Indian and Chinese Oil Buys
China is the #1 importer of oil; India is #3
What do India and China’s oil buys tell us about shifting alliances as the U.S. and China slide toward a new cold war, and the aftermath of June’s deadly clash between China and India in the Himalayas?
For its part, India announced plans to reduce the country’s dependence on Gulf countries for oil and natural gas imports. New Delhi wants to diversify, with a particular focus on supplies from Russia and the United States. Specifically, it wants to develop a sea route for energy trade between Vladivostok and Chennai.
It hopes not only to buy more American supplies, but also to access U.S. space for strategic oil reserves, now that India’s own storage has reached capacity.
India is highly dependent on energy imports, and is thus vulnerable to price spikes and disruptions, like Iran sanctions. The government appears to be using this window of low prices and low demand to improve its energy security by creating a large reserve.
Of course, trade is usually proximity; Middle East oil can be sent to India much cheaper than oil from Russia or the U.S.. Middle Eastern oil is also cheaper to produce than Russian oil, and significantly cheaper than American oil. (Note: the media often creates confusion that there is one global price for a barrel of oil by quoting the spot price of a barrel of benchmark crude oil like West Texas Intermediate (WTI), or Brent Crude. In fact, the price of oil varies considerably and depends on factors like grade, location, production cost, etc.).
Iraq, Saudi Arabia, Iran, Kuwait and the UAE are all Muslim countries. What they might do if India got into a conflict with Muslim Pakistan is an Indian concern.
In essence, India will be paying more for its oil to try to guarantee its supply, and work with allies. That India is keeping Moscow in its planning tells us New Delhi doesn’t think Russia will go all in with China in a Sino-American split; it also shows India will hedge its bet on America.
Accordingly India must also hedge on Iran. If reelected, the Trump Administration will clearly continue to squeeze Tehran with sanctions, and demand others do the same or lose access to the American market. A Biden Administration will likely restore the Iran nuclear deal framework — and cozy up to China (more on Joe Biden’s US $5 billion worth of business dealings with China here.)
Intriguingly, Iran is not waiting. It has apparently dropped India from two major projects.
The first is official. Tehran told New Delhi in January it would develop the large Farzad-B Gas field without India. That hurts since India generates almost 60 percent of its electricity with coal, and gas is a cleaner and relatively cheap alternative.
It also appears Iran has also dropped India from the Chabahar-Zahidan port and railway line project. That matters for two reasons:
Before partition in 1947, India had direct access to mineral rich Central Asia through Afghanistan and Tajikistan. But Pakistan now blocks that. From Chabahar, India can connect with the border town of Zaranj in Afghanistan and then along the proposed Zaranj-Delram highway, link further north to Central Asia and beyond.
The Chabahar Port is also of great strategic importance as it sits at the entrance of the Strait of Hormuz. The Strait of Hormuz is the world's most important oil chokepoint; more than 20% of daily production goes through it. Amid escalating tensions in the Persian Gulf, the Indian Navy has already started escorting Indian crude oil carriers transiting through Hormuz. Chabahar is also quite near Gwadar, Pakistan were China is heavily involved in building a port.
In a conflict, India is the best poised country in the world to cut off the flow of oil China needs from Middle East and minerals it gets from Africa. Look at a map. They don’t call it the Indian Ocean for nothing.
For about 15 years, the U.S. has been trying to get India to join the Quad — a proposed alliance of itself, America, Japan and Australia to deal with Chinese ambitions. Historically dubious of alliances generally and America specifically, India has been the most reluctant partner in the Quad. Yet, it’s the critical one because India is best positioned to cut off China from those essential resources. If the other three members don’t have to do that in a conflict, it gives them many more assets to use against China in the Pacific. And forces China to deploy many more of its own to the Indian Ocean.
As a result of June’s battle in the Himalayas, India is tilting rapidly toward the Quad. (More on Beijing’s historic strategic blunder here.)
If India is out as Iran’s partner at Chabahar, who is in? The answer appears to be China — a strategic coup for Beijing.
