The ever-changing oil map

Although US dependence on foreign oil has been decreasing, accompanied by an increase in China’s dependence, this is unlikely to result in major geopolitical shifts in the Middle East.

al-monitor Organization of the Petroleum Exporting Countries (OPEC) Secretary-General Adullah al-Badri looks on during the presentation of OPEC's 2013 World Oil Outlook in Vienna, Nov. 7, 2013.  Photo by REUTERS/Leonhard Foeger.

Topics covered

us middle east policy, oil revenue, oil crisis, oil contracts, energy, china

Nov 18, 2013

Oct. 16, 2013, marked the anniversary of the day the Kingdom of Saudi Arabia and other Arab countries enforced an unprecedented oil embargo on the United States and the Netherlands and cut oil production by 5–10%, due to their support for Israel [during the 1973 war]. Oil prices doubled and OPEC [Organization of Petroleum Exporting Countries] demanded a new global economic system. Today, 40 years later, the global oil market will seemingly once again experience adverse steps entailing geostrategic consequences.

At the time [in 1973], US President Richard Nixon had called for achieving US oil independence and reducing the country’s dependence on foreign, imported oil, which accounted for 36% of [US] needs at the time. He wanted this done within seven years. Six Republican and Democrat administrations later, [the United States'] dependence on foreign oil peaked during the term of George W. Bush, reaching 65% of US needs. Market powers and some policies, however, led to the development of a new technology that has contributed during the past five years to the growth of domestic production. So-called shale oil managed to add 2.5 million barrels per day (b/d) to US production.

Not only does this development infer a decline in US dependence on foreign oil, especially from the Gulf region — despite the political and economic consequences that this could have — but it also indicates that the growth in US domestic production resulted from a new technology known as hydraulic fracturing. This technology enabled tapping new oil and gas sources that were previously stuck in rock. How much this technology will be able to continue to promote and spread oil supplies to outside the US is an unprecedented challenge for countries that produce oil and gas conventionally.

China following suit

Last month witnessed another remarkable development. The US Energy Information Administration (EIA), the statistical section in the Department of Energy in Washington, issued a report according to which September figures indicated that US foreign oil imports amounted to 6.24 million b/d [barrels per day], while China's share amounted to 6.3 million.

According to the International Energy Agency (IEA), this trend will continue throughout next year, paving the way for China to become the largest oil importer in the world. China, however, refuted the US figures putting it in this position. It quoted university energy researchers and referred to figures issued by the Chinese General Administration of Customs (GAC) indicating that Beijing’s crude oil imports in September 2013 amounted to 25.6 million. In the first nine months of 2013, China’s oil imports stood at 210 million tons compared to the 304 million tons imported by the US during the same period. The IEA added that given the gap of nearly 100 million tons, it was unlikely that China would overtake the US as the largest crude oil importer for 2013.

According to China, the increase in oil imports volume in September 2013 was due to improvement of the economic situation and growth in the automotive market, as well as urbanization and urban sprawl in general. The Chinese economy witnessed a 7.5% growth rate in the second quarter of 2013, compared to the 2.5% registered by the US, its runner up. Auto sales during that same month reached 16 million vehicles, a 12.7% increase compared to 2012 … China has supplanted the US as the world's largest auto market since 2009.

This Chinese defense stems from what seems to be a desire not to shed light on China's progress and its standing as the world’s largest oil importer, which has its ramifications, especially in terms of a strategic commodity like oil, linked to several difficulties in the Middle East, the world’s primary oil tank.

Indeed, China's [becoming] the largest oil importer in the world was merely a matter of time. In August 2013, the renowned Ireland-based energy consultancy Wood Mackenzie published a report predicting that Beijing would be ranked the largest importer of oil within four years. The report went on to say that China would be spending $500 billion on oil imports by 2020, which is more than the largest amount ever spent by Washington on oil imports, i.e., $335 billion. Wood Mackenzie forecasted that within seven years, Washington’s oil import bills would plummet to $160 billion due to growth in domestic production.

Wood Mackenzie added that Chinese oil imports would rise from 2.5 million b/d in 2005 to 9.2 million by 2020, while US imports will drop from 10.1 million b/d to 6.8 million during the same period. It is worth noting that, during that period, Washington will tend to concentrate its imports from sources in the Americas — such as Canada, Venezuela and Brazil — while China's reliance on Middle East and OPEC oil will increase.

According to researchers from the Brookings Institution in Washington, China imports more oil from the Middle East than any other region of the world. In 2011, China’s total Middle East oil imports reached 2.9 million b/d, i.e., 60% of China’s volume of oil imports. On the other hand, in the same year, the US imported 2.5 million b/d of oil from the Middle East, accounting for 25% of its volume of oil imports. In this respect, Saudi Arabia was China’s top crude oil supplier with oil imports of 1.1 million b/d.

