Why Iran Wants to Supply China With Oil

The race is really on now.

The ink is barely dry on lifting the international sanctions on Iran and already companies are moving in to tap its market.

The case is compelling. Iran has the world’s largest natural gas reserves, a population of 80 mln and a US$400 bln economy.

The Australian Financial Review reports that already German automaker Daimler has announced a joint agreement to build Mercedes-Benz trucks inside the country.

It’s a crowded door leading into Iran at the moment.

All this is especially bullish for Europe…

Iran’s $50 bln upgrade bill

Iran has closer trade and diplomatic ties to Europe than the US.

For example, Iran used to account for 13% of Peugeot sales before sales were suspended in 2012. And don’t forget the money to upgrade the domestic Iranian airline industry. Now Iran has already agreed to buy 114 planes from European company Airbus. The order is a mix of new and used jets.

That’s just a start.

Iran estimates it needs 500 planes in total to overhaul its fleet. Iran’s existing fleet is 25 years old. This is part of the reason its safety record is so terrible. 1200 people have died in crashes since 1980. In total, the bill for 500 new planes could hit US$50 bln.

As of now, there’s a question mark over whether the country can afford that. But even a half or a quarter is still a huge order for the airline industry.

Of course, a lot of what Iran can and can’t afford depends on the direction of the oil price.

Iran will now add another 500,000 barrels of crude oil exports a day to the global supply. Although this addition is already built into prices.

But Iran wants its market share back. That’s especially true supplying one place in particular — China.

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A simple market shift or something more?

Saudi Arabia is the biggest exporter of oil to China.

Demand for oil in China is expected to grow 3% this year. That’s about 300,000 barrels a day. So in theory Iran could take the market share of whatever growth in oil demand comes out of China.

The question is then which country will China chooses to import its oil from?

Now, here’s a warning. I’m no oil expert. But I do study the rent of natural resources. I’ll get to that in a moment.

Statistics in the Wall Street Journal this week show that China’s import sales from Saudi Arabia were only up 2.1% last year. But they went up 28% for Russia.

That looks significant to me. China could be propping up Russian exports to help it withstand the pressure of the low oil price — and unite against US financial warfare and NATO’s encirclement of Russia.

Both China and Russia are looking to develop a trade framework outside the US dollar.

The US shale revolution is flooding the world with oil. The US seems happy to see this smash Russia because its economy is almost entirely dependent on oil and gas.

The geopolitics of oil

Perhaps the US is even happy to see Saudi Arabia under pressure. But don’t be under any illusions about the fragile state of Saudi Arabia — in terms of money anyway.

The potential partial float of Saudi Aramco — the State owned energy firm — revealed just how deep the Saudi energy treasure chest is.

The valuation for the entire company is 10 trillion US dollars. That’s astronomical. It’s 12 times the largest non-state oil and gas firm Exxon Mobile.

And Exxon is the second largest company in the world after Apple at my last check.

It’s also interesting to note that Chinese President Xi Xingping is actually doing a tour of Saudi Arabia and Iran this week.

According to the Wall Street Journal, Xingping is there to seek promises they’re committed to regional stability after the diplomatic clash over the Saudi execution of prominent Shiite cleric Nimr al-Nimr.

Now this is interesting.

Could we at last be seeing a world power make a genuine attempt to create some sort of peace?

Conventional opinion would have you believe that religion is causing all the problems in the Middle East. But this is only half the story. And it is not the most important half.

This is what you need to know to understand geopolitics.

You need to know who is collecting the oil wealth. Because they will do everything in their power to hang on to it.

The classical economists called the value of natural resources above their cost of extraction economic rent.

It’s the return you get without having to work…

In this case, it’s the return the Saudis get for owning the oil…

So have a look at this map. A cartographer and adjunct master professor at the US Air Force Special Operations School/Joint Special Operations University in Florida called M. R. Izady created it.

Source: Dr. Michael Izady at Columbia University, Gulf2000, New York


It’s a map of where the Middle East oil is, by religion. And national boundaries overlay it. According to The Intercept:

What the map shows is that, due to a peculiar correlation of religious history and anaerobic decomposition of plankton, almost all the Persian Gulf’s fossil fuels are located underneath Shiites.

This is true even in Sunni Saudi Arabia, where the major oil fields are in the Eastern Province, which has a majority Shiite population.

As a result, one of the Saudi Royal family’s deepest fears is that one day, Saudi Shiites will secede, with their oil, and ally with Shiite Iran.

This fear has only grown since the 2003 U.S. invasion of Iraq overturned Saddam Hussein’s minority Sunni regime, and empowered the pro-Iranian Shiite majority.

Nimr himself said in 2009 that Saudi Shiites would call for secession if the Saudi government didn’t improve its treatment of them.’

Nimr is the cleric I mentioned above. His execution sparked the current confrontation between the two regimes.

The Saudis cut off his preaching — at the neck.

The ruling Saudi government does what all ruling governments do: stamp out any sign of independent thinking

There is after all, control of that vast oil rent to protect. It keeps the House of Saud in astonishing luxury.

They’re not alone. The rent of land and natural resources drives practically all of the world’s behaviour.

To learn more about how you can see and understand the world differently — and to accurately forecast economic behaviour as a result — go here.

Best wishes,

Callum Newman

Ed Note: This article was first published in Money Morning.

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Callum Newman

Callum Newman

Callum Newman is the editor of Markets and Money and Associate Editor of Cycles, Trends and Forecasts. He also hosts Markets and Money Podcast. Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect. To have Callum’s thoughts and insights on the current state of the currency, commodities and stock markets delivered straight to your inbox, take out a free subscription to Markets and Money here.

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