Sino-Saudi Energy Relations
Author: Clayton Cheney, 2017
“The energy relationship between Saudi Arabia and China is one of the most important energy relationships on the globe and it has important implications for the global economy, geopolitics, and climate change…”
Photo from Pixabay under Creative Commons.
The energy relationship between Saudi Arabia and China is one of the most important energy relationships on the globe and it has important implications for the global economy, geopolitics, and climate change. Saudi Arabia, as one of the world’s leading exporters of oil, and China, as the second largest consumer of oil and largest energy user in the world, are natural partners for establishing a mutually beneficial energy relationship. The importance of the association between the two countries can be seen through their recent increased economic activity, with Saudi Arabia and China announcing agreements totaling $65 billion in economic and trade deals spanning a range of sectors (Gramer “Saudi Arabia China Sign Deals”). This paper will analyze the energy and geo-political issues related to the Sino-Saudi relationship. First, the paper will describe the growing relationship surrounding Saudi oil production and export and Chinese oil consumption. Next, the paper will highlight some of the important geo-political issues that arise as a result of the Saudi and Chinese relationship, with a focus on the implications for the Middle East region. Subsequently, the status of renewable energy sources in China and Saudi Arabia will be addressed, as this issue not only impacts China and Saudi Arabia, but also the rest of the world through the effects of climate change. The paper will then look to the future and, more specifically, how the Sino-Saudi relationship affects the Chinese One Belt One Road project and the Saudi Vision 2030 plan. Finally, the paper will briefly discuss a few of the potential technological disruptions, such as advancements in the transportation sector or energy transmission, which could alter the course of Saudi-Chinese relationship and the global energy landscape as a whole.
Chinese Oil Demand and Saudi Oil Supply
The relationship between China and Saudi Arabia is primarily an energy and economic relationship, though there is a potential for it to expand to a political and security relationship as well in the future. The energy and economic relationship is driven by the massive energy demand produced by the Chinese economy. In 2011 China became the world’s largest energy consumer and in 2013 it surpassed the United States as the largest importer of petroleum and other energy liquids (“China Report”). Estimates indicate that China’s population will continue to steadily grow, with the 2015 population at 1.371 billion and a projected 2030 population of 1.409 billion (“World Bank Data”); and while gross domestic product (“GDP”) growth has slowed in recent years, China still targets a 6.5% growth rate for 2017 (“China Premier”). Additionally, by 2035 the energy consumed in the transport sector is expected to grow by 93 percent and oil will continue to represent 86 percent of the energy used in the transport sector (“Country and Regional Insights – China”). In the absence of a large shift in the transport and automobile sectors, the growing Chinese population, and corresponding increase in Chinese automobile ownership, will require substantial oil imports. These numbers illustrate that China is the most lucrative oil export market for Saudi Arabia, especially considering that the United States has drastically decreased its oil imports from Saudi Arabia, due to the development and success of unconventional oil sources. Previously the United States represented the most important market for Saudi oil, but as China now constitutes “almost 15% of global GDP, 13% of global trade and around 30% of global oil demand growth,” Saudi Arabia is recognizing that it must shift its focus to China in order to maintain its strength in the oil market (“China’s 13th Five-Year Plan” 2).
Conversely, China has acknowledged that it has a vital national interest is ensuring that the country has access to sufficient oil imports from a diverse range of oil suppliers, in order to maintain a sufficient energy supply to continue its economic growth. The Chinese government’s legitimacy rests in its ability to maintain a rapidly growing economy, and satisfying its energy demand is a key component to its economic growth. The Chinese demand for imported oil is expected to grow from 6 million barrels per day (“mb/d”) in 2015 to 13 mb/d in 2035 (Singh). Currently, Saudi Arabia meets approximately 20 percent of China’s oil import demand, which has caused bilateral trade between the two countries to rise from $1 billion in 1990 to $70 billion in 2013, making Saudi Arabia an extremely important contributor to the Chinese economic engine (Jin).
