On Iranian Sanctions And Chinese Energy Needs
US reliance on oil imports as a share of consumption is gradually declining; but China's, however, is rising and is now higher than the US. As JPMorgan's Michael Cembalest notes, China now has the world's largest new car market and most extensive network of superhighways - which given the lack of a viable, affordable electric car - means fossil fuel consumption is expected to continue to rise. The trends that lead to this inexorable rise have critically important implications for the West in the ongoing containment of Iran's nuclear ambitions. Unfortunately for the West, the prospects for cooperation on sanctions appear dim as the following nine points (on China's relationship with Iran) should make clear.
As shown below, US reliance on oil imports as a share of consumption is gradually declining. China’s percentage, on the other hand, is rising and now higher than in the US (in dollar terms, US imports are higher but they should converge in a few years)
The penetration rate of passenger vehicles in China is considerably lower than in other countries. China’s per capita GDP is lower as well, so the gap will not close overnight. The second chart below gives a good indication of the potential rise in automobile use in China over time. These trends are part of the reason why we do not expect reduced US imports to result in lower oil prices.
Vaclav sees these trends as important, since they affect prospects of China co-operating with the West on containment of Iran’s nuclear ambitions. Unfortunately for the West, the prospects for co-operation on sanctions appear dim. Some things to keep in mind about China’s relationship with Iran, described in greater detail in a 2012 Rand Institute report:
- Iran and China share a deep ambivalence about the West given their prior experiences as semi-colonial states in the beginning of the 20th century. The US supported a coup against a popular Iranian leader in 1953 (and also influenced other political transitions), and Communist China was under U.S.-led international sanctions for most of its existence.
- China extended recognition to Iran’s Islamic Republic only 3 days after its founding, and improved relations with Iran through arms sales during the Iran-Iraq war (small arms, ballistic and anti-cruise ship missiles)
- China became a net oil importer in 1993, and further strengthened ties with Iran. Once China was accepted into the World Trade Organization in 2001, the West lost the little leverage it had over Sino-Iranian ties.
- From 1985 to 1996, China provided Iran with civil nuclear technology and machinery, assistance in uranium exploration and mining, training for nuclear engineers, and instruction on the use of lasers for uranium enrichment. China ended its direct support for these nuclear programs in 1997. Chinese design and technology are seen in Iranian ballistic and anti-cruise ship missiles, anti-ship mines and fast attack boats.
- For the last two decades, China has built railroads, bridges, dams, ports and tunnels throughout Iran. In 2007, China became Iran’s largest trading partner, and the two countries announced plans to broaden bilateral trade to $100 bn per year by 2016.
- The two countries formed a joint oil and gas committee to broaden energy cooperation. China is the most important investor in Iranian exploration and extraction operations, and has been selected to develop the Azadegan and Yadavaran oil and natural gas fields, and the South Pars field. Iran is the largest methanol exporter to China, displacing Saudi Arabia.
- Iran used to be vulnerable to refined fuel sanctions when it imported 40% of them; China helped Iran build out its refining capacity, and Iran is now a refined fuels exporter.
- China is paying Iran in rice and medical/engineering supplies (and cash) in exchange for Iranian oil, and a Chinese shipyard delivered the first of 12 supertankers to Iran, giving it extra capacity to transport its oil to Asia.
- A couple of quotes on the geopolitics of all of this, from the Peking University School of International Studies and Renmin University: “It is beneficial for our external environment to have the United States militarily and diplomatically deeply sunk in the Mideast to the extent that it can hardly extricate itself”, and “Washington’s deeper involvement in the Middle East is favorable to Beijing, reducing Washington’s ability to place focused attention and pressure on China.” [Rand report]
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