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In the midst of the worst global recession in decades, oil producers in the Gulf are increasingly turning their attention to India and China – the still-growing economies in Asia – for the security of a steady and growing market. The two countries combined represent one-third of the global population.
Consequently, instead of holding China and India over a barrel, a practice they followed for years, oil-producing Gulf countries are now not only selling oil to both nations at cheaper prices, but are also expanding commercial and political ties with them.
Take for instance oil premiums – the extra charge that Asia pays over the official selling price that Gulf oil producers charge their U.S. and European customers. According to a recent Reuters report, the Asian oil premium that once ruled at a high of US$6 per barrel is currently down to US$1. In fact, during the last quarter of 2008, the premium dropped to a negative, which prompted analysts to speculate that it may be abolished forever.
As the Asia market was much smaller in the past compared to the developed Western markets, the premium was imposed decades ago to ensure a growing supply of oil to the resource-hungry economies of China and India in the past decade, and Japan and South Korea in the years prior to that. But the sliding Asian oil premium may just be the newest confirmation of an older trend.
“Over the past few years, the growing realization in the Gulf has been that the future of exports from the Gulf will not be so much to Japan or even to South Korea and other smaller Asian nations, but to China and India,” said Al Troner, managing director of Texas-based Asia Pacific Energy Consulting. “So there has been a growing pressure on Gulf oil exporters to make a choice on whether they want the highest profits or to retain their market share.”
Moreover, China and India are the only economies in the current recession where demand for oil is actually on the rise, say analysts.
“The room for expansion in China and India is still huge and Gulf oil producers understand that the growth engine is in Asia,” said Gal Luft, analyst and executive director of the U.S.-based Institute for the Analysis of Global Security. “This is why they – the Gulf oil producers – are increasingly interested in developing the (Chinese and Indian) markets and shifting some of the production exports from traditional buyers in Europe and North America to Asia.”
With little sign of economic recovery and few hopes of growth in demand in traditional Western oil markets, the Gulf is already worried about the future of oil prices. There is also fear over the recent U.S. policy to depend less on oil and shift to non-fossil fuels.
In a paper presented to the Organization of Arab Petroleum Exporting Countries on April 28, Ibrahim al-Muhanna, advisor to Saudi oil minister All Naimi, said, “It is obvious that the international oil market and the industry in general has entered a critical turning point and faces big challenges, some of them related to the sharp rise and subsequent fall in oil prices.”
Directly hitting at U.S. President Barack Obama’s recent pledge to reduce dependence on foreign, particularly Middle Eastern, oil, al-Muhanna wrote that there is a “return of a wave of hostility from some Western countries under the guise of energy security, protecting the environment and fighting global warming.”
“As a result of the economic crisis and policies called for by the Western states as far as lessening dependence on oil is concerned, demand for petroleum is not expected to grow at the same level as the last 10 years, when demand rose from 73 million barrels a day in 1997 to 86 million barrels a day in 2007,” he added.
While OAPEC forecasts that global oil demand in 2009 will see its biggest decline in 26 years, down 1.5 to 2 billion barrels per day, “emerging economies such as China, India and Brazil, which are still enjoying strong economic growth despite the crisis, are expected to see this continue, pulling their oil demand up at the same time,” said al-Muhanna.
Reports suggest that China’s current oil demand is 6.9 billion barrels a day. According to Platts, a leading global provider of energy and commodities information, the demand in the first quarter of 2009 slipped into the red for the first time since 2005, and could end up with 2 to 3 percent growth by the year’s end.
In contrast, India’s minister for petroleum and natural gas, Murli Deora, expects India’s current demand of 3.2 million barrels a day to grow 6 percent annually.
“Therefore, when Gulf oil producers sit down to strategize on which growth market they need to be addressing, China and India emerge at the top,” said Bill Farren-Price, an energy analyst at Medley Global Advisors.
According to Gal Luft, the gulf oil producers’ strategy to court China and India is two-pronged. “One is diplomatic, in which they are increasing diplomatic activities to high-level state visits that indicate that on the diplomatic level the Gulf states are interested in tightening their relations, particularly with China,” said Luft. “Secondly, there has been a marked increase in economic activities as well.”
For instance, according to statistics from Standard Chartered Bank, trade between the Middle East and Asia has been increasing by an average of around 30 percent a year, with Asia emerging as the six-nation Gulf Cooperation Council’s largest trading partner since 2006.
In the past few years, China and India have been sending to the Middle East almost everything from cars and computers to food. “Moreover, both India and China are actively cultivating their relationship with Iran, much to the dismay of the U.S.,” said Luft.
In return, the petro-dollar rich Gulf has been investing aggressively in Asia. Most notable is the US$5 billion Chinese refinery that Saudi Arabia’s oil company Aramco is building with China's oil company Sinopec and Exxon Mobil from the United States.
Another significant investment is Kuwait Petroleum Corporation’s Nghi Son refinery project in Vietnam. KPC is also wooing China, hoping to set up an oil refinery and petrochemical complex in southern Guangdong province. If the deal succeeds, the complex would be the largest Sino-Kuwaiti joint venture in China with an estimated outlay of US$9 billion.
“One big reason why Middle Eastern oil producers are keen to develop refining capacity is not just that there is considerable added value, but also because they can target the crude oil they have to markets (read China and India) that cannot use such oil,” said Christopher Segar, an analyst at the Middle East desk of the International Energy Agency.
Although both India and China have substantial capacities to process crude oil, the biggest drawback Gulf oil producers face in these two countries is that about 60 percent of that capacity is not capable of refining the Gulf’s high-sulphur, or “sour,” crude oil.
Nevertheless, with 60 percent of the world’s oil reserves, although the Gulf nations can dominate crude supply in the Asia-Pacific, competition is increasing in these two markets.
Two pipelines from Russia and Kazakhstan to China that are expected to be completed by the year 2012 and 2015 are already threatening to reduce some of China’s dependence on Gulf oil. Besides, “there is growing ambition from Venezuela, West Africa and even the U.S. and Brazil to trade crude into Asia,” says Troner.
India, being geographically closer to the Middle East and with fewer other sources to bank on compared to China, may be forced to depend on oil from the Gulf. Yet India’s aggressive pursuit of its own oil reserves and its penchant for natural gas may not be comforting news for Gulf oil producers either, say analysts.
China’s and India's thirst for oil is already shaping their international relations and the impact will not only “have pretty profound effects on Asia- Pacific, but also ultimately on world oil balances," said Troner.
