China has become the world’s largest oil importer, and despite establishing the largely successful yuan-denominated oil futures, Beijing will have to grapple with an overlooked geopolitical and economic consequence as it seeks to quench its thirst for oil and gas.
As China relies more on both foreign crude oil imports and imported gas in the form of LNG and piped gas from neighboring countries, the outflow of petro-dollars or in this case petro-yuan will see the country contend with the decades-long dilemma that the U.S. faced; a massive transfer of capital to foreign oil producers.
Worse yet, for the U.S. at the time of its foreign oil import dependence, the transfer of funds was often to less-than-friendly Middle Eastern oil producers, including Saudi Arabia who in the 1970s and 80s could arguably have been called a quasi-friend or at least an ally of convenience. The U.S. needed Saudi oil as American oil production continued to decline while U.S. oil consumption spiked to unprecedented levels. For their part, the Saudis needed, and still do, the U.S. Navy’s 5th to keep open vital shipping lanes including the world’s most important maritime chokepoint, the Strait of Hormuz, to allow the export of massive cargoes of crude to foreign markets.
China’s insatiable oil thirst
China surpassed the U.S. in annual gross crude oil imports in 2017 by importing 8.4 million barrels per day bpd compared with 7.9 million bpd of U.S. crude oil imports. China had become the world’s largest net importer (imports less exports) of total petroleum and other liquid fuels in 2013. New refinery capacity and strategic inventory stockpiling, combined with declining domestic production, were the major factors contributing to its recent increase in imports.
In 2017, an average 56 percent of China’s crude oil imports came from OPEC producing members. This declined from a peak of 67 percent in 2012, while Russia and Brazil increased their market share of Chinese imports more than any other country, from nine to 14 percent and from two to five percent respectively.
Moreover, imports from Russia, which passed Saudi Arabia as China’s largest source of foreign crude oil in 2016, totaled 1.2 million bpd last year, while Saudi Arabia accounted for 1.0 million bpd. OPEC countries, and some non-OPEC countries, including Russia, agreed to reduce crude oil production through the end of 2018, which allowed other countries to capture Chinese market share in 2017.
Of course, in the past decade, U.S. overreliance on Saudi and OPEC oil has been offset in large part due to the wonders of the U.S. shale oil and gas boom that has seen Saudi oil imports to the States reduced recently to multi-decade lows, not seen since the 1980s.
The question now is: Will China find itself in the same foreign oil dependence quandary as the U.S. did from the early 1970s until the past decade? All signs indicate that the answer to this question is a resounding yes.
The sheer size of China’s economy, its prolonged run of economic growth, its massive population and its own oil and gas production problems create a scenario that will not only make Beijing more reliant on oil from unstable or geopolitically volatile regions, including Iran, Nigeria, Saudi Arabia, and other OPEC producers, but also from Russia, particularly pipeline oil and gas imports from that country.