With its relations with the US worsening by the day, China is looking to forge stronger ties with Iran. In fact, there are reports the two countries will sign a 25-year economic and security deal in the next few weeks.
In essence, this means China is no longer concerned about American sanctions because it expects significant decoupling, and Beijing has little to lose by dealing with Tehran.
According to an 18-page draft of the deal reportedly circulating online, China would invest up to $400 billion over 25 years in Iran's banking, telecommunications, ports and railway sectors. The countries will also deepen military cooperation — something that is bound to raise the hackles of Iran's rivals in the Middle East — especially Saudi Arabia.
However, if you look at China’s current major oil suppliers, the Saudis are the only Tehran opponent. And Saudi Arabia is in the American camp. It sends most of its production to Japan, South Korea, Taiwan and Europe. China is making the bet Saudi Arabia wants to keep it as a customer, or it can replace Saudi oil, if necessary.
Enter Iran, which has vast potential. Iranian crude production has nearly halved from about 3.8 million barrels per day because of U.S. restrictions on its exports since November 2018. However, its oil exports have not been squashed to zero, despite the Trump administration's threats last year to ensure that happened. That has been in large part due to China's continued support.
Last week, China’s General Administration of Customs (GAC) said China did not import any crude oil from Iran in June ‘for the first time since January 2007’.
This is a lie, according to the highly respected specialist site OilPrice.com:
“China continues to import many millions of barrels of crude oil from Iran every single month. Specifically, from 1 June to 21 July (51 days), China imported at least 8.1 million barrels of crude oil – 158,823 barrels per day (bpd) - from Iran in a number of relatively direct ways, a senior oil and gas industry source who works closely with Iran’s Petroleum Ministry exclusively told OilPrice.com. The vast majority of these 8.1 million barrels were delivered by crude oil container ship, beginning with the cargo of the ‘Giessel’.
“The Giessel likely loaded Iranian crude oil via ship-to-ship transfer just off the Strait of Hormuz at the Gulf of Oman and this likely occurred between the 26 April and 5 May,” sources at global energy markets intelligence company, Kpler, told OilPrice.com last week. “The Giessel then discharged about 2.1 million barrels of Iranian crude oil to [China’s state-owned] Sinopec at the Qingdao Huangdao port on 13 June,” added the Kpler sources.
Shortly thereafter, according to the Iran source, the crude oil tankers ‘Stream’ and ‘Snow’ left Iranian ports for China and later offloaded their respective 1.6 million barrels and 2.1 million barrels of Iranian crude oil at Chinese ports.
In addition to the near-159,000 bpd being exported directly, another 6.8 million barrels or so was exported over the same 51 day period (another 133,333 bpd) from Iran to China indirectly via Malaysia (and to a much lesser extent, Indonesia), according to highly-placed sources in Iran. This process involves shipping Iranian oil to somewhere within Malaysian (or Indonesian) maritime boundaries, changing the vessel registration documents relating to its origin and ownership, and to the provenance of the crude oil cargo, and then continuing the voyage on to China.”
A sign that this has been going on for many months, appears in the official Chinese GAC crude oil import figures which show that for the January-June period of this year there was an 81.2 percent increase in China’s imports of crude oil from Malaysia.
What this underscores is Beijing’s word is worthless. The Chinese Communist Party does not believe in international norms. As its then Foreign Minister Yang Jiechi said, “China is a big country and other countries are small countries, and that's just a fact.”
Put it all together, and we see Beijing is gearing up for a Cold War with the U.S. by creating its own version of a Warsaw Pact. In the Middle East, Iran will be a key member; as we said a few weeks ago, Turkey is already drifting Beijing’s way, unless Recep Erdogan and his Justice and Development Party lose power. For those who scoff at the significance, Iran and Turkey occupy the best defensive positions in the region.
Russia is a swing power, just as China was in the original American-Soviet Cold War. Moscow has strategic reasons to fear China’s encroachment in mineral rich Siberia, and economic reasons for working with China to develop those resources. Putin’s Russia also needs the U.S. as an enemy for propaganda purposes.
What’s happening with oil is a harbinger of what’s happening with everything else.