The COVID-19 pandemic has sent shockwaves through energy markets. Since March 2020, lockdowns around the world have led adults to work remotely and children to learn virtually. Last year, according to estimates, global energy demand and investment fell by 5% and 18%, respectively.
Yet as restrictions ease and economies pick up pace, the sense of normality that many hope for is one of the few luxuries energy producers cannot afford. In the race to comply with mounting political pressure to reduce carbon emissions while simultaneously securing their energy futures, the Sino-Gulf alliance may become the new center of gravity for global energy markets.
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The pandemic has undoubtedly cast a dark shadow on energy. The International Energy Agency (IEA) recently revealed that energy demand will not return to pre-pandemic levels until 2023 in its most optimistic outlook or 2025 in the case of a delayed economic recovery. However, a return to pre-COVID demand does not necessitate a return to pre-crisis growth. Predicted growth in demand between 2019 and 2030 is estimated at 4% in the delayed recovery case, compared to 12% in a COVID-free world.
Nevertheless, the pandemic has also highlighted the importance of a reliable and accessible electricity supply. The IEA predicts that the electricity sector, whose demand outpaces other fuels, will support economic recovery and account for 21% of global final energy consumption by 2030. This push for electricity is widely driven by the various global emission reduction targets, increased use of electric vehicles and heat sources in advanced economies, and greater consumption from emerging markets.
Leader of the Pack
Of the countries driving this growth, China is leading the pack and is predicted to be the main driver of energy demand over the next decade. Following his call for an “energy revolution,” President Xi Jinping has sought to reposition China as a key player in global energy markets. While the Chinese are currently the world’s biggest consumers and producers of coal-fired electricity, Xi’s pledge to make China carbon neutral by 2060 means that energy demands are increasingly being met via renewables.
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China is predicted to account for 40% of global renewable expansion, leading in the realm of nuclear power, biofuel production and will account for almost half of globally distributed photovoltaic power. In addition to this, Chinese demand is also predicted to account for 40% of global electricity sector growth by 2030, up from 28%. It was as a consequence of East Asia’s growing appetite for clean energy that, in 2016, global electricity investment outpaced that of oil and gas for the first time in history.
However, as with everything, there will be winners and losers. While electricity is on the up, sluggish global oil demand has led to falling oil prices. With demand predicted to plummet in the 2030s, there is a growing urgency for Gulf Arab states to diversify as oil becomes more of a burden than a blessing. Yet, in their hurry to claim their stake in the new energy world order, Gulf countries may begin to look east rather than west for a friend to rely on.
China and the Gulf
Sino-Gulf relations are not a new occurrence. As the world’s largest importer of oil and natural gas, these two commodities dominate Chinese trade relations and have been the basis of the Saudi-led Gulf alliance. The Gulf Cooperation Council supplies over 30% of China’s oil imports, with Saudi Arabia topping the list, accounting for over 16% of the oil import total. Nevertheless, in a world that is increasingly turning its back on oil, GCC states and China may increasingly look to each other to secure their respective energy futures.
From the establishment of the China–Arab States Cooperation Forum (CASCF) in 2004 to the China–GCC Strategic Dialogue in 2010, Sino-Gulf relations have grown from strength to strength. As such, it was hardly supplying when China gave the GCC a starring role in its Belt and Road Initiative. Announced in 2013, this global infrastructure project that seeks to boost physical connectivity, financial integration, trade and economic growth has become the core pillar of China’s increasingly active foreign policy approach under Xi.
During the Sixth Ministerial Conference of the CASCF in 2014, Xi spoke about the Gulf Arab states as “natural cooperative partners in jointly building” the BRI. This set the stage for a flood of multi-billion-dollar investments and agreements between China and the Gulf states, advancing the Belt and Road Initiative in the Arabian Peninsula and deepening economic ties.
Chinese investment activity in the Gulf has followed the “1+2+3” Sino-Arab cooperation framework. This features energy cooperation as its central axis, investment and infrastructure, and accelerating breakthroughs in three high-tech sectors, namely aviation satellite, nuclear energy and new energy. However, there is no doubt that the BRI aims primarily to strengthen this central pillar of energy cooperation. Aptly described as “oil roads,” the initiative will enable China to establish the necessary infrastructure, transport and refinery facilities needed to secure its energy future and keep GCC coffers full.
These ambitious plans will be of greater significance in the years to come. Despite the economic and energy market turmoil triggered by the pandemic, Sino-Gulf relations show no signs of slowing. Rather, the pandemic may have made way for a greater mutual dependence between China and the Gulf states. This is particularly true for the GCC, whose economic wellbeing depends heavily on the revival of global oil markets. China may prove to be the answer to Gulf ministers’ prayers, stimulating growth by providing a guaranteed revenue stream for the region’s main export, no doubt stabilizing GCC economies.
Beyond the energy sector, however, the two regions offer a wealth of investment opportunities that will likely deepen relations, particularly as the GCC economies realize their various diversification plans. The synergies between the GCC’s various “vision” agendas and China’s BRI are extensive, thus acting as a major point of collaboration. The two are already in the final stages of concluding the long-awaited China–GCC free trade agreement, a move that would no doubt propel economic cooperation and open the doors to a vast array of trading opportunities. Saudi Arabia has already taken active steps to consolidate this BRI-vision cooperation by signing various agreements and memorandums of understanding with China. Riyadh has since considered the BRI to be “one of the main pillars of the Saudi Vision 2030,” consequently making China “among the Kingdom’s biggest economic partners.”
Closer Partners
It is thus clear that, willingly or unwillingly, recent global events have further pushed China and GCC into each other’s arms. Sino-Gulf relations can be expected to gain serious traction in the next few years, especially in the realm of energy cooperation, which is likely to continue to spearhead this strategic alliance as a sector of great mutual importance. Meanwhile, as China seeks to entrench itself in the Gulf, it may find itself caught in the middle of the regional power struggles that threaten stability, namely the Iran-Saudi rivalry. President Xi, however, shows no intent of mixing business with politics, as seen in his recent regional tour, which saw him visit both Saudi Arabia and Iran among others.
Nevertheless, if China wishes to grow its presence in the Gulf, ensuring regional peace will undoubtedly become a priority for Beijing. Chinese neutrality may be exactly what is needed to defuse regional tensions and maintain a level of accord that keeps the feud below boiling point. Yet despite Sino-Gulf relations taking center stage in the near future, China will not be replacing the United States as the dominant foreign power in the Middle East any time soon. Beijing’s focus on economic rather than political matters makes China, to use the words of Prince Turki bin Faisal Al Saud, “not necessarily a better friend, but a less complicated friend.”
*[Fair Observer is a media partner of Gulf State Analytics.]
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.
