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China-GCC Free Trade Agreement? 22, September 2009

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chian gcc

China’s integration into Middle East’s markets continues apace. Plans have been announced to form a free-trade zone between the GCC and China. According to Qatar’s daily newspaper, The Peninsula, the first round of talks were held in Riyadh and were successful.

Key to the GCC’s thoughts are the removal of custom tariffs. As for China, they will welcome any kind of increased or deepened relationship with the GCC. China’s thirst for energy is increasing at seemingly inexorable rates whilst their domestic supplies are in their twilight years. The confluence of these factors (discussed here) rightly has the Chinese leadership searching for better links with oil producing areas of the world to bolster their energy security (discussed here). Indeed, it is thought that China’s so-called ‘string of pearls’ – naval bases strung around the Indian Ocean including a key one in Gwadar in Pakistan right at the Straits of Hormuz – are aimed first and foremost at guarding the life-line of oil and gas from the GCC to their mainland (more here and here).

However, not all of China’s best made plans are coming to fruition. Ben Simpfendorfer’s excellent New Silk Road blog mentions two setbacks recently for the red state.

Libya has rejected a $417 million bid by China National Petroleum Company (CNPC) for Verenex, a Canadian oil-exploration company with Libyan oil leases. Libya’s national company has since purchased Verenex at 30% less than CNPC’s offer price. I’m [sic] not sure if Libya’s response was specific to China itself, or a de-facto attempt to nationalize some of its oil assets. But the response is interesting given that Libya, alongside Algeria, is one of few countries in the Middle East to receive large numbers of Chinese workers. In fact, I heard from a Libyan central bank official in June that 6,000 Chinese workers had applied for visas in the previous month alone. And I wouldn’t be surprised if this has caused some friction.

Iraq may blacklist China’s Sinopec for its purchase of the Geneva-based oil-exploration company Addax, which owns several licenses directly issued by the Kurdish Regional Government. The licenses are in breach of an Iraqi law requiring all oil deals are made in Baghdad.

Russia’s contribution to solving Sudan’s problems 25, November 2008

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MIG 29

Russia has agreed to sell 12 MIG-29s to Sudan in a bid to help them overcome the multiple and chronic humanitarian issues they are facing. It is not clear, however, exactly how these supersonic fighter-jets can help out with the near-famine or with the building of new schools or hospitals or villages or houses or with the resettlement of the 2,000,000 people who have been forced to flee since the start of the conflict in 2003.

A corollary of this agreement is that – and i want to make it clear that i am casting no aspersions as to Russia’s motives here – Russia will now (coincidentally) have better access to Sudan’s oil industry. And speaking of large sums of money, whilst some may say that the untold millions of dollars that the Sudanese government spent on these exceedingly useful jets could have been better spent on medicine or food or shelter or something ‘practical’ like that, Russia, no doubt, thought long and hard about this, listened to their conscience and – as ever – came up with (what some people might refer to as) the most morally reprehensible course of action.

The oil roller coaster continues 28, October 2008

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It is a joy to see (from a Western perspective) the price of oil falling through the floor. The FT reported recently that US consumers had been spending up to 4% of their income on fuel – around $440 billion. However, now that oil prices have fallen to roughly half of what they were but a few months ago, you don’t need to be a financial wizard to see that savings in the region of $200 billion are in the offing.

On the other side of this there are the oil producers. Smug as well as inordinately and unexpectedly rich for so long off the back of soaring prices, it is hard not to feel sizable waves of schadenfreude crashing down on their disconsolate leaders. The picture is, however, by no means universal. The surprisingly prudent Saudis apparently predicated their budgetary plans on the price of oil at around $50 per barrel. This, coupled with incredible levels of liquidity, means that the Saudis will not suffer greatly from this decrease, barring any unexpected crashes. The less conservative Venezuela and Iran, however, bet that oil would remain somewhere around $95. This, therefore, leaves an impressive hole in the midst of their financial plans. Russia too, according to the same FT article, could be in for a rough ride, after expecting prices of $70 per barrel.


The evils of ‘big oil’ 23, October 2008

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The Tyranny of Oil” is a new book ranting and raving about the evils of oil companies. I have only read the introduction which was – rather unsurprisingly – averagely written and generally far too excitedly angry. I agree that oil companies are not exactly warm, kind-hearted companies but I think that hatchet-job books like this, with their desperately simple and emotive language and eye-catching covers of fire and brimstone, are just not helpful. They may well be wholly right (which i sincerely doubt) but the very manner of their writing to me just screams “one sided”, and there are always two sides to every story, however apparently cut and dried. Nevertheless there are a few interesting or at least surprising facts. Obviously, these snippets are all to do with the incarnation of evil that are the oil companies, but – assuming that they are correct – they do paint a stark picture of the industry.

