Time and time again, headlines surrounding various points of tension between the United States and the Organization of Petroleum Exporting Countries (OPEC) pop up, with experts fervently commenting on one aspect or another of this equation but oftentimes ignoring the elephant in the room: the fact that at this point in time and most likely beyond, it’s not the United States but China that represents the world’s number one importer of oil.
Yes, it is true that the US still consumes more oil than China but it also produces more and is therefore able to secure a greater percentage of its requirements domestically than China, with the end result being represented by the fact that in 2020 and beyond, the United States will most likely import less oil than China.
Moving on with this (important) line of thought, it is worth noting that OPEC members account for almost half of the worldwide oil production and over 80% of the world’s proven oil reserves. To put it differently, the more oil a country imports, the more proverbial skin in the game it has with respect to OPEC issues and as such, a valid case could be made that the OPEC equation is more important for China than the US.
As a bit of an intro, there are currently 13 OPEC members (in alphabetical order): Algeria, Angola, Equatorial Guinea, Gabon, Iran (founding member), Iraq (founding member), Kuwait (founding member), Libya, Nigeria, the Republic of Congo, Saudi Arabia (founding member), the United Arab Emirates and Venezuela (founding member). Prior to January of 2019, there were actually 14 members but Qatar ended up leaving on the first of January 2019 so as to focus on its edge, which is the production of natural gas (with Qatar representing the world’s #1 LNG exporter). Furthermore, Ecuador made a clear announcement that it left OPEC on the 1st of January 2020 but at this point in time, it is still included as a member state on the OPEC platform despite the month of January being behind us.
Why are a nation’s (China, the United States or any other country) relations with OPEC problematic?
For many reasons, for example the fact that OPEC is a cartel in every sense of the word, plain and simple, with member nations colluding so as to reach mutually beneficial anti-competition agreements. However, despite the fact that it represents the world’s largest cartel, OPEC tends to get a free pass in light of the state immunity under international law issue… this, however, doesn’t mean that trading partners are happy with the status quo, on the contrary, with for example (in)famous US Congress punitive action occasionally being in the spotlight but usually fizzling out.
Or the fact that, yes, OPEC members have extremely compelling financial reasons to act in quasi-unison but this doesn’t automatically mean that OPEC should be considered a homogeneous entity. On the contrary, with the fact that let’s say Iran and Iraq have been founding members despite their (many!) issues speaking for itself. To put it differently, expecting predictability as an OEPC trading partner in light of the fact that the geopolitical landscape can become tremendously volatile among member nations represents a significant disadvantage.
As explained on more than one occasion here on ChinaFund.com, China is an entity that puts pragmatism on a pedestal and as such, is less than thrilled about the fact that it ends up having to rely on oftentimes shaky trade-related frameworks. Of course, the same principle is valid for any other country, especially when it comes to key issues such as the energy sector, which should make it clear why energy independence represents a goal across the board.
As far as the United States is concerned, significant progress has been made in this respect, especially in the context of its domestic shale and gas revolution. Unfortunately for China, the same cannot be said about its oil production situation. Not because it doesn’t produce a more than impressive quantity but rather as a result of the fact that it consumes considerably more, with domestic production only accounting for roughly one-third of China’s needs.
It does go both ways, however.
China is indeed perhaps overly dependent on OPEC members but at the same time, especially in light of energy independence progress experienced by various nations such as the US, OPEC can also be considered too dependent on Chinese demand. As a recent example, the coronavirus situation made it clear that should a widespread calamity occur which results in the economy of China even temporarily slowing down, countries for which exporting to China represents a significant chunk of their revenue end up facing difficulties.
As such, thinkers on both sides of the fence are diligently working on solutions which tackle this less than sustainable situation. For the time being, however, it is abundantly clear to any observer who cares to notice that China being the world’s number one importer of oil is a status which comes with its own set of issues.
Therefore, it would in our opinion be wise to allocate even more energy (sic) and brainpower to the China – OPEC dimension than to the US – OPEC one moving forward in light of just how high the stakes are on the Chinese side of the fence. Should you and/or your organization be interested in digging deeper and require our assistance with the research dimension which enables you to do just that, the ChinaFund.com team is only a message away. For more information on our credentials, visit the About page of ChinaFund.com. To learn about what we might be able to do for you, the Consulting page is here to help and, finally, our Contact section enables you to get in touch with us by simply filling out a user-friendly form.