China’s Oil Cutbacks may be only temporary

Erica Downs

On June 28, the United States reported that China cut its imports of Iranian oil by 25 percent to avoid U.S. sanctions. What impact will the cutback have on China-Iran relations, both economically and politically?
Politically, the exemption from the Obama administration is not necessarily that damaging for China-Iran relations. While China’s relationship with the United States is Beijing’s most important bilateral relationship, the Chinese government would also like to preserve a good working relationship with Tehran. The fact that the Chinese government did not publicly promise to reduce oil imports from Iran to secure an exemption from U.S. sanctions gives Beijing some room to maneuver. 
Beijing can tell Tehran that it opposes the sanctions--and that the U.S. exemption does not reflect China’s support for U.S. sanctions. It can note that the reduction is due instead to a contract dispute earlier this year between Sinopec, the largest Chinese importer of Iranian crude, and the National Iranian Oil Company.  As a result of this contract dispute, China’s oil imports from Iran fell by more than one-third in the first quarter of 2012. 
Economically, China’s cutbacks are having an impact on the Iranian economy, as are reductions made by other countries.  Iran’s crude oil exports have fallen from 2.5 million barrels per day (bpd) in 2011 to 1.5 million bpd, which implies revenue losses of $8 billion per quarter, according to the International Energy Agency.
Moreover, unilateral sanctions by the United States, the European Union, Japan and other countries in 2010 have constrained China’s national oil companies in Iran.  Since these sanctions were imposed, Washington repeatedly warned Beijing that it opposed Chinese companies taking over oil and natural gas projects abandoned by European and Japanese companies.  China’s companies have not taken over any of these projects. 
What will China’s cutback mean for Iran’s economy? Can China find alternative oil imports on a long-term basis?
China can find alternative oil imports. Earlier this year, for example, Sinopec was not buying from Iran due to its contract dispute with National Iranian Oil company. So China it bought more oil from Russia and Vietnam. Going forward, China should be able to continue to find oil supplies to replace future reductions in its imports from Iran. Saudi Arabia has increased its output; Libya is back on-line; and oil production is growing in Iraq and the United States.  The decline in U.S. imports of light crudes from Africa due to increased domestic production, in theory, frees these crudes for sale to China. 
The U.S. waiver of sanctions on China is good for only 180 days. China must cut back even further on its Iran oil imports to continue to get the U.S. waiver in six months. Is Beijing likely to comply? Why or why not?
It will probably be more challenging for China to secure another exemption in six months. The reduction in China’s imports of Iranian crude during the first five months of this year were due largely if not entirely to the contract dispute between Sinopec and National Iranian Oil Company. The contract dispute, which began in late 2011, was resolved in March 2012.  As a result, China’s oil imports from Iran began to rise in April, and by May, China’s oil imports from Iran were back to 2011 levels of more than 500,000 bpd.
Sinopec has said it plans to buy 16 to 20 percent less from Iran in 2012. But most of those reductions have already occurred. If China continues to buy at 2011 levels this year, then China is unlikely to satisfy the U.S. criteria of “significant reduction in Iranian crude oil purchases” for another 180-day sanctions exemption. 
China is the largest importer of Iranian crude oil. China accounted for 22 percent of Iran’s oil exports in the first half of 2011, averaging 543,000 bpd. How much Iranian oil can China cut back realistically without hurting its own economic growth?
China has reduced its Iranian oil imports by 25 percent from January to May 2012 without any adverse effects to its economy. There are other sources of supply, which could replace future reductions in China’s oil purchases from Iran.  Sinopec may be reluctant to change the mix of crudes in its refineries, but it would not be that difficult for Sinopec to do so.  
Erica Downs is a fellow at the Brookings Institution’s John L. Thornton China Center. 
The following is a link to her latest paper on Iran and China.