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Thursday, April 16, 2020
What Awaits China in the Upcoming Oil Geopolitics?
He Jun

The world is at a long battle with the Covid-19 pandemic, and while combating the disease and salvaging the economy remains the top two priorities for every country at the time being; it needs to be stressed that the pandemic has brought massive structural changes to a wide range of areas in the world, ranging from the global supply chain, geopolitics, culture and ideology to nations and ethnicity and so forth, all which are seeing widening gaps.

The international oil market, being an area that is highly susceptible to geopolitics, emergencies, and fluctuation in the economy, is a key area that has been affected too.

The recent focus in the oil market is this – Will international oil prices continue to decline if major oil-producing countries agree to lower their output by 9.7 million barrels a day? Judging by the oil market’s performance in the recent days, it looks like a production cut will do little to help the situation, especially since the cut is lesser than the market’s expected figure of 12 to 15 million barrels, meaning oil prices will continue to fall. On April 16 evening, once again, U.S. crude oil prices fell below US$ 20 / barrel, and Brent Crude at $ 28 / barrel. This allowed the global market to realize that production cuts were ineffective. Regarding the matter, a Goldman Sachs analyst commented the reduction is too little, too late. Going by ANBOUND’s previous estimates, the global oil production and output would have to be reduced to at least 20 million and 30 million barrels respectively per day for things to look up.

However, the international market does not approve of OPEC+'s production cut for a few reasons. The first being the changes happening in the supply and demand chain. The pandemic has drastically reduced global oil demands, and mere reduction in productions will do little to change things in the market. The market’s prediction is if the current impacts of the pandemic were to persist, it will be difficult for oil demands bounce back before fall. Secondly, certain major oil-producing countries are divided on the production cut and are unwilling to sign the deal. The United States in particular, being the world ’s largest oil producer, has not enforced a forced production cut. U.S. Secretary of Energy Dan Brouillette stated the country’s oil output would be reduced by nearly 2 million barrels during year end when in fact, it should be happening now.

International oil prices are at a crawl due to the implications of the pandemic and the competition between countries, namely Saudi Arabia, Russia and the United States. According to former chairman of Sinopec, Fu Chengyu’s analysis, neither Saudi Arabia nor Russia can bear low oil prices long-term, they know that the oil prices are determined by the pandemic though they are also aware that it falls on them to go great lengths to maintain the prices. Unfortunately, both Saudi Arabia and Russia have their own economic demands and political interests to look after too. To achieve their economic goals, both countries would have to put up with U.S.’ shale oil whilst separately pursuing their political goals. Saudi Arabia hopes to obtain the Royal House of Saud’s protection to ensure a smooth transition of Prince Mohammed bin Salman’s crowning while Russia wishes to exchange interests with the United States in Venezuela and Nord Stream 2 sanctions. Meanwhile, U.S. President Trump wants both Russia and Saudi Arabia to commit to the largest ever production cut agreement so as to protect American employment and save American shale oil companies.

The pandemic has enabled the three-way competition has to outline the basic structure of the current international oil market. For a country like China who happens to be the world's largest energy consumer, it would have to bear with latest changes in the market. Also, considering the changes are driven by geopolitical factors, the term "oil geopolitics” would be a fitting name.

How should China adapt to the new oil market driven by geopolitics? And how should it adjust its energy security strategy? These are no longer precautionary measures for China to consider, but an urgency that would determine the most basic of China's security ideas and response strategies. On a macro perspective, there may be some important points that require China’s attention:

One, China must up its game in controlling its oil and gas resources better and ensure safety of the international energy transportation channels. In the future when China becomes the world's largest consumer in energy and net importer of oil and gas resources long-term, it would need to meet its requirement of energy security within a global framework. With that context in mind, it is crucial that the country maintains “control” of its oil and gas resources, namely its investment, extraction, and transportation capabilities. It goes without saying that the United States is the only country dominating the transportation of global oil and gas resources currently. Put simply, China’s goal now is to have enough resources, harvest them, and transport it back to the country.

Two, China needs to increase the capacity in its oil and gas reserve resources. Establishing one’s own oil and gas reserve resources is a key strategy to ensuring a country’s short-term energy security. Thus, China should act quickly and strengthen its oil and gas reserves, including strategic reserve, commercial reserve etc., and form a strategic oil reserve model similar to that of the United States soonest. That way, it will not only ensure the country's oil and gas safety for a period but guarantee market regulation ability too.

Three, energy self-sufficiency needs to be made a long-term goal for China. Energy security under globalization is different from that of energy security under “inverse globalization”. Ultimately, China can only ensure its energy security by increasing its rate of energy self-sufficiency. Fu Chengyu once suggested that China has to make up its mind to achieve basic energy self-sufficiency in 10 years or so - that is, more than 70% of the energy should resolve itself by then as the majority of increase will come from new energy and renewable energy, which will carry great strategic significance for China in the future.

Final analysis conclusion:

In the future, China's energy security issues will unfold under a completely different background of “inverse globalization”. Faced with the complexities from oil geopolitics, China will need timely management and adjustments to handle its energy resource supply, reserves, and demand management to ensure its future energy security.

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