Why the oil industry can no longer rely on China

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Why the oil industry can no longer rely on China

By Dr. Cyril Widdershoven – Berry Commodities – Global Head of Strategy & Risk

The global oil sector is reeling from a combination of negative oil prices, storage overload, demand destruction, and calls for a renewable energy revolution in the post-COVID-19 era.

US and European oil market analysts appear to be pinning their hopes on a rebound in oil demand from Asia. Even international financial institutions, such as the IMF, WB, ECB and OECD indicate that the future of economic and energy demand growth is inextricably linked to the future of China and, increasingly, India.

OPEC oil and gas producers, after decades of prioritizing Western economies, have been rerouting their investments and oil and gas strategies to capture these markets of the future. Before COVID-19, China was already a key global center for trade, investments and geopolitical influence. While some critical reports have been warning about the worrying economic and financial situation of China, mainstream investors and operators still had the country as their top investment target. Growing concerns about Beijing?s geopolitical aggression in the South China Sea and the negative impact of its One Belt One Road initiative were not enough to dissuade nations and global conglomerates from engaging economically with the Asian giant. Arab OPEC producers weren?t immune to China?s influence either, with over 50 percent of their overall investments going to the country. China, the argument goes, would always be a vital partner due to its huge population and growing political-economic reach. Then came COVID-19. The unexpected implications of this global pandemic had only previously been discussed in think-tank reports and Hollywood horror films. Nobody, it seems, thought it would ever become a reality. Now that it has, the major potential fallout from this transformative disease is far bigger than most people think.

The true extent of the damage caused by COVID-19 is yet to be seen, mainly due to the trillions of dollars of government support that has been given to businesses. But geopolitical relations and trade routes have already changed drastically. China?s web of influence is now unraveling as it has become clear just how dangerous it is to rely so heavily on just one country for international trade and security. The lack of resilience in the global economic system, especially when it comes to production and trade, is going to very negatively impact China in the coming years.?A new resilience based on a diverse economic system will be needed to confront and mitigate future international crises or pandemics. For oil producers, especially the Arab OPEC producers and Russia, relying on China to consume a majority of their future production is a dangerous game. Just as US shale is far too heavily reliant on Cushing storage and paid the price when WTI prices crashed into negative territory as Cushing hit capacity, Arab producers have been hit hard by Chinese demand destruction.

The next development, one that is already visible within major OECD countries, will be to rethink future investment projects or current financing schemes, and set up new non-Chinese production centers or bring industry and production back home. This may sounds like Trump?s ?America First? policy, but it is seen by European parties as a necessary to counterweight to the ever-growing influence of China. A Make Europe Great Again (MEGA) policy, based on shortages of Chinese products, has already gained traction. The automotive, chemical and medical sectors are reconsidering their relationships with China. Discussions are clearly on the table to bring production facilities back home or to set up new ones in India, Egypt or other places, where high-tech, high education levels, and low costs are also available.

OPEC?s strategists should also take a step back and look beyond China when it comes to economic interests. A restructuring of production, supported by geopolitical, financial and operational issues, outside China will directly put a major damper on oil and gas supplies and demand in the Tiger State.

OPEC and Russia should assess the options that OECD countries, supported by others, are considering regarding the restructuring of their China policies. New emerging regions will be needed to increase the resilience of the global economy. This transformation will rapidly and dramatically influence future energy demand trade flows. Saudi Arabia, UAE, Qatar and Kuwait, must consider this before they are confronted by a fait accompli. COVID-19 has transformed international relations, nationalism has returned to influence the economic policies of two of the largest economic power players in the world, the USA and the EU. If it fails to act, OPEC?s oil and gas future will hit hard by lower Chinese demand. The oil cartel needs a new resilience-focused approach to its economic policies. The future of oil and gas demand will not be focused purely in China, and any nations with an interest in the industry should start to plan for that future now.

By Cyril Widdershoven for Oilprice.com