IEEJ：December ©IEEJ 2022

Special Bulletin
A Japanese Perspective on the International Energy Landscape (614)

December 9, 2022

Rapid Oil Price Decline and Enhanced China-Saudi Arabian Cooperation
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
Since early December, we have seen various attention-attracting developments in theinternational oil market. As described in A Japanese Perspective on the International Energy
Landscape (613), the European Union agreed on a Russian oil price cap at $60 per barrel on December
2, paving the way for Western countries, including the Group of Seven industrial democracies andAustralia as well as the EU, to introduce the Russian oil price cap system on December 5. While theinternational oil market’s reactions to the price cap attracted attention later, crude oil prices continued
to decline substantially in the second week of December. The key futures price for the West Texas
Intermediate crude plunged from $81.22/bbl on December 1 to $76.93/bbl on December 5 and fell
further to $71.46/bbl on December 8, extending its losing streak to six straight market days. In the firsteight days of December, it lost some $10/bbl. The key futures price for Brent crude also dropped bysome $10/bbl from $86.88/bbl on December 1 to $76.15/bbl on December 8.
Both WTI and Brent prices on December 8 represented their respective lowest levels thisyear, meaning that these prices fell back to their year-before levels. Crude oil prices began to rise on
growing tensions in Ukraine early this year, topped $100/bbl on Russia’s invasion into Ukraine andsoared above $130/bbl temporarily in early March. They later remained above $100/bbl before turning
down in summer. They slipped below $80/bbl in September. Their latest drops mean that their rises
amid growing tensions in Ukraine were lost.
It may be needless to note that the biggest factor behind the crude oil price decline is growing
concern about global economic deceleration and a subsequent slowdown in oil demand. Energy andfood price spikes amid the Ukraine crisis led to rapid global inflation, prompting U.S. and European
monetary authorities to tighten monetary policy by raising interest rates substantially. Concern about
economic deceleration grew on the monetary tightening, leading the International Monetary Fund torevise economic growth projections downward. A slowdown in oil and other energy demand under thestrict zero-corona policy in China, the largest oil importer in the world, also pushed down crude oil
prices. Rallies against the zero-corona policy in November have led Chinese authorities to ease thepolicy. However, how the easing would contribute to an economic recovery is still uncertain.
Crude oil price declines encouraged the OPEC-plus group of oil-producing countries toreverse its policy of increasing oil production continued since 2020 and reduce production by 0.1
million barrels per day in October and by 2 million bpd from November. The OPEC-plus group thus
signaled its willingness to defend crude oil prices, contributing to supporting crude oil prices. However,
the recent price trend indicates that the global oil demand deceleration’s downward pressure on crude
oil prices has been greater.
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In such situation, the world saw an attention-attracting development that could have great
influence on the international oil market, the international energy landscape and energy geopolitics.
Chinese President Xi Jinping visited Saudi Arabia and clinched a comprehensive strategic partnershipagreement with Saudi leaders.
On December 8, Xi visited the Saudi capital of Riyadh and held talks with Saudi ArabianKing Salman bin Abdulaziz Al Saud and Crown Prince Mohammed bin Salman. The Chinese andSaudi leaders agreed to enhance strategic cooperation and collaboration in a wide range of areas,
including crude oil trade expansion, investment promotion and cooperation between China’s Belt andRoad Initiative and the Saudi Vision 2030. They not only called for the enhancement of economic
cooperation but also agreed on the importance of respect for national sovereignty and the significanceof non-intervention in domestic affairs.
It is natural and obvious that China as the world’s largest oil importer and Saudi Arabia as
the world’s biggest net oil exporter need each other and are destined to deepen their mutual dependence.
At a time when Russian oil supply grows insecure and uncertain amid the Ukraine crisis, Saudi
Arabia’s presence in the international oil market is increasing more and more. Deepening relations
with Saudi Arabia is significant for energy security in China that gives priority to stable oil imports.
As the gravity center of the international oil market shifts to Asia, particularly China, it is importantfor Saudi Arabia to increase its presence in and its share of the Chinese market to enhance oil demand
security. If developed countries’ oil phaseout makes progress, the Chinese market where oil demandis expected to continue expanding until 2030 will become even more important for Saudi Arabia. It
will be significant for the two countries to deepen their mutual dependence.
However, China-Saudi Arabia relations are not limited to the energy area. The latest bilateralagreement indicates that they are conscious of enhancing the bilateral strategic economic partnershipfrom a comprehensive viewpoint, including cooperation between the Belt and Road Initiative and theVision 2030. Their enhancement of cooperation in a wide range of areas is related to their respective
ulterior motives. By positioning China as its important partner for the long-term challenge of tackling
economic sophistication and diversification, Saudi Arabia may demonstrate its significance to theworld, attract attention from developed countries such as Japan, the United States and European
countries and diversify international cooperation, while securing support from and cooperation withChina. By approaching Saudi Arabia as a linchpin to the Middle East and the most important player
in the international oil market, China may secure its economic interests. Geopolitically, China may
attempt to increase its presence in and influence on the Middle East by enhancing its relations withSaudi Arabia as its strategic partner. This may drive a wedge between the United States and Saudi
Arabia that have had a special relationship regarding geopolitical and oil market stability.
How will the United States view the enhancement of the strategic partnership between China
and Saudi Arabia? I am concerned about this question. The U.S. Biden administration’s relations withSaudi Arabia have been strained. In only two months after President Joe Biden’s visit to Saudi Arabia
in July, Saudi Arabia decided to reverse its oil production increase and cut production. In November,the Saudi-led OPEC-plus group decided on a substantial production cut of 2 million bpd, straining
Saudi-U.S. relations further. The United States may grow nervous about Saudi Arabia’s further
approach to China that the United States sees as its biggest competitor. If Saudi Arabia leads theOPEC-plus group to enhance its production cut to cope with the oil price weakness in such situation,
U.S.-Saudi relations may be aggravated.
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The special relationship between the United States and Saudi Arabia, which has been one of
the key factors supporting international energy market stability, is seemingly shaken. As there are amountain of challenges regarding the maintenance and enhancement of global energy governance, wecannot ignore the fate of the special relationship.

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