– There have been 2600 mergers in the oil industry since 1991. This, therefore, brings words such a monopoly, oligopoly and cartel to mind.

– “Were the five largest oil companies operating in the United States one country instead of five corporations, their combined crude oil holdings would today rank within the top 10 of the world’s largest oil-rich nations.” Its always interesting – though beyond pointless – to note figures like these.

– “Six of the ten largest corporations in the world are oil companies. They are, in order, ExxonMobil, Royal Dutch Shell (Shell), BP, Chevron, ConocoPhillips, and Total. (The others are Wal-Mart, General Motors, Toyota Motor, and Daimler-Chrysler.)”

– “From 1998 to 2006, ExxonMobil alone spent more than $80 million lobbying the federal government, over 14 times more money than it spent on political campaigns.” One can imagine whole chapters raging against the companies premised on figures like these.

And the best statistic of all:

– The 10 largest oil companies in the world made over $167 billion of pure, clear, brilliant profit in 2006. That’s a lot of cash.

China’s demand for oil: a tale of three graphs 15, October 2008

Posted by thegulfblog.com in China.
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We all know that a picture can tell a thousand words, but how about a graph? For my money, I’d suggest that they can tell rather a lot too. And, to keep the slightly confused mixed-topic-analogies going, one mustn’t forget that there are lies, damned lies, and graphs.

Consider the following graph from this excellent website.

This clearly shows that China’s production of crude oil is rising steeply. This is no doubt a good thing (though not necessarily for the planet). Everyone knows that China’s demand for energy is rising and seemingly insatiable. So if they can produce such an amount (and such a large increase) of oil, this leaves more for the rest of us. This would mean that there would be marginally less demand on, for example, Middle Eastern oil, and this can but only help the price stay one or two cents lower.

However, consider the following graph. This is taken from the same site and shows China’s predicted oil reserves. The rising red line to the orange vertical line is the actual known production. The line on the other side is the predicted curve using the Hubbert curve. This is a formula used for predicting when oil will run out. It suggests that the rate that a country can find and produce oil (how steep the initial curve is) will be mirrored in terms of its downturn after the peak has been reached. The author of this thesis – King Hubbert – was initially ridiculed for this thesis, but was proved eerily correct when he correctly predicted – decades before the event – that American oil supplies would peak and begin to fall in the 1970s.

This graph, obviously, is not as positive. Moreover, it is rather pessimistic. Just look at the predicted precipitous decline of production of barrels of oil, beginning in the next five to ten years. Such a steep decline means that China will inevitably dive into other sources of oil at quite a rate come 2020, according to the prediction. Obviously, China realise this to some degree and are currently scouring the world for oil as we speak, but this search will turn into something of a mad panic should the decrease be as steep as predicted. For it is one thing to plan for a future problem; it is another if and when the problem is immediate and rather larger than expected. Needless to say, such a massive leap in demand would cause an equally large rise in the price of oil.

And the situation gets worse. Look at the following small graph.

The vast Chinese demand for oil can clearly be seen here and there are few indicators suggesting that this demand will slow that much. Certainly it will not drop or even markedly drop off. Therefore, couple this large increase with the previous graph and there is a worrying conflagration of factors that bode ill for oil supplies and in particular the oil price in the near future.

These graphs show that all angles of a problem must be examined before a conclusion is made. If one were only to see first graph, the prognosis might be significantly rosier than it perhaps ought to be. One can only hope that either Hubbert’s equation is wrong this time or I’ve simply missed out a crucial graph or three.

Oil Price Graph 9, October 2008

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Here is a simple but effective graph of oil prices over the last sixty years or so.

A Chinese military base in Iran? 28, January 2008

Posted by thegulfblog.com in China, China and the ME, Iran, Oil, Western-Muslim Relations.
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After France’s move to secure a military base in the UAE looking out at the Straits of Hormuz last week, it is no surprise that the Iranians are feeling yet more hemmed it. Kaveh L Afrasiabi , an Iranian expert has suggested that it might not be too long before Iran seek a Chinese base on Iranian soil to compensate and reinforce their security. This is, without doubt, a premature forecast. However, the logic at the heart of the argument is sound.

