When President Donald Trump on Sunday said the United States was "locked and loaded" to respond to the drone attacks on Saudi oil infrastructure, many smelled war. Even though on Monday Trump backpedaled and said he did not want a war, the worry about an escalation in the Middle East remains. And one big loser from such an escalation would be China.
Following the attacks on Saturday, Brent crude briefly jumped to over $70 a barrel before retreating to $68 at the time of writing. In China, crude oil and refined product futures soared yesterday, as refiners rushed to stock up. According to market research company JLC, every price increase of $5 in Brent will inflate costs of imported crude for independent refiners by about $40 per metric ton. That's quite a shock to deal with. And it could get worse.
China has pledged $400 billion in investments in Iran's oil, gas, energy infrastructure and transport industries over the next 25 years, Kenneth Rapoza noted in an article for Forbes yesterday. This is a major commitment aimed at securing a much needed future oil and gas supply for China whose domestic production cannot come close to satisfying its growing needs. For Iran, it is a way to continue making money from its oil despite the U.S. sanctions. The commodities will be priced in yuan and other currencies that China has reserves in. However, if the U.S. or Saudi Arabia decide to act on their conviction that Iran was behind Saturday's attacks and target oil fields, "it might be setting a Chinese investment on fire," Rapoza writes.
The drone attacks on the Khurais oilfield and the Abqaiq oil processing facility took an estimated 5.7 million bpd in production capacity off the market, according to initial estimates. Oil data analytics firm OilX, however, has estimated the cumulative loss for the three days to Monday at some 12 million barrels. Saudi Arabia has enough oil in storage to cover 10 days of exports at a rate of 7 million bpd, OilX analysts note, adding that it may speed up the restart of production in the Neutral Zone with Kuwait to cover for losses. Related: Is A Full-Blown War In The Persian Gulf Inevitable?
A loss of 12 million barrels in supply, albeit temporary, is enough to shake markets and send prices higher. But for China, this is the smaller problem. The bigger one is retaliation. The Houthi rebels in Yemen were quick to take responsibility-and boast-about the attack, but the U.S. and Saudi Arabia have blamed Iran. Whether or not they are right is irrelevant, Forbes' Rapoza says. It's the fact that they claim it was Iran behind the attacks that could, besides a retaliatory attack, lead to a further tightening in U.S. sanctions, with China suffering the consequences alongside its ally.
Others have got burned already, Rapoza recalls. BNP Paribas got stung with a $9-billion fine for violating international sanctions against Iran a few years ago. Total, the French supermajor, had committed several billion in investments into the development of the South Pars gas field, but had to pull out of the country when Trump reimposed the sanctions on Tehran. The company left to take care of the field was China's CNPC. Yet it, too, later suspended all work on the field for fear of suffering a sanction penalty.
China is perhaps Iran's biggest creditor. It stands the most to gain if pressure from the United States is lifted and the most to lose if this pressure is intensified. For now, the situation is unfolding in the latter direction.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
Comments
China is currently defying US sanctions and importing more than 1.2 million barrels a day (mbd) from Iran. It is also planning to invest heavily in Iran’s oil and gas industry. A US-Iran war would only prompt China to halt its planned investments in Iran and would add a few billion dollars to its oil import bill.
For the United States, war with Iran will not be an easy ride. As in Iraq before, the United States may win the military battles with its overwhelming military assets but end up losing the war including having thousands of US troops inside the US Embassy in Baghdad and in Deir ez-Zur in Syria taken prisoners or killed by Iran’s militia in addition to saying bye to its national interests in the Middle East and seeing Saudi oil installations totally destroyed sending oil prices beyond $140 a barrel.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
After armoring, only big bombs dropped from planes, like the Grand Slam bombs the British used on German U-boat pens in France during WW II, could seriously damage the major oil facilities. Planes carrying such enormous bombs are easy to shoot down on the way in, if the defender has an air force, like the Saudis do.
Small cruise missiles can hug the ground, and are impossible to detect without early warning radar planes in the air. I saw those planes over the Gulf of Mexico right after the 9/11 attacks. They were up there 24 hours a day watching for hijacked aircraft heading for Houston, or New Orleans refineries and chemical plants, I guess.
Depending on the subsurface geology, some things could go deep underground, like the Canadians did in Quebec with their dam powerhouses inside solid granite mountains. Smart, those Canadians. Those caverns will probably outlast humans.
Of course, as any general knows, the best defense is a good offense. You sink their navy, shred their air force, and level their refineries first. And if that doesn't work to change behavior, you move on to the power plants, steel mills, chemical plants, truck plants, bridges, dams, grain silos, and railroad facilities. That is probably coming from Trump after the next such attack on Saudi Arabia.
The retired generals on TV are saying any US attack on Iran has to be big enough to set them back years, so they can't strike back too strongly before additional military assets can be transferred from the US, Europe, and maybe even China, India and Japan, to friendly countries bordering the Gulf. The Iranians would be outnumbered 20 to 1, and the oil would flow. Additional pipelines to the Red Sea could also be built. Attack helicopters could be stationed along the pipelines to shoot up any attackers. Drones could patrol the pipes 24/7.
Having had, 'The Art of the Deal' book ghost written for him, I'm sure The Donald will negotiate the return of any American POW pilots in no time.