This is not to say that the Saudis do not have immense competition for the Chinese oil market, including from competitors in the Middle East as well outside of the region. Following the 2015 Iranian nuclear deal, President Xi Jinping was the first world leader to visit Iran, marking the importance of the Iranian-Chinese relationship. The Iranians are the sixth largest oil supplier to China, supplying approximately 8 percent of their imports, and China also has significant upstream investments in Iranian oil production (“China’s Loans for Oil” 8). As Iran accelerates its oil production and exports following the nuclear deal, the Chinese oil market will undoubtedly be one of its main targets. The competition between Saudi Arabia and Iran for Chinese market share also has important geo-political implications, as will be discussed below. In 2016, Russia replaced Saudi Arabia as the largest oil importer to China, with Russia importing 1.05 mb/d and the Saudis importing 1.02 mb/d (“Russia Wrests Crown”). The expansion of a Sino-Russian oil pipeline, which is targeted to be complete by the end of 2017, will result in increased competition between Russia and Saudi Arabia to satisfy the growing Chinese oil demand.
The Chinese are in a comfortable position right now because the world is currently experiencing a global oil glut and the world’s major oil exporters, especially the Saudis and the Russians, are fighting for the top prize of the Chinese oil market share. This allows the Chinese to purchase oil from a diverse group of oil suppliers and reduce their risk of any major interruptions to their oil import supply. In fact, China has “already hedged significantly against a potential oil shock through stockpiling and diversifying its import sources” (Daojiong and Meidan 9). The importance of being the top importer of oil to the world’s largest import market is essential to Saudi Arabia and recently both the Saudi King, Salman bin Abdulaziz Al Saud, and Deputy Crown Prince, Mohammad bin Salman, have made official visits to China to signify the importance of the Saudi-Chinese relationship. Through King Salman’s visit to China, “Saudi Arabia is promoting itself as a better, richer, and more reliable partner for China than its regional rival – Iran” (Seznec).
It is also worth noting that continued Chinese economic growth is extremely important to Saudi Arabia, and not only because of the corresponding increase in the purchase of Saudi oil. Because China constitutes such a large portion of the world oil demand, its oil consumption can heavily influence the price of oil, which greatly impacts the Saudi economy. The oil sector accounts for 90 percent of Saudi exports, 80 percent of its government revenues and 40 percent of its GDP, making the price per barrel of oil a primary concern of the House of Saud (Nazer). A decline in economic growth in China, and the associated decline in oil consumption, would bring down global oil demand and the price of oil, which would negatively impact the fiscal stability of Saudi Arabia. As has been described above, Saudi Arabia and China are natural partners because of their energy production and consumption capabilities and, as a result, both countries should seek to further strengthen their energy and economic ties.
The energy relationship between Saudi Arabia and China has important geo-political and security implications, especially for the Middle East. As oil flows from Saudi Arabia to China increase, the importance of maintaining secure transit routes from the Persian Gulf to China will also increase. The United States, as the world’s hegemonic power since the end of World War II, has been the guarantor of security for oceanic flows of trade, including oil. The United States has also played the primary role of attempting to establish a secure Middle East, although it has obviously been less than successful in some instances in this regard. China’s ascendency as a major world power and its dependence on oil imports, especially from the Middle East, has started to cause a shift in its previous non-interventionist foreign policy approach. In light of the United States’ increased domestic oil production capabilities, “China is no longer willing to sit on the sidelines and watch the region descend into chaos. China has for several months harbored a suspicion that the United States, entering an election year while drowning in domestic oil and gas supply, is not as interested in the Middle East as it has been for the past half century” (Luft). Furthermore, China’s dependence on imported oil is expected to grow from 54 percent of its oil consumption in 2014 to 76 percent of its oil consumption in 2035, which will increase its interest in maintaining security in oceanic transit routes and in promoting stability in strategically important regions of the world, such as the Middle East (“Country and Regional Insights – China”).
China, as the world’s largest importer of oil, will be the country most impacted by any significant increases in global oil prices. One potential scenario that could result in a significant increase in oil prices would be a major confrontation between regional powers Saudi Arabia and Iran, which is giving China an impetus to direct its efforts to reducing tensions in the region. As a result of the United States’ longtime alliance with Saudi Arabia and Russia’s growing alliance with Iran and increasing activities in Syria, neither of these global powers is perceived as a neutral mediator with regard to Sunni-Shiite tensions in the Middle East. China is in the unique position of having a significant interest in Middle East peace and security, while at the same time being viewed as an honest power broker in the region. Furthermore, “China can use the One Belt One Road initiative as a tension-reduction mechanism, promoting projects that create shared Sunni-Shiite economic interests like the Iran-Pakistan gas pipeline, the port of Gwadar on the coast of the Arabian Sea, and a Silk Road high speed railway connecting Xinjiang and Tehran via the Sunni Muslims countries of Central Asia — Kazakhstan, Uzbekistan, and Turkmenistan” (“Country and Regional Insights – China”).