China’s ever expanding need for importing fossil fuels is well known. Indeed, in the coming years, China will be – from their perspective – worryingly dependent on shipments from both sides of the Persian Gulf. They have tried to compensate for this in many ways. For example, recently China has been exploring the potential of overland pipes from various Central Asian countries through to the west of China. However, no matter how optimistic projections are about such a project, the lion’s share of fuel would still need to be shipped from Iran and the Gulf countries through the Straits of Hormuz to China. Bearing this in mind, there seems to be no way that China, in the long run, would simply accept American stewardship of a sea passage so crucial to Chinese interests. At the moment, the Chinese have a naval base in Gawdar, Pakistan (just around the corner), from which they have limited power projection to the Straits. However, compared to the massive American bases in Kuwait, Bahrain and Qatar, the Chinese base is far from adequate. The fact that the French have just announced that they will soon have a base in the region too is no deal breaker, but it certainly does not help ease China’s nerves, especially since the recent French-American rapprochement under Sarkozy.

As far as Iran are concerned, China are excellent trading partners. They have a guaranteed growing demand in the long term for their fossil fuels, they have the means to pay for it (in goods or cash), they have fairly sophisticated weaponry to sell to the Iranians, they have no (or at least, certainly fewer) compunctions about selling such weaponry or indeed nuclear related technology, they have a meticulous approach to never criticising other governments internal policies and as they are a member of the P5 on the UN Security Council, they have a casting and blocking vote there. They are, thus, very useful allies to have. Additionally, Iran are currently uncertain and not a little perturbed about American intentions regarding their nuclear activities. China too, whilst having good relations with the US right now, are by no means close to America. To choose just one example, the issue of Taiwan – deeply, deeply important to Beijing – is a divisive issue that reoccurs periodically between the two powers. Add to this the afore mentioned point about China not wanting America to be able to cut off their supplies so easily, and there is a definite dove-tailing of interests here: a Chinese base in Iran doesn’t seem so far fetched all of a sudden.

However, China are a country with a long-term view of things and there are no pressing needs right now to do something as drastic as establish a base in Iran, especially with their moment in the sun – the Olympics – coming up. However, the West generally, and America specifically need to be wary about forcing China and Iran closer and closer together. Such a situation, with a worried and recalcitrant China sated for fossil fuels and with an emboldened Iran with access to sophisticated weaponry and even advanced nuclear technology, is not that much short of a nightmare scenario.

China and the Middle East – made for each other 27, January 2008

Posted by thegulfblog.com in China, China and the ME, Oil, Saudi Arabia, Western-Muslim Relations.
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Everyone wants a piece of the Middle East at the moment. Israel, unfortunately, takes this quite literally and seems intent on forever expanding its borders with uncomfortable overtones of lebensraum. American companies have, for the most part, been falling over themselves to find GCC cash to bail themselves out of their various woes. The list of those seeking investment is a veritable who’s-who’s of the American blue chip elite: Citigroup, General Electric, Dow Chemicals, and Merrill Lynch to name a few. The French seem to have placed, in a rather un-Gallic, highly capitalistic way, a price tag on their cultural heritage. For about $1 billion, you can now purchase priceless French art, plucked from the bosom of the most famous museum in the world, the Louvre. Furthermore, the French have also taken the name of their most prestigious university in vain by building ‘the Sorbonne Abu Dhabi’ with infinitely easier entry requirements. However, not only have the French been handsomely rewarded for the loan of their culture, but they now have a military base overlooking the straits of Hormuz, so maybe they knew what they were doing all along. Britain were predictably slow on the uptake and are now desperately searching for Middle Eastern cash to bail out the collapsing Northern Rock bank and moving further east, Dubai holdings have invested heavily in the Indian bank ICICI, as well as taking an estimated billion dollar stake in Sony of Japan.

Among those doing their utmost to make friends and influence states in the region are the Chinese. However, they are doing this in a less brash manner. Indeed, to some degree, they have been doing the opposite way by investing in the Middle East. For example, two Chinese state-owned companies are investing some $4 billion in Saudi aluminium production. This is but one half of an example of reciprocal investment between various Middle Eastern countries and China, and, more to the point, you’re going to be seeing a lot more of it.

China are the most natural trading partner for countries in this region. This may seem like something of a bizarre statement, but it stands up to scrutiny. As any good (or even only mediocre) economics student will tell you, two crucial factors when discussing trade are supply and demand.

In terms of supply, the Middle East has oil and money. According to the US Energy Information Administration, as of 1st January last year, the Middle East as a whole had 739 billion barrels of proven oil reserves, more than the rest of the world combined which amounts to 578 billion proven barrels. As for money, thanks to the bumper oil prices of recent years, the region is awash with cash. In total, Morgan Stanley estimate that in 2007 alone, Persian Gulf countries invested around $75 billion overseas. This, therefore, excludes the $500 billion that is being investing domestically in creating new super-cities, trying to look ahead to the paradigm changing day when oil runs out. The crucial point here is that this inflated oil price appears to be with us for the medium term, and, therefore, so do these record profits for Middle Eastern government and thus their ability to generously invest abroad.

