China’s plans affect the future of oil

Aramco is betting on China to boost a well-supplied crude market and – here’s hoping in Riyadh – enable Saudi Arabia to unwind production cuts.

Amin Nasser, the Saudi state oil giant’s CEO, said last week that he expects demand from China to drive global oil market growth of a healthy 1.5 percent next year.

Nasser also pointed to Chinese petrochemicals, partly driven by the shift to renewables in the world’s second-largest economy, to support his case.

How realistic is this?

It is likely Nasser is looking at emergency stimulus measures adopted by the CCP in September to boost GDP growth north of an unofficial target of 5 percent. Additional fiscal stimulus is expected to be approved imminently, in the form of an opening of the spending taps.

China is already Saudi Arabia’s leading export market, accounting for around 15 percent of exported goods.

The kingdom is investing heavily in Chinese petrochemicals – which contribute to everything from plastics to car parts, from building materials to textiles and packaging. Chemical company Sabic, 70 percent owned by Aramco, has a joint venture to build a massive $6.4 billion petrochemical complex with state-owned Fujian Fuhua Gulei.

Sinopec expects domestic oil demand to peak before 2027 – less than three years away

Aramco itself is in negotiations to buy, or has already bought, stakes in several other important private Chinese refining and petrochemical groups.

In 2022 Saudi Arabia and Beijing agreed a strategic partnership during a visit by Xi Jinping, CCP secretary general, to Riyadh.

But in June China Petroleum & Chemical Corporation, or Sinopec, said in its Energy Outlook 2060 that it expects domestic oil demand to peak before 2027 – less than three years away. And China is not – yet – a petrochems hub. It produces mostly for its own purposes.

Moreover, Beijing has a serious green agenda. China is currently responsible for about a third of global carbon emissions but is committed to peak emissions by 2030 and to carbon neutrality by 2060 – the so-called 30-60 formula.

To attain that, progress on building out hydropower, nuclear, solar and wind is frenetic. While the scale around nuclear is astonishing by Western standards – China said in August that it would build 11 new nuclear reactors by 2030 – it remains a small contributor in China’s total energy mix.

Much larger, for the moment, is the role of carbon-intensive coal-fired power stations, which raises the question of how the 30-60 goals will be achieved. One method espoused by Chinese officials is technology.

The freneticism does mean that China has an abundance of energy supply, a fact of which CCP strategists are keenly aware, according to Erlend Ek of China Policy, a think tank.

There is massive overcapacity in petrochemicals in China in many segments

Erlend Ek, China Policy

Ek says the CCP’s Third Plenum in July – a forum that sets economic policy for the next five years – signalled the end of the prioritisation of energy security, an enduring feature of CCP policy since China became an energy importer in 1992.

This is the crucial takeaway. When China launched its renewable programme “obviously at that time they did not have the technology and they did not have the money,” Ek says. “Now they have the technology and the money. The capacity is there. They are building it out very quickly, more quickly than they thought or planned.”

The main issue then is around China’s ambition. Today China accounts for 30 percent of global manufacturing capacity – by the CCP’s accounting – but, according to Ek, there are discussions within the CCP over whether to increase that proportion to 50 percent.

Why? Because China can – witness the impact of BYD EVs – and officials know they have massive competitive advantages that will not last forever.

This affects Saudi Arabia and other GCC states.

“There is massive overcapacity in petrochemicals in China in many segments,” Ek says. “Then there are the lucrative segments where they want Saudi Arabia to help them build up. That is where the oil demand is coming from in the future.”

There is also the issue of artificial intelligence. No groans, please. If China has serious ambitions to become an AI powerhouse it may ditch or fudge the 30-60 targets because it will need to power data centres.

All of which adds up to saying: Amin Nasser may be right, he may be wrong. But it is not as simple as saying that oil for transport and petrochems is going to drive Chinese demand, which will bail out Saudi Arabia from its current bind.

Conclusions:

• Although China imports 80 percent of its oil, and is likely to remain a major importer, demand is about to decline and there are many suppliers, including forced sellers such as Russia and Iran.
• China has an excess of power generation capacity.
• Petrochemicals are the future.
• Demand and margins depend on whether the CCP decides to develop manufacturing further, and whether it decides to turn China into a petrochems hub or to prioritise AI. Or both.