Guest Column
China, India, and the Slippery Business of Oil
By Rollie Lal
China and India’s rapid economic growth in the past few decades has been fueled (pun intended) by rising levels of energy consumption, and the global implications of these heavy-weights as players in the oil market cannot be underestimated. If growth slows in these two behemoths, the result would be a glut of crude oil and a drop in global prices. Conversely, if growth accelerates beyond what is expected, or richer Chinese and Indians consume more oil than anticipated, the world will find itself in an oil crunch, with prices rising rapidly.
In either scenario, oil suppliers in the Middle East, Russia, and elsewhere are finding their destinies tightly intertwined with the energy paths of these two countries. Furthermore, the question of where China and India decides to purchase oil from - Saudi Arabia, Iran, or Russia - carries weight beyond simple monetary considerations. These choices are ways in which China and India can exhibit their blessing or curse.
China is now the world’s biggest importer of crude oil, taking in 8.4 million barrels per day (bpd), a role that gives it considerable clout in the international economy. And in a fascinating turn of events, Russia is China’s largest single supplier, providing 15% of China’s oil. As such, China has been able to avoid dependency upon US ally Saudi Arabia, threatening to pull back oil imports from the Kingdom when faced with rising prices.
In the meanwhile India has leapt to become the world’s third largest importer, receiving 4.9 million bpd, just behind China and the US (7.9 million bpd). And while US oil consumption has stagnated, China and India have continued their rapid pace of consumption growth, with India at 4.2% and China at 5.7%. Both countries together provided two thirds of global oil demand growth last year, making them the critical players in determining prices in the crude oil market going forward.
China’s growth in energy demand is so great that even its shift from fossil fuels to electric has not had the positive impact on the environment that many anticipated. China’s move towards electric buses and vehicles, while reducing petroleum-based fuel emissions from passenger cars, increases the load on the electricity grid. However, approximately 66% of electricity generation in China comes from coal, hardly a clean fuel. In fact, China remains the largest producer and consumer of coal in the world, with coal the source of 71% of China’s carbon emissions.[i]
India and China are the top two destinations for Iran’s oil exports, and as such they play a critical role in Tehran’s strategy to counter US oil sanctions. Between January to June of 2018, India was importing approximately 600,000-700,000 barrels per day from Iran, and China approximately 718,000 bpd. According to an Iranian analyst, as long as China continues to buy Iranian oil, the country would be able to resist the US.[ii] Iran’s total oil exports in May of 2018 were 2.7 million bpd, indicating the immense importance of oil sales to China and India.
In contrast, Indian companies are negotiating under the threat of sanctions against Iran by President Trump. In July, Hindustan Petroleum cancelled a crude shipment from Iran because it could no longer insure the cargo in the face of US sanctions, and Indian refiners are trying to avoid being cut off from the US financial system. India has been working hard in recent years to buttress its relationship with the US, under both the Obama and Trump administrations. New Delhi is in a bind in that it has a strong desire to expand oil trade with Iran in the face of India’s burgeoning demand, yet it is hesitant to put a crimp in its growing relations with the US. Nonetheless, India’s need for Iranian oil would mean that it is unlikely to cut imports to zero, and some analysts estimate that India may only halve its imports from Iran.[iii]
China’s situation is more complex. Because its own oil production is limited, in the coming years, the Chinese government accepts that it must depend increasingly upon imports and stability in the price of imported oil. As a result, in its current trade war with the US, Beijing has been less willing to back down in the face of Washington’s demands. As each country continues to slap billions of dollars of sanctions on each other’s goods, China has stated that it will ignore US sanctions on Iran. The Chinese government has argued that its trade with Iran does not violate any UN Security Council resolutions, and therefore, is protected. China’s stance on the Iran sanctions supports the continuation of the 2015 Iran nuclear deal, and as such the EU agrees with the Chinese position.
Certainly, China and India together have an inordinate influence on the oil trade and the global alliances and disputes that are created by this trade. The most recent events with regard to Iran indicate that China alone can undermine US policy maneuvers, and together with India they can create a policy conundrum for the US.
Adding intrigue is the role of Russia. The US has imposed sanctions on Russia, effectively pushing Russia and China towards closer cooperation. As China’s largest oil supplier, Russia may be looking to expand its exports further given the opportunity of reduced US oil exports. This would isolate the US and reduce its policy options even further.
Lastly, the influence of China and India on global climate goals cannot be ignored. Whereas most countries are aiming to reduce reliance on high carbon emission fuels, 2017 saw the power sector sucking up the same share of coal for power generation as in 1998.
[iv]
China and India lead the pack in expanding power generation, and as a result, carbon emissions are not likely to see improvement in the near future. A ray of hope remains that as such massive consumers, if China and India decide to move decisively towards solar, wind and geothermal energy, the world will need to move with them.
Rollie Lal is a Visiting Associate Professor at the Elliott School of International Affairs where she teaches graduate courses on Transnational Threats and International Political Economy.
[i] CSIS, “How is China’s Energy Footprint Changing?” https://chinapower.csis.org/energy-footprint/
[ii] Anjli Raval and Najmeh Bozorgmehr, “Iran Eyes Asia Buyers to Protect Oil Exports from US Sanctions,” Financial Times, 15 July 2018. https://www.ft.com/content/e54129b4-85cc-11e8-96dd-fa565ec55929
[iii] Julian Lee, “Iran Oil Sanctions Will Hurt More than You Think,” Bloomberg, 12 August 2018, https://www.bloomberg.com/view/articles/2018-08-12/trump-s-iran-oil-sanctions-will-hurt-more-than-you-think
[iv] BP Statistical Review of World Energy, June 2018, British Petroleum, https://www.bp.com/content/dam/bp/en/corporate/pdf/energy-economics/statistical-review/bp-stats-review-2018-full-report.pdf
The views expressed in the article are solely those of the author and do not necessarily reflect the position or policy of the Lee Kuan Yew School of Public Policy or the National University of Singapore.
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Compiled and sent to you by Centre on Asia and Globalisation and the Lee Kuan Yew School of Public Policy, National University of Singapore.
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