China’s Way Out in Iran’s Oil Crisis

As the second largest crude oil producer in the Organization of Petroleum Exporting Countries (OPEC)， Iran exports 2.6 million barrels of crude oil on a daily base， around 20% of which are for the EU countries， mainly Italy， Spain and Greece. Since the International Atomic Energy Agency (IAEA) announced last November that Iran’s nuclear programs were for military use， the international community led by the US and Europe has been stepping up sanctions against Iran. The EU approved in January the ban to import petroleum from Iran， but it postponed the date for full implementation to July 1 of 2012， so that Greece， Span and Italy may have enough time to find alternative supplies. This initiative has sparked off violent reaction in Iran and many senators and governmental officials have even claimed that petroleum will not be exported to some EU countries.

On February 19， the Iranian Oil Ministry announced on its website that it had stopped selling petroleum to the UK and France. On the next day， the Iranian official said that if the EU countries continued to take hostile actions， Iran would be likely to stop exporting petroleum to Portugal， Span， Greece， Italy， Germany and the Netherlands. With its own oil clients， Iran faced no problems in terms of selling oil and besides Iran would sell oil to some new clients， said Alireza Nikzad， Spokesman of the Iranian Oil Ministry. But Alireza Nikzad refused to reveal more details. Both the UK and France have almost stopped importing oil from Iran， indicating that Iran’s move merely has symbolic significance in the real sense.

Nevertheless， this is the first real action Iran took after it issued threats several weeks ago. Therefore， this may still cause psychological impact， which will push up the oil price as the market fears that Iran may stop oil exports to other countries.

The national oil price trend shows that after the Iranian oil embargo was approved at the EU Foreign Ministers’Conference held on January 23， the international oil price began to pick up. The rising international oil price in the past days did have something to do with the Iranian situation， but the future trend was subject to changes， said Dong Xiucheng， Vice President of the College of Business Administration of China University of Petroleum. If the war starts， the oil price will soar instead of rising slightly. This will impact more heavily on the European economy than on the US economy， but nobody has a way to step outside. At present， the Hormuz Strait is the sole maritime channel for the Gulf area to export petroleum to such destinations as Western Europe， the US as well as Japan and Iran is exactly located at the north coast of the Hormuz Strait. To some degree， Iran’s situation will directly determine the trend of the international price oil.

A few days ago， China’s National Development and Reform Commission (NDRC) announced that from the midnight of February 8， gasoline and diesel prices will be raised by RMB 300 per ton， which means that the retail prices of the #90 gasoline and the #0 diesel will increase by RMB 0.22 and RMB 0.26 per liter respectively on average at a national level. As the current international political and economic situation was quite complicated， it was possible that the Iranian nuclear crisis may prompt turbulence in the international oil market and oil price surge， said the NDRC. The International Energy Agency (IEA) partly attributes the rising oil price to worries about geopolitics due to the Iranian issue， claiming that worries from various parties over the upcoming supply problem have undoubtedly lent a temporary support to the rising oil price.

Due to production hikes in petroleum and hydrofracturing natural gas， the US had cut its oil imports from 57% in 2008 to 45%， said Daniel Yergin， President of the IHS CERA. He held that Saudi Arabia would be able to feed the globe by increasing its oil production. Daniel Yergin believed that the Iranian issue would impact the oil price by no more than USD 10 per barrel and he also observed another factor that threatened the oil price. “The oil price will be driven up by increasing fundamental demand from Europe and China， but not the disrupted supply in the Middle East，” said Daniel Yergin.

The European refiners had decreased oil imports from Iran and so will some Asian buyers， IEA—an oil supervisory agency in the western countries — expressed earlier this month.

However， statistics show that China imports 40% crude oil from the Gulf area， about 11% of which are from Iran. As Iran’s biggest crude oil buyer， China usually imports 556，000 barrels per day， accounting for about 1/5 ofIran’s oil exports. As China was cutting oil imports from Iran， Asia’s oil imports from West Africa hit a record high in this quarter， said the IEA. In the mean time， the international sanction measures have made China more powerful in bargaining with the Iranian Oil Company. The new agreement stricken between Iran and China signaled that Iran’s cuts in oil exports to China earlier this year was out of nothing but business reasons rather than political ones， the US Dow Jones News Agency analyzed.

For such a big energy-consuming nation as China， development will halt without energy. And the Iranian oil crisis just provides an opportunity for China to ponder on a series of issues including energy security， energy reserve and energy alternatives.