Despite the decline in US imports of foreign oil, Washington will not be able to turn its back on the Gulf region for good in light of the oil market’s globalized nature. Oil self-sufficiency will not shield the US from the impacts of in oil price fluctuations, since any development would affect the barrel price or the selling price to consumers. Moreover, with around 17 ​​million barrels a day passing through the Strait of Hormuz, US preoccupation with the ongoing events in the [Middle East] region will remain more or less the same, in addition to other vital issues [in this region], like Israel, the fight against terrorism and maritime piracy, ... all of which require political attention and a militarily presence.

China and Iraq

The [United States’] close relationship with the Gulf countries is likely to witness a deterioration. A first indication of this, for instance, was the public dispute between Riyadh and Washington on issues related to the crisis in Syria and to Iran. On the other hand, China's increased reliance on the Gulf region might have cross-cutting implications.

It is first noted that Iraq has become the second largest oil supplier to China, which plans to import from Iraq 850,000 b/d next year, i.e., nearly one-third of Iraqi exports. This development is due to China’s huge investment in the Iraqi oil industry. For instance, PetroChina owns a 25% share in the West Qurna project, which was, paradoxically, purchased from the US giant ExxonMobil. The Chinese company also has a partnership with British Petroleum (BP) in the Rumaila oil field, the largest producing field in Iraq at present. The two companies have lifted daily production from 400,000 barrels to 1.4 million. PetroChina is also co-managing the Halfaya and al-Ahdab oil fields. All this has made it the largest foreign investor in Iraqi oil.

China’s strong participation in Iraq’s crude oil exploration and production, an activity Saudi Arabia forbids to foreign companies, is expected to elevate Iraqi-Chinese ties to a higher level, enhance Baghdad’s oil capabilities and, as production increases, probably result in demands that Saudi Arabia decrease its current daily production to 9–10 million barrels, since Saudi’s share expanded when Iraqi production was nonexistent in the past. In the event this happens and is accompanied by lower prices, there will be spillover for Gulf countries, which have been used to huge oil revenues in past years, as a result of their large production and rising oil prices. However, things may not reach this stage, given the ongoing unrest in a number of oil-producing countries, including Iraq, and the decline in their exports. This would reassure Saudi Arabia as a reliable source of supply.

The development of Chinese oil ties with Iraq is partially linked to the problems faced by its imports from Iran, because of the US boycott of Tehran (sanctions over its nuclear program), leading to its fall from third to sixth place among countries exporting oil to China. These imports decreased from 555,000 b/d in 2011 to 439,000 b/d last year and to 402,000 b/d in the first four months of this year. China also has not made significant progress in implementing its contracts in the Iranian Azadegan, South Pars and Yadavaran projects, which pushed Tehran to warn that it would cancel the contracts because of the lack of progress.

Two factors seem to be behind China's vigilance: first is supporting the stance of the West, which calls for halting Iran's nuclear program, as it falls within China’s call for a nuclear weapons–free Middle East and its policy of “reducing conflicts.” For this reason, it has always reiterated the need to keep the Strait of Hormuz open, in direct response to Iran’s threats to close it. The second reason is because US markets, with their huge financial capabilities, represent an area too vital to be ignored by Chinese companies, especially in mergers and acquisitions of operating companies. It is believed that, over the past three years, China has spent $8 billion in this field, in which it definitely hopes to pursue its activities.

The summary of the situation is that US dependence on foreign oil will be reduced, especially in the Middle East, at a time when Chinese dependence on the region’s oil is increasing. Is that going to be reflected in the security and defense obligations that Washington has committed itself to since Britain’s military withdrawal from the region in early 1970s? Is China expected to assume part of this burden, at least to protect its own vital interests? This does not seem likely any time soon, because the US has invested time and effort and established a defense system [for the region], which needs an alternative system to be replaced. It seems that Beijing is not ready for that, at least for the time being, as Beijing has asked that Washington continue to assume its responsibilities and that the … Obama administration not focus on Eastern Asia at the expense of America's defense commitments in the Gulf.

The above article was translated from As-Safir Al-Arabi, a special supplement of As-Safir newspaper whose content is provided through a joint venture of As-Safir and Al-Monitor.

Continue reading this article by registering at no cost and get unlimited access to:
  • Al-Monitor Archives
  • The Week in Review
  • Exclusive Events
  • Invitation-only Briefings

More from  Saed Ahmad