries – and virtually all of the Middle East’s major oil and gas players – have already pledged their allegiance to China in one of its geopolitical building blocks or another. While BRICS can be considered China’s alternative to G8 (now G7 again following Russia’s permanent withdrawal in January 2017), the Shanghai Cooperation Organisation (SCO) is a much bigger deal altogether. As exclusively reported by OilPrice.com at the time, and analysed in full in my new book, Saudi Arabia had already signed a memorandum of understanding on 16 September 2022 granting it the status of SCO ‘dialogue partner’. At that point, the Kingdom did nothing to encourage the release of the news at that point, unlike later in April this year - just after it had agreed to a stunning resumption of a relationship deal with Iran, brokered by China. By then, Saudi Arabia had decided that the time was right to ensure full coverage for the news that its cabinet had approved a plan to join the SCO as a dialogue partner. As also exclusively reported by OilPrice.com at the time, Iran approved its own ‘full membership’ to the SCO back in September 2021 and was granted it on 4 July this year. Iran’s membership of the SCO simply rubber-stamped China’s control over the country – and over neighbouring Iraq, heavily influenced by Iran – through the all-encompassing ‘Iran-China 25-Year Comprehensive Cooperation Agreement’, as first revealed anywhere in the world in my 3 September 2019 article on the subject and fully examined in my new book

Related: Iraq-Turkey See More Delays In Resuming Oil Flows

Unlike the rather vague operational parameters of the BRICS organisation, the SCO is very specific, very powerful, and very serious in its objectives. Already it is the world’s biggest regional political, economic and defence organisation both in terms of geographic scope and population. It covers 60 percent of the Eurasian continent (by far the biggest single landmass on Earth), 40 percent of the world’s population, and more than 20 percent of global GDP. It was formed in 2001 on the foundation of the ‘Shanghai Five’ that was set up in 1996 by China, Russia, and three states of the former USSR (Kazakhstan, Kyrgyzstan and Tajikistan). Aside from its vast scale and scope, the SCO believes in the idea and practice of the ‘multi-polar world’, which China anticipates will be dominated by it by 2030. Veteran Russian Foreign Minister, Sergey Lavrov, has since stated that: “The Shanghai Cooperation Organisation is working to establish a rational and just world order and […] it provides us with a unique opportunity to take part in the process of forming a fundamentally new model of geopolitical integration”. Aside from these geopolitical redesigns, the SCO works to provide intra-organisation financing and banking networks, plus increased military cooperation, intelligence sharing and counterterrorism activities, among other things. 

The end of December 2021/beginning of January 2022 saw meetings in Beijing between senior officials from the Chinese government and foreign ministers from Saudi Arabia, Kuwait, Oman, and Bahrain, plus the secretary-general of the Gulf Cooperation Council (GCC). The principal topics of conversation, as analysed fully in my new book, were to finally seal a China-GCC Free Trade Agreement and to forge “a deeper strategic cooperation in a region where U.S. dominance is showing signs of retreat”. Also during the meetings, Chinese President Xi Jinping and Saudi Crown Prince Mohammed bin Salman signed a China-Saudi partnership pact with King Salman. The new pact pledged cooperation in finance and investment, innovation, science and technology, aerospace, oil, gas, renewable energy, and language and culture. Having got all the names gathered to sign these all-consuming cooperation agreements, Xi then identified two ‘priority areas’ that he believes should be addressed as quickly as possible. The first is the transition to using the Chinese renminbi currency in oil and gas deals done between the Arab League countries and China, and the second is to bring nuclear technology to targeted Middle Eastern countries, beginning with Saudi Arabia. 

