Gulf oil forcing China to forge closer relations with GCC

[LRE]

But deepening long-term economic dependency will not translate into abandoning political and military links with the US

China is becoming a major strategic partner for all Gulf states, but its huge and rapidly growing commercial interests in the Gulf Cooperation Council (GCC) states will not translate into close political or military support, which remains with the US and the Gulf states' other western allies.

The Gulf will hit an important milestone in the next two years as more Saudi oil is sold to China than to the US. This actually happened in 2009, but the US is set to be just ahead in 2010 before falling back to second place again by 2011 and the following years.

What is surprising is the fact that this long-term shift is not just in one direction with China buying more and more Saudi oil. In fact, Saudi Arabia is also buying more Chinese goods than before, as is shown by the Chinese-Saudi trade gap falling from a large $19.6 billion in 2004, to a much smaller $3.6 billion in 2009, despite the total volume of trade increasing substantially.

The whole Gulf is well aware of the new importance of Asia, and all Gulf states are looking east to find new allies and new markets. Most Gulf rulers have led major delegations to the east over the past few years, such as His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, who has led very high-level UAE delegations to South Korea and China.

Saudi Arabia's King Abdullah Bin Abdul Aziz went to China in 2006, immediately after his accession, at a time when China was also waking up to the Gulf. In 2001 China's tenth five-year plan which covered 2001 to 2005 made a point of targeting energy security for the first time.

Kristian Ulrichsen of Georgetown University in Qatar, points out in a paper on the GCC and the shifting balance of global power that in 2005 China opened a deepwater port and naval base at Gwadar in Pakistan, very close to the Strait of Hormuz. This base serves two purposes.

It gives China important naval capability in the Arabian Sea and the Arabian Gulf when required, which has been a lot more than some theoretical project sitting in the Chinese admirals' lists of contingency plans.

This base has been used to great effect recently in the strong Chinese actions against the pirates operating out of Somalia. But the Gwadar base also has significant commercial impact as it offers China a transit terminal for crude oil imports coming from the Gulf and Africa.

Demand

And the scale of what could be passing through Gwadar is awesome, as China's future energy needs are due to grow almost exponentially, and the Gulf is a major part of that requirement.

The International Energy Agency (IEA) has forecast that China will account for 43 per cent and India for 19 per cent of the increase in global oil demand by 2030. This means that Chinese thirst for oil will grow from below 2 million barrels a day in 2002 to 11 million barrels of oil a day in 2030, with more than half of this coming from the Gulf.

Ulrichsen looks ahead to similar increases in demand coming from all east Asian states, particularly South Korea and Japan.

This fundamental shift in demand is being prepared for in many ways by all Gulf states. For example, both Saudi Aramco and Kuwait Petroleum Corporation have started joint venture refinery and petrochemical complexes in China. Qatar Petroleum has signed 25-year exploration and product sharing deals with Chinese companies.

But despite this terrific economic growth, and long term dependency between the GCC and China, China remains limited in its political plans in the Gulf. There are no ambitions from either the six Gulf states or the Chinese to seek to replace the US as the paramount ally for the six GCC nations.

The American troops are in the region and have proved themselves as active guarantors of national security during the liberation of Kuwait. But the growing awareness of the importance of China will pose challenges as the GCC states implement a more active foreign policy, which cannot blindly follow the American view.

For example, Saudi membership of the G20 will require the Gulf state to take a view on how the accumulated capital of the Gulf states can be used to ease the current global recession. It will also have to take a view on the currency war between the dollar and yuan.

Another example is the UAE, which is a member of the IEA, and is staking out its position in trying to help formulate the world's energy policies. This will require it to take a view on Chinese CO2 emissions, and also on American reluctance to pay for reform in many developing nations.


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