Saudi Arabia has also started to understand the geo-political importance of its energy and diplomatic relations with China. Increased efforts by the Saudis to bolster economic, diplomatic and energy ties with China and other powerful Asian nations “appears to be less a pivot away from the U.S., and more a widening of relationships with these important powers to counter and contain Iran” (Seznec). Currently, China is able to court both Saudi Arabia and Iran through the purchase of large amounts of oil from both nations; however, should tensions escalate beyond their current state, China may be forced to choose which side of the Middle Eastern sectarian schism it most benefits from supporting. As a result, both Saudi Arabia and Iran view their ability to increase their oil exports to China as not just an economic benefit, but also essential to their position of power in the Middle East.
Renewable Energy Sources
The development of renewable energy sources is an important issue for Saudi Arabia and China, and this development will affect their energy relationship. China is coming under increasing domestic pressure to address the issue of pollution and, as a result, it is vital that the country shift away from its dependence on coal and develop its renewable energy sector. China recently announced that it will invest $360 billion in renewable energy sources, which will “create more than 13 million jobs in the renewable energy sector by 2020, curb the growth of greenhouse gasses that contribute to global warming and reduce the amount of soot that, in recent days, has blanketed Beijing and other Chinese cities” (Forsythe). While it may appear that this type of investment may threaten Saudi oil imports, this is not the case, as renewable energy sources are geared primarily towards domestic power generation, with the aim of cutting high carbon emitting coal, rather than at the transportation and other oil heavy sectors in China. Through this large investment, China aims to increase the percentage of its domestic power mix from 18 to 27 percent renewables, with the ultimate goal of achieving 80 percent of its power being generated by renewables in 2050 (Taylor).
For Saudi Arabia, the development of solar, wind and nuclear energy will play a vital role in diversifying its domestic energy consumption mix and stopping its use of oil as a major source for its domestic electricity demand. Saudi Arabia has the twentieth largest economy in the world, yet it is the fifth largest consumer of oil (El Gamal, et. al.). Currently, Saudi Arabia burns a quarter of the oil it produces through domestic consumption and this consumption is growing at a rate of seven percent per year, which, if trends continue on this path, would make Saudi Arabia a net oil importer by the year 2038 (Ball). This is obviously an unsustainable model and one that threatens the very existence of the House of Saud. Building on the Saudi-China oil relationship, China could be a valuable partner to the Saudis with regard to expanding the Kingdom’s solar capacity, since, “[s]olar-energy prices have fallen by about 80 percent in the past few years, due to a rapid increase in the number of Chinese factories cranking out inexpensive solar panels, more-efficient solar technology, and mounting interest by large investors in bankrolling solar projects” (Ball).
Saudi Arabia should take advantage of the Chinese capability to produce low-cost solar energy by allowing Chinese and Saudi companies to jointly construct much needed solar power infrastructure in Saudi Arabia, which could even be done on an exchange for oil basis and thus further integrate the two countries’ energy sectors. Furthermore, such an investment may be extremely appealing to the Chinese because not only would they be able to reap the benefits of investing in solar power, but this would also free up additional Saudi oil to be placed on the global market, which could bring down the cost of oil. This would be appealing to the world’s largest importer of oil and could spark additional growth in the Chinese economy. From the Saudi perspective, reducing its domestic oil consumption is important because it will enhance their oil export capacity. Saudi flexibility in oil export capabilities will allow the country to have greater influence over global oil prices and in turn exercise greater geo-political power on the world stage. In this way, Saudi Arabia is “investing in solar energy as a way to remain a global oil power” (Ball).
One Belt One Road and Saudi Vision 2030
Both China and Saudi Arabia have established ambitious long-term plans to promote economic growth. China’s One Belt One Road initiative is an “effort to connect the landmass and surrounding waterways stretching from China to the heart of Europe in a network of trade and transportation corridors [which] is crucial to China’s efforts to stimulate Asian economic growth and create new markets for Chinese goods and services” (Luft). While the One Belt One Road initiative does not have direct implications for the Saudi Arabia and China energy relationship, it will nonetheless impact it. If China’s initiative is successful, it could result in significant economic growth for China, as well as other Asian, Middle Eastern and European countries. This increased growth would be accompanied by an increased energy demand, some of which would be satisfied by oil. Saudi Arabia should support China’s One Belt One Road initiative and attempt to capitalize on any resulting growth in the global oil demand. However, the initiative does present certain problems for the Saudis. The One Belt One Road Initiative aims to increase transnational trade in Central Asia, including between China and Iran through a rail connection between China and Tehran (Farchy). Saudi Arabia must be cognizant of the growing trade relations between China and Iran and take measures to ensure that this relationship does not become more important than the energy and economic relationship between itself and China.