On the first of Xi’s urgent priorities – moving away from the core U.S. dollar pricing of the energy markets and substituting the renminbi instead – China has long regarded the position of its renminbi currency in the global league table of currencies as a reflection of its own geopolitical and economic importance on the world stage. An early indication of China’s ambition for the renminbi was evident at the G20 summit in London in April 2010, when Zhou Xiaochuan, then-governor of the People’s Bank of China (PBOC), flagged the notion that the Chinese wanted a new global reserve currency to replace the U.S. dollar at some point. China has also long been acutely aware of the fact that, as the largest annual gross crude oil importer in the world since 2017, it is subject to the vagaries of U.S. foreign policy tangentially through the oil pricing mechanism of the U.S. dollar. This view of the U.S. dollar as a weapon was reiterated by the former executive vice-president of the Bank of China, Zhang Yanling, in a speech in April, saying that the latest sanctions against Russia would “cause the U.S. to lose its credibility and undermine the [U.S.] dollar’s hegemony in the long run.” She further suggested that China should help the world “get rid of the dollar hegemony sooner rather than later.” Saudi Arabia has long been receptive to the idea of replacing the U.S. with the Chinese renminbi for its energy dealings with China, as also analysed in my new book. In August 2017, the then-Saudi Vice Minister of Economy and Planning, Mohammed al-Tuwaijri, told a Saudi-China conference in Jeddah that: “We will be very willing to consider funding in renminbi and other Chinese products.” He added: “China is by far one of the top markets’ to diversify [the funding basis of Saudi Arabia] … [and that] We will also access other technical markets in terms of unique funding opportunities, private placements, panda bonds and others.” 

Turning to the second of Xi’s urgent priorities – bringing nuclear technology to the Arab League and GCC countries, starting with Saudi Arabia – there was a peculiar timing attached to the statement. Just before Christmas 2021, news emerged that U.S. intelligence agencies had found Saudi Arabia was manufacturing its own ballistic missiles with the help of China. Given China’s long-running and extensive ‘assistance’ to Iran’s nuclear ambitions, fully analysed in my new book, this information was received very poorly in Washington, with the focus being on what Beijing’s endgame might be in building out the nuclear capabilities of rival key states in the Middle East. Currently, the only Arab nation to have nuclear reactors is the UAE – also newly signed up to the BRICS grouping. Even with the U.S.’s extensive presence of military huge military bases in and around the UAE, Washington was “extremely concerned”, as a senior figure in the U.S. energy security complex exclusively told OilPrice.com last year, to find that China had been building a secret military facility in and around the UAE port of Khalifa. Based on classified satellite imagery and human intelligence data, U.S. officials stated that China has been working to establish “a military foothold in the UAE.” The UAE authorities stated that they were not aware of such activity being conducted by China at one of their biggest ports with months of extremely high levels of movement of enormous Chinese ships in and out of it day and night. Previously, Saudi Arabia had been in talks to acquire nuclear technology from the U.S. under the ‘1-2-3’ protocol - intended to limit the enrichment of uranium for arms purposes. Whether China will insist on such a protocol, or if it is in place will insist that it is adhered to, remains to be seen.

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on September 06 2023 said:
    This is inevitable. By 2030, the yuan will be the top reserve currency in the world and the petro-yuan the dominant oil currency. By then the US dollar would have lost one third to one half of its value.

    The BRICS group poses threats to the United States that go far beyond undermining the dominance of the US dollar as a major reserve currency and a global oil currency, It is already heralding a New World Order away from the unipolar system led by the United States into a fairer and more equitable multipolar one and also a new global financial system away from the US dollar based on the yuan and other major currencies.

    By inviting major oil powers like Saudi Arabia, UAE and Iran to join their organization, the BRICS countries accelerate the decline of the dollar as a reserve currency and also as an oil currency.

    With Saudi-led Gulf Cooperation Council (GCC) countries virtually accepting the petro-yuan in payment as China is demanding, the petrodollar’s share in global oil trade will decline by 20%. And with China paying for its imports in petro-yuan, Russia selling its crude in rubles, Indian rupees and petro-yuans and India paying rupees and petro-yuans for its imports, the share of the petrodollar in the global oil trade could plummet by 60% leading to a devaluation of the dollar by one third to one half overnight. This will be the most devastating blow for the US economy and its financial system.

    Moreover, whether the BRICS countries reach agreement on a new currency or maintain the use of their national currencies for transactions among themselves, it amounts to the same result, namely dropping the dollar and moving towards de-dollarization which will harm the dollar in global trade immeasurably and also undermine the US financial system.

    The BRICS group already accounts for 32% of global GDP economy compared to 27% for the G7 countries. . And with the addition of the six invited countries to become members (Saudi Arabia, UAE, Iran, Egypt, Ethiopia and Argentina), BRICS share of the global economy rises to 42%. They are on track to account for more than 55% of the global economy by 2030 with more new members expected to join.

    Both the BRICS and the Shanghai Cooperation Organization (SCO) represent a pincer movement aimed at encircling both the US-dominated unipolar world and the US financial system based on the dollar and eventually forcing them to surrender or collapse.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

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