Amid US-China trade war, a new source of tension emerges: Iranian oil

China and the US are looking at a new round of trade talks. But dire US relations with Iran complicate China’s attempts to import Iranian oil and meet its huge energy needs

Neal Kimberley

Published: 11:00pm, 10 Sep 2019

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There is hope that a new round of talks next month will bring China and the United States closer to resolving their trade dispute. But even if that proves to be the case, diverging strategic national interests mean the two economic behemoths will continue to clash.

Indeed, energy security issues may be the next flash point.

China has every right to maintain its own energy security and every right to decide whom it buys that energy from. Equally, the US has every right to pursue its own interests but often seeks to persuade others to follow its lead. While many countries would cooperate with Washington, Beijing could conclude that China’s economic interests and place in the world dictate a more independent stance.

China depends on energy imports, as it does not produce enough to power its own economy. Conversely, the US has become less reliant on imported energy due to its success in producing oil and gas from its own shale fields.

Washington’s comfortable position with regard to energy security has arguably allowed it to be more proactive about achieving foreign policy objectives in the Middle East. That is likely to lead to friction with Beijing, which is pursuing its energy needs in the region.

China’s appetite for imported energy is increasing. “China’s reliance on oil and gas imports is growing too rapidly, with oil topping 70 per cent and gas moving towards 50 per cent,” Lin Boqiang, director of the Energy Economics Institute at Xiamen University, told Reuters.

The trade war only complicates matters further, particularly in light of China’s retaliatory decision to impose a 5 per cent tariff on crude oil imports from the US from September 1. Why would Chinese energy importers pay that tariff if tariff-free crude oil can be sourced from elsewhere?

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Additionally, in the longer term, if the economic – and indeed political – relationship between China and the US is going to be more fractious than it has been, it just doesn’t make sense for Beijing to be overly dependent on imports of US energy.

Either way, China still needs to improve its energy security. At the end of August, a National Energy Administration report recommended an expansion of natural gas production in Sichuan province.

“Sichuan is likely to account for about a third of the country’s total natural gas output,” the report said, up from the current 20 per cent.

An oil pump in the Permian Basin in the US state of Texas. China has imposed a retaliatory tariff of 5 per cent on US crude oil imports from September 1. Photo: Reuters

That’s helpful but not enough. Which brings us to Iran, whose relations with the US are dire but which is in a position to be a major supplier of energy to China.

As things stand, the US has not only withdrawn from the 2015 Joint Comprehensive Plan of Action – which set limits on Iran’s civilian nuclear enrichment programme and to which China remains a co-signatory – but also imposed new unilateral sanctions on Iran.

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In addition, the US is blacklisting foreign firms, including Chinese companies, that it identifies as dealing with Iran in areas of commerce covered by those sanctions.

Back in July, Washington imposed sanctions on Chinese oil trading company Zhuhai Zhenrong for violating US restrictions on dealing with Iran’s oil sector, despite Beijing’s consistent objections to US attempts to force other countries to abide by its unilateral sanctions.

That decision, which is perfectly rational from Washington’s standpoint but unjustifiable from Beijing’s, serves to highlight the more fundamental issue.

China needs oil and it has no particular beef with Iran, which is in a position to supply oil, never mind the state of its relations with the US. Consequently, Beijing’s thirst for oil may trump any diplomatic desire to avoid further conflict with Washington.

Already, according to the trade magazine Petroleum Economist, China is set to invest US$280 billion in Iran’s oil, gas and petrochemical sectors. In return, China will reportedly be able to buy energy products from Iran at discounted prices.

Meanwhile, trade talks between the US and China are entering yet another round. China’s commerce ministry spokesman Gao Feng said last week that “efforts striving for substantive progress will be made in the 13th round of China-US high-level economic and trade consultations in early October”.

Perhaps progress will be made and the trade war will eventually end. But, as the energy issue illustrates, China and the US might still have blow-ups over other national interests.

Neal Kimberley is a commentator on macroeconomics and financial markets

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