Saudi Arabia has also established its own forward looking national plan in Saudi Vision 2030. Saudi Vision 2030 sets out a number of economic and social goals for Saudi Arabia to achieve and one of the main overarching goals is to create a more vibrant and diverse Saudi economy by increasing the percentage of its GDP coming for the non-oil sector from 16 percent to 50 percent (“Saudi Vision 2030” 61). Additionally, the plan seeks to exploit “Saudi Arabia’s key strategic location to turn the country into a global trade hub connecting the three continents of Asia, Europe and Africa” “Saudi Arabia’s Vision 2030, Oil Policy” 2). China and Saudi Arabia should explore the potential for collaboration that can help benefit both the One Belt One Road initiative and Saudi Vision 2030, as they both seek to establish trade networks connecting Asia, the Middle East and Europe. Saudi Vision 2030 also aims to promote further downstream oil investment by Saudi Aramco in a variety of markets, especially the growing Chinese market (“Saudi Arabia’s Vision 2030, Oil Policy” 10). These investments have the potential to benefit both Saudi Arabia and China and to further strengthen their energy and economic relationship. Given the dominant positions of Saudi Arabia as a leading global oil exporter and China as the world’s leading oil importer “[i]t is not surprising that the two countries are interested in deepening their cooperation with each other under the ‘One Belt, One Road’ strategic outline put forward by Chinese President Xi Jinping and the ‘Vision 2030’ program put forward by Prince Salman” (Jin).
Potential Technological Disruptions
The global energy landscape and the Saudi-Chinese energy relationship have the potential to be transformed should certain technological advancements in the energy sector occur. These technological disruptions are difficult to predict, but two possibilities include a substantial development and investment in the electric vehicle infrastructure in China and technological advancements in the transmission of energy sources. China has indicated that it is seeking to expand the use of electric vehicles and it has a plan to add 1,200 charging stations and 4.8 million charging poles for electric vehicles by 2020 (“China’s 13th Five-Year Plan” 11). If this type of investment in electric vehicle infrastructure is realized, it will have a significant impact on Chinese oil demand. However, the electric vehicle sector in China still faces significant difficulties because “battery technology remains relatively weak and the driving range, despite significant improvements, was at around 150km in 2014 while charging times ranged from 6-8 hours” (“China’s 13th Five-Year Plan” 11). If China is able to make significant strides in its electric vehicle sector it will be crucial in helping address the pollution problem in the country and it will also have a large impact on the country’s oil demand and the Saudi-Chinese energy relationship.
Another potential technological disruption that could alter China’s growing demand for imported oil would be wireless power transmission, which “is a process that occurs in a system, where power source transmits electromagnetic energy to electric load with no wires” (“Wireless Power Transmission”). Numerous companies are attempting to develop this type of technology and the implications for its use could be endless. If wireless power transmission is developed in a way that would permit the transmission of power over long distances, any energy source, including renewable energy sources, could be transferred to meet energy demands in various regions. Thus, solar power developed in the deserts of Saudi Arabia could be transferred easily to Riyadh to meet the growing electricity demand or hydropower harnessed in the south of China could be transmitted to coastal cities in the east of the country. Predicting how technological disruptions will change the energy landscape is impossible; however, both Saudi Arabia and China need to allow themselves the flexibility to respond to such developments. This can be done most effectively through diversifying their energy sources and reducing their potential exposure to wasted investments or stranded assets in the energy sector.
The relationship between Saudi Arabia and China is becoming an increasingly important one with global implications in terms of energy and geo-politics. Allies and adversaries of these countries, such as the United States and Iran, should closely monitor the Sino-Saudi relationship as it has important implications for their own energy and foreign policies. Saudi Arabia and China have recognized the importance of this relationship and are seeking to further integrate their countries through energy and economic ties, which will be beneficial to both countries. Renewable energy will increasingly become an important part of the energy mix in Saudi Arabia and even more so in China, but for the foreseeable future oil will still be the dominant energy source for many sectors. Both Saudi Arabia and China, as well as all other major energy producing or consuming countries, should be cognizant of potential technological disruptions in the energy sector and take measures to reduce their potential exposure to risk as a result of these technological advancements.
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