China stated two weeks before Russia invaded Ukraine that “there is ‘no limit’ to how far Russian and Chinese friendship may go” and signed a swathe of huge oil and gas deals shortly thereafter that provided an additional layer of insulation to both countries from any U.S. sanctions in the future. Only a day after the invasion began on 24 February, however, Chinese President Xi Jinping held urgent talks with Russian President Vladimir Putin and advocated peaceful negotiations between Russia and Ukraine. This was widely seen as a sign that Beijing had not believed that Russia would launch a full-scale invasion of Ukraine before it did so and that Xi thought that overtly lining China up on the side of Russia against the U.S. and its NATO allies at that point on that issue might be too much too soon. Developments over the past week or so, though, indicate that Beijing’s caution in challenging U.S. supremacy around the globe might be dissipating. The practical ramifications for the global oil sector from such a shift would clearly be enormous, given that China remains the big global backstop bid for oil and that Russia remains one of the world’s top three oil producers.
Last Wednesday (15 June – and Xi’s birthday), Russian news sources in the first instance released statements from the Kremlin that Russian President Vladimir Putin and his Chinese counterpart, President Xi, had enjoyed a “warm and friendly” telephone call during which Xi had pledged China’s ongoing support for Russia. The Russian news sources cited the Kremlin as adding that President Xi had “noted the legitimacy” of actions taken by Russia to protect itself “in the face of challenges to its security created by external forces”. The Russian sources went on to state that the Kremlin highlighted that Putin and Xi both agreed that China-Russia relations were at an “unprecedentedly high level” and that they planned to deepen ties in energy, finance and industry. China has not contradicted any element of the Kremlin’s statements on the content of the lengthy call and nor has it sought to tone down any of the specific language used in the statements. Moreover, Beijing has still not condemned – or overtly criticised in any way – Russia’s invasion of the independent sovereign state of Ukraine. On the contrary, at the beginning of April, China’s Foreign Ministry spokesperson, Zhao Lijian, laid the blame for Russia’s invasion of Ukraine squarely at the feet of the U.S. “As the culprit and leading instigator of the Ukraine crisis, the U.S. has led NATO to engage in five rounds of eastward expansion in the last two decades after 1999,” he said during a virtual summit call with leaders of the European Union.
With Russian troops still on the ground across sizeable portions of Ukraine, and keeping European theatre troops of the U.S. and its NATO allies focused on ‘breakout threats’ from that war, Xi – on the same day as his call to Putin – for the first time ever signed a document that provides a legal basis for China’s military to carry out missions other than those directly necessitated by a war against China. According to local news reports, the new directive signed by Xi will: “Standardise, and provide the legal basis for, Chinese troops to carry out missions like disaster relief, humanitarian aid, escort and peacekeeping, and safeguard China’s national sovereignty, security and development interests [italics are OilPrice.com’s]”. As other Chinese news sources highlighted, the order signed by Xi, which came into effect from the moment he signed it on the 15th of June: “[Comprises 59 articles and six chapters] that serve as a legal base for military operations other than war [and] aim to protect people’s lives and property, safeguard national sovereignty, security and development interest, and safeguard world peace and regional stability”.
Xi has always seen the self-governing Taiwan as an inalienable part of China’s territory, just as Putin has always seen Ukraine as being fundamentally a part of Russia. China has long pledged to ‘reunite’ Taiwan with China, just as Putin as sought to ‘reunite’ Ukraine with Russia – in both cases irrespective of the wishes of the citizens of those two countries. China has long said that it ‘wants’ to achieve this ‘reunification’ of Taiwan by peaceful means but – crucially – it has never ruled out using force to achieve its goal. And Russia needed no clear and present danger to its own interests to lunch its invasion of Ukraine in February. For its part, the U.S. has not openly deployed ground troops into Ukraine or enforced a no-fly zone across the country, partly because it has no legal jurisdiction to do so – as Ukraine is not a member of NATO – but principally because it fears escalation into a nuclear war with major nuclear power Russia. Both of these reasons for a lack of tangible response from the U.S. apply to Taiwan: first, it is not a member of NATO or a similar Asia-Pacific version of it; and second, the risk of escalation into a nuclear war with major nuclear power China is real. China knows all of this and is almost certain to have been strategising a scenario for launching a ‘special operation’- as Russia calls its invasion of Ukraine – against Taiwan. This would give the U.S. all the get-out clauses it has for the Russia invasion of Ukraine, as China could insist it is simply a ‘reunification’ and would never formally declare a war.
At the same time as the political manoeuvring of China and Russia over their respective ‘reunifications’ is going on, so is the positioning of oil supply and demand agreements between not just Russia and China but also the further – massive – supplies of oil that can come from Iran and Venezuela, to name but two of the biggest. Venezuela holds the biggest reserves of crude oil in the world, by a long way, according to EIA (and all other major industry agencies’ figures): 300 billion barrels-plus (much more than Saudi Arabia, even if Saudi’s figures are true). Iran has around 158 billion barrels, and Russia has about 80 billion barrels. These figures do not include oil from major oil states that could be said – by dint of their relationships either to Iran, or to Russia, or to China – to be favourably inclined to this formal or informal China-Russia-led alliance. Iran has a longstanding historical sway over Iraq (through a combination of political, economic, and military factors), which holds over 140 billion barrels of crude oil reserves, although this is likely much higher, as highlighted by OilPrice.com. The UAE has been especially keen in recent months to not be seen as in any way aligned to the U.S., and it has 98 billion barrels of reserves. And there has been an extremely significant shift away from the U.S.-led bloc and towards the China-led one by Saudi Arabia, as analysed in depth in my new book on the global oil markets, and the Kingdom supposedly has just over 268 billion barrels of crude oil reserves. A back-of-the-envelope totting up of daily crude oil production from these countries makes for extremely concerning conclusions for those that want oil prices to go lower, if even half of the total was taken out of the general volume available for supply in the freely flowing oil market.
Going down the list from countries most likely to choose to side with China-Russia if and when required – in the event of a Chinese ‘special operation’ to ‘reunite’ Taiwan, for example – and in order of timing: Russia can easily produce 11 million barrels per day (bpd), Iran 4.5 million bpd, Venezuela currently under 1 million bpd but can go a lot higher, Iraq 4.5 million bpd, the UAE 3 million bpd, and Saudi 10 million bpd (and if Saudi aligned with China-Russia then Kuwait would follow, adding another 2.5 million bpd). The total of all is 36.5 million bpd, out of usually around 90-100 million bpd used in the world, but readers can add or subtract countries to this figure according to their own views, of course. It is apposite to note here, however, the disproportionately extreme effect on oil pricing of just a relatively minor supply outage in recent months, such as those in Libya.
By Simon Watkins for Oilprice.com
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