The oil politics of the Persian Gulf are looking more like a love triangle this week, and China is the hot date. Iran is courting the Chinese with discounted oil, hoping to keep the favour of its top client. The Chinese are courting oil-rich Arab states, looking to secure a steady supply of crude — hedging the risk that sanctions or military conflict might cut Iran’s flow.
This week Premier Wen Jiaobao took a tour of Saudi Arabia, Abu Dhabi, and Qatar, an astute foreign policy move, according to security analyst Theodore Karasik in Dubai.
‘China wants guaranteed oil supplies…so it’s playing all the countries of the Gulf, to it advantage,’ he said.
‘It’s like watching a bad episode of Desperate Housewives.’
Arab leaders in Saudi Arabia, the UAE, and Qatar signaled closer ties with Beijing, hinting they’d deliver more oil to energy-hungry Asia if Iran could no longer deliver. Saudi Aramco signed deals with China’s Sinopec, including one for a $10 billion refinery at Yanbu. The UAE and China announced a currency swap for 35 billion yuan, part of a push for broader trade ties.
It’s a well-timed response to a slow-rolling regional crisis,a diplomatic showdown between Iran and the West. It has escalated over the past month, adding a risk premium of $10 per barrel to the price of oil, according to Morgan Stanley.
But the super spike in oil prices would come if Iran makes good on its threat to close the Strait of Hormuz, the way out of the Persian Gulf and the most important oil shipping lane in the world. If that happens we could see crude at $200 a barrel, says Societe General. Analysts worry that with tensions so high the slightest trigger could spark a military confrontation – a potential repeat of the 1980s Tanker War, with potential chaos in those waters. It would be an especially big problem for China, which gets 50% of its oil from the Persian Gulf — most of it, 1 million barrels per day, from Saudi Arabia.
Which is partly why China spend this week shoring up ties with Arab leaders, who then showed them the love. What do Arabs want in return? They want Beijing to take a stand against Iran – or at least use its unique leverage to squeeze the decision-making mullahs in Tehran. As sanctions shrink the circle of Iran’s oil clients, China has the power to negotiate on price, further thinning Iran’s cash flow. That’s a powerful card to play as Arabs and the West keep piling pressure on Iran, hoping economic pain can curb its nuclear ambitions.