June 8th, 2016 Bridge Cafe (Wudaokou)
CUI Shoujun 崔守军, Associate Professor and Assistant Dean at the School of International Studies, Renmin University of China.
The global energy landscape has been undergoing rapid and radical change. Following the United States’ shale revolution, the economic slowdown of Asia’s energy-hungry powerhouses, and the worldwide political pledges made toward the achievement of ambitious environmental goals, the downward pressure on oil prices continues unabated.
Faced with a fossil fuel industry swamped by excess supply, China is building up its Strategic Petroleum Reserve in a bid to grow more resilient to potential disruptions. At the same time, the profound implications that the industry’s busts have brought upon the world’s largest oil exporters – from Russia, to Venezuela and Angola – are now leading China to continuously reshape its energy strategy across the Middle East, Subsaharan Africa, and Latin America.
Providing a complete assessment of China’s energy strategy, Renmin University’s Cui Shoujun touched upon issues of security of demand and supply, and the impact oil prices have on the long-term economic stability of the world’s largest fossil fuel producers and consumers. Overall, Cui challenged assumptions which view China’s “loan-for-oil” strategy as effective for Beijing’s sustained economic development, also questioning the forecasts of oil bears, who envision prices plummeting below $40 per barrel of crude – a scenario which would “bring the industry to its knees”, Cui noted.
Professor Cui’s initial considerations pertained to the current price of crude oil. At present, while Brent crude is traded at $47 per barrel, the price of WTI (NYMEX) crude is stable at around $45 per barrel. These prices have been in free-fall since September 2014, now becoming unsustainably low for countries where the production of one barrel of crude exceeds $35. Examples include Russia, Brazil, Canada, and the United States, where arctic oil production, offshore oil extraction, tar sands processing and shale oil production have become less profitable endeavors.
The same cannot be said for countries such as Saudi Arabia and Kuwait, where the production costs of Arab Light Crude have been consistently lower than $10. Yet, Professor Cui noted that the oil-rich kingdom of Saudi Arabia has already shown signs of dramatic economic distress. In May 2016, the foreign assets of the Saudi Arabian Monetary Agency (SAMA) reached a four-year low, declining to $572 billion. Meanwhile, Riyad’s fiscal break-even price per oil barrel dropped to $86 dollars (from $94.5 in 2015), as the kingdom adjusted to the slump in crude triggered by OPEC countries fighting for market shares.
How is China reacting to oil price slumps, then? Professor Cui noted that Beijing has taken advantage of the current state of the energy landscape to fill up its strategic and commercial oil reserves. In non-traditional security terms, China is currently seeking to enlarge its stockpile up to the levels of IEA members such as the United States, Germany, and Japan, with backup oil reserves worth 150 days. “Beijing has never bought more oil today in its history, while crude continues being traded below $50. Thus, no correlation exists between recent oil price spikes and China’s sustained energy demands”, Cui added.
With regards to its commercial reserves, Beijing started importing 6.2m crude oil barrels per day (bpd) in 2014 to sustain an overall daily consumption of 10.3m bpd. Out of these imported 6.2m bpd, 3m came from the Middle East and the Gulf, while 1m originated from Saudi Arabia. To further strengthen its ties to the region, in 2004 China initiated talks with the Gulf Cooperation Council (GCC) for the establishment of a free trade agreement, alongside setting up the China-Arab States Cooperation Forum (CASCF). Today, the Middle East is consistently featured as an area of heightened interest in policy papers describing the future of China’s One Belt One Road initiative (OBOR). To continue fostering its relationship with the region without over-relying on Gulf oil, Beijing has also gone at great lengths to establish partnerships with other oil producers. Yet, China’s oil supply diversification efforts do not appear to have been particularly successful.
Over the past few years, in fact, China has implemented “loan-for-oil” measures across Africa, Asia and Latin America, bringing Venezuela, Angola, and Kazakhstan at the heart of its most pressing interests. Due to falling oil prices, these countries now find themselves with dwindling amounts of oil to sell back to Beijing. According to an estimate by professor Cui, China has already sunk over $60 billion in the crumbling Venezuelan economy, and $40 billion is outstanding. A similar scenario concerns Angola, where the local government struggles with the repayment of roughly $25 billion of debt to China. In either country, cases of triple-digit annual inflation and shortages of food and medicine have left China with no choice other than maintaining great flexibility with its debtors, and hope for oil prices to rebound.
…With one caveat, however. According to Cui, here lies China’s greatest energy conundrum. While soaring oil prices would allow China’s greatest debtors to pay back their outstanding loans, these could at the same time create greater sources of tension across the Middle East. Drawing on Benjamin Smith’s work, professor Cui argued: “when oil prices are low, oil producers become the most stable”. Interregional disruptions would exacerbate also from downward trends in the prices of crude oil. Thus, what professor Cui most hopes for the future of China’s energy strategy is for the price of crude to be maintained, first and foremost, stable.
Addressing a question on the potential tensions that could spark between China and the United States along China’s maritime oil choke points, professor Cui recalled how the world’s greatest oil giants have placed great emphasis on the upcoming eighth session of the China-U.S. Strategic and Economic Dialogue, scheduled for June 2016. He also warned against focusing too heavily on China’s vested interests on said choke points, noting how the oil and gas imports of ROK and Japan, too, depend on the safety of navigation maintained along the straits of Hormuz and Malacca.
Further elaborating on how risky it is for China’s major state banks to denominate their loans to African countries in oil, iron, and ore, rather than in currency, professor Cui observed that said banks, albeit being momentarily concerned with swamping oil prices, are generally not worried with the consequences that could derive from having debt denominated in other mineral resources. The commodity prices for metals and minerals undergoes 7-to-8 year cycles. Any backdrop, therefore, is not only temporary, but expected and constantly monitored. Quoting IMF data on how the world’s eight fastest growing economies are from the African continent, Cui mentioned China’s confidence in the continuous growth of its long-standing diplomatic partner.
Last but not least, responding to another question on whether the Chinese government intends to release the untapped economic potential of Guyana (where 15 billion barrels of proven crude reserves have been discovered), professor Cui mentioned the policy decision making power of China’s three oil giants: Sinopec, CNPC, and CNOOC. The moment any of China’s giants will awaken and show interest in Guyana, the government will then take the necessary steps to further diversify its oil supplies throughout South America.
Written by Carlotta Clivio