As for demand, the same economics student would no doubt tell you that demand is infinite. This is meant in a theoretical way, but when discussing China, the theory becomes a lot more practical. China has a population of 1.3 billion people. By the year 2050, however, the UN population division estimates that (depending on which report you read) the population will rise to between 1.5 – 2 billion people. So not only do these people need their energy needs taken care of, but thanks to China’s phenomenal growth, many people have ever growing energy needs. With greater affluence comes greater demand for bigger and better houses and apartments and, of course, bigger and better cars, to name but two energy consuming factors. In 2007 alone, the Chinese car market grew 20% and overtook Japan as the world’s second largest automobile market, and with tens of millions of people waiting to dump their bicycles, this market is only going to grow faster in the coming years. The staggering conclusion of these factors is that, according to Commentary magazine, China’s demand for imported oil will grow by 960% over the next two decades.

Issues of demand and supply, therefore, are clearly suitably poised for a long and prosperous relationship. Yet there are many more factors to consider. After all, the rest of the world demands oil and will continue to do so for a long time yet. So what makes China so special?

For one thing, China do not have any historical or colonial baggage in the region. This could be construed as a good or a bad thing. For example, France’s long standing relationships with the Emirates clearly made it possible for Abu Dhabi to cede some land for a French military base, and America’s long history in Saudi Arabia made it possible for similar arrangements there in the past. I would suggest that the latter example is more instructive, especially considering the eventual outcome of the US bases in the land of the two holy places. China, however, has a clean slate; indeed, it was as late as 1990 when they officially recognised all GCC countries. There are no old policies to appease, apologise for or defend.

Another aspect that appeals to many governments worldwide is that China are very good partners to have in terms of demands exogenous to the deal itself: there aren’t any. For example, China will never lecture, pressure, castigate or otherwise try to impose their ideals on another state. This is a fundamental pillar of Chinese policy: the absolute and utter respect of sovereignty from criticism or interference. Thus, if a state is not appreciative of America’s lectures regarding full democracy or the rule of law (especially regarding the egregious hypocrisy of Guantanamo Bay) then they will certainly know that they would receive no such criticism from China.

Along the same lines, China make it easier for Middle Eastern companies to invest there. Whilst, as it was shown above, many countries have invested heavily in the West, there is still an element of quasi-racism. This was clearly shown in the Dubai Ports World controversy, where a furore erupted when it was revealed that a Middle Eastern company would be involved with security arrangements at American ports. This would, according to some woefully misguided segments of the American media, lead to security concerns. It is difficult to imagine such security concerns from the Chinese.

Lastly, with significant anti-Americanism in the Middle East, and significant anti-Arab sentiment in America and the West generally, China could offer themselves as a neutral alternative to the Middle East-American/Western axis. It is no great secret that parts of the Middle East have security concerns, which are answered in one way or another by the West generally or America specifically. For example, answered in terms of arms sales ($20 billion only last week) as well as physical protection, as in the Gulf War. However, it must not be forgotten that China has been supplying various countries in the region for a long time now. More to the point, China are more willing to sell certain weapons that the West are – generally – not willing to, such as ballistic missiles and related technology, which were sold to both sides during the Iran-Iraq war, to take but one example. Furthermore, with the amount of industrial espionage that Beijing currently engages in, certain aspects of their armaments technology may not be that far behind the US itself.

However, there are a few caveats. Firstly, America is currently the only power capable of offering a meaningful security blanket, such as the one that freed Kuwait and protected Saudi Arabia. Theoretically, were the Chinese to sell an Atomic bomb ‘off the shelf’ to Saudi, that might negate that particular US role, but such a reckless policy is highly unlikely for the cautious and long-term thinking Chinese. Secondly, the prevalence of American goods, ideas, motifs, restaurants, books, films, TV channels, and music throughout the Middle East, compared to the utter lack of Chinese equivalents, shows that America, or at least, its manifestations are not going anywhere. It does not seem at all likely that McDonald’s will turn into Jowza (dumpling) restaurants any time soon. American culture, therefore, may well be here for the next 100 years, even if the manifestations of American power and trade are not.

Map of world oil reserves 17, January 2008

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This map equates a countries oil reserves with geographical size.

Oil Reserve Map