Christopher Davidson - After the Sheikhs - The Coming Collapse of the Gulf Monarchies

Although the Gulf monarchies have little shared modern economic history with the principal Pacific Asian powers [424] 116. Davidson, Christopher M., The Persian Gulf and Pacific Asia: From Indifference to Interdependence (London: Hurst, 2011), chapter 1. —notably China and Japan — their economies are now becoming increasingly intertwined. What began as a simple, mid-twentieth century marriage of convenience based on hydrocarbon imports and exports is rapidly evolving into a comprehensive, long-term mutual commitment that is not only continuing to capitalise on the Gulf’s rich energy resources and Pacific Asia’s massive energy needs, but is seeking also to develop strong non-hydrocarbon bilateral trade and is facilitating sizeable sovereign wealth investments. Although this increasingly extensive relationship does not yet encompass the Gulf monarchies’ military security arrangements — which remain predominantly with the Western powers — and although few serious attempts have been made by either side to replace or balance these with new Pacific Asian alliances, there is nonetheless compelling evidence that the Gulf monarchies are seeking to strengthen their non-hydrocarbon economic ties and even non-economic ties with these states. Indeed, an abundance of state-level visits, often at much higher levels than with western powers, and a plethora of cooperative agreements, gifts, loans, and other incentives are also undoubtedly helping the Gulf monarchies build up a soft power base in the East as well as the West.

China and Japan now have the second and third greatest oil consumption needs in the world, behind only the US, while Japan still has the fifth greatest gas consumption needs in the world, ahead of Germany and Britain. [425] 117. CIA World Factbook 2009 . Economics overviews on Japan, China, and South Korea, 2006–2008 estimates. Author calculations for totals. According to the Organisation of Petroleum Exporting Countries although Japan’s demand for oil is likely to fall by 15 per cent by 2030, China, South Korea, and other Pacific Asian economies are likely to make up 80 per cent of net global oil demand growth over the same period. [426] 118. The National , 5th August 2009, citing OPEC data. Most of this increased Pacific Asian demand is already being met by the Gulf monarchies, with their total hydrocarbon trade now close to $200 billion per annum [427] 119. Davidson (2010), chapter 3. —a figure likely to increase dramatically over the next decade. The Pacific Asian economies do little to disguise their dependency on hydrocarbon imports from the Persian Gulf, in contrast to many Western powers which are openly trying to reduce their dependency and diversify their sources. Although the non-hydrocarbon trade that takes place between the two regions is on a much smaller scale, there has nevertheless been an historical precedent for the importing of certain goods from Pacific Asia into the Gulf monarchies, especially textiles and electrical goods. And since the substantial rise in per capita wealth on the Arabian Peninsula following the first oil booms, the demand for such imports has increased correspondingly, along with new demands for cars, machinery, building materials, and many other products associated with the region’s oil and construction industries. In total, the Gulf monarchies’ imports from Japan, China, and South Korea could now be worth as much as $63 billion per year. [428] 120. Ibid., chapter 4. Moreover, there is no longer as much of an imbalance in non-hydrocarbon trade between the two regions as there used to be, as some of the Gulf monarchies’ export-oriented industries — especially those producing metals, plastics, and petrochemicals — are now gearing their sales to Pacific Asian customers.

While the Gulf monarchies’ sovereign wealth investments in the Eastern powers remain much more modest than in the West, this is also slowly changing as investments in Pacific Asia become regarded as realistic and more hospitable alternatives to the more mature western economies. Such an alternative was viewed as being particularly necessary following 9/11, after which many western governments and companies did little to disguise their distrust of Gulf sovereign wealth funds, with many commentators arguing that Gulf investments were not merely commercial and that power politics could be involved. [429] 121. Arab News , 7th May 2009. Quoting Nicholas Janardhan. With regards to Japan, Saudi Aramco has, for example, been holding a 15 per cent stake since 2004 in its fifth largest oil company, Showa Shell Sekiyu. [430] 122. Japanese Ministry for Foreign Affairs. Overview file on Saudi Arabia from 2009. In 2007 Dubai International Capital purchased a ‘substantial stake’ in the beleaguered Sony Corporation — the first ever major UAE investment in Japan. [431] 123. Arabian Business , 26 November 2007. And in summer 2009 the Japan External Trade Organisation named the UAE as one of its top three target countries for sourcing FDI. [432] 124. Along with Russia and Brazil. Since JETRO’s drive began, Abu Dhabi’s International Petroleum Investment Company has taken a 21 per cent, $780 million, stake in Japan’s Cosmo Oil Company [433] 125. Reuters, 4 November 2009. Although Kuwait’s sovereign wealth investments in Japan are more modest, the Kuwait Investment Authority nonetheless recently stated that it intends to increase by threefold its investments in Japan. [434] 126. Calabrese, John, ‘The Consolidation of Gulf-Asia Relations: Washington Tuned in or Out of Touch?’, policy brief published by the Middle East Institute, Washington DC, June 2009, p. 5.

In 2005 China’s Ministry for Commerce revealed that investments from the Gulf monarchies in China totalled $700 million, [435] 127. Ghafour, Mahmoud, ‘China’s Policy in the Persian Gulf’, Middle East Policy , Vol. 16, No. 2, 2009, p. 87. most having come from Kuwait. Back in 1984 a subsidiary of the Kuwait Petroleum Company took a 15 per cent stake in China’s Yacheng offshore gasfield, while the following year KPC set up a joint venture — the Sino Arab Chemical Fertiliser Company to invest in the Qilu petrochemicals facility in China’s eastern Shandong province. [436] 128. See Calabrese, John, ‘China and the Persian Gulf: Energy and Security’, Middle East Journal , Vol. 52, No. 3, 1998; Bin Huwaidin, Muhammed, China’s Relations with Arabia and the Gulf, 1949–1999 (London: Routledge, 2002), p. 194. In the 1990s the Kuwait Investment Authority increased its portfolio share in Chinese investments from 10 to 20 per cent, [437] 129. Calabrese (2009). p. 5. and it is now the largest foreign investor in the Industrial and Commercial Bank of China. [438] 130. Washington Post , 9 April 2007. This has effectively made the Kuwaiti government the biggest investor in one of