Strengthening communication with the Middle East is one approach among others to address the oil crisis. Aiming at strengthening communication in the domain of energy with major oil exporting countries which are also the US’s trading partners， Premier Wen Jiabao of China’s State Council paid a visit to the Middle East this January， when the US pressured the Chinese government into cutting crude oil imports from Iran. Saudi Arabia is the world’s largest crude oil exporter， and Qatar the largest producer of liquefied natural gas (LNG). China’s crude oil imports from Saudi Arabia are on a steady rise in recent years. According to the statistics from China’s General Administration of Customs， Saudi Arabia exported 45.5 million tons of crude oil to China during the first 11 months of 2011， or about 1 million barrels per day， registering a year-on-year rise of 13%. Besides， Qatar is China’s second largest LNG supplier， only next to Australia. Statistics from China’s General Administration of Customs show that during last January to November， Qatar exported approximately 1.8 million tons of LNG to China， up 76% over last year. During his visit， Premier Wen signed a cooperation contract with Saudi Arabia to set up oil refineries locally. This contract will benefit both sides as on the one hand Iran’s oil crisis provides an opportunity for Saudi Arabia to increase oil production and oil exports， and on the other hand Saudi Arabia may sell its oil more cheaply than Iran， which may be in China’s favor.

National Iranian Oil Company and China International United Petroleum Chemical Co.， Ltd. (hereinafter referred to as UNIPEC) signed a contract to increase Iran’s crude oil exports to China to 500，000 barrels per day， the Tehran Times reported on February 18， which has caused great attention from the western media. This contract also sends a signal that China declines to implement the US’s sanction measures against Iran immediately. Just on the day before the news about the Sino-Iranian new contract was reported， the US once again urged China and Iran’s other oil trading partners to stop importing oil from Iran. Moreover， Zhuhai Zhenrong has maintained the same crude oil imports from Iran as last year， when the former imported about 240，000 barrels per day from Iran. As a key state-run company in China， Zhuhai Zhengrong specializes in military productsoil trading and it has built up longterm ties with the Iranian government. But the US imposed sanctions against Zhuhai Zhengrong in January on the pretext of the latter’s business relations with the Bank Markazi.

It is of great urgency to advance the oil reserve system for China. As China depends increasingly heavily on foreign countries’ energy， economic risk derived from energy is still the biggest risk for China’s economic security， experts have pointed out. At the present stage， the domestic crude oil supply capacity had reached a bottleneck， while crude oil imports were increasing by leaps and bounds， introduced Lin Boqiang from the Energy Economic Research Center of Xiamen University. The IEA has predicted that China is likely to import 80% crude oil. As a re- sult， both the domestic market and the external environment demonstrate that it is an urgent task for China to advance the establishment of an oil reserve system. More efforts need to be spared in looking for overseas oil supplies so as to ensure the domestic energy supply. China needed to strengthen its awareness of energy security， said Han Xiaoping， CIO of China’s Energy Network. That the US has made today’s achievements is because it has depended slightly on the Middle East’s oil， only about 80 million barrels. In the past three years， through the shale gas revolution， the US increased 100 billion cubic meters of natural gas， which equals to 84 million tons of oil. Thus， the US earned energy independence by innovating shale gas as an oil alternative. Since China is also rich in natural gas resources， it may increase natural gas supplies and thus depends less on external oil by replacing diesel with LNG and gasoline with compressed natural gas (CNG). Only in this way can China achieve energy independence. “As a matter of fact， China needs a fundamental reform， which requires a consensus among the general public. If a consensus is reached， I believe that we may be impacted but this will provide an opportunity for us to reform. This opportunity will also remind us of taking the initiative to master our energy security，” said Han.

In the recent World’s Future Energy Forum， Premier Wen particularly stressed that China had begun to look for various oil alternatives， such as wind power， solar power and nuclear power， which surely refers to a safe one. Premier Wen also emphasized that in future energy technologies would call for innovation and partnership would be supposed to be established for energy security， which meant that the energy exporting countries across the world would understand that as energy providers they were supposed to have the awareness and mechanisms for safeguarding energy security. This does not mean that today you can provide several ten thousand tons of energy， but tomorrow you’ll be exhausted all of a sudden， which will give rise to energy supply shortage for developing countries， in particular for China where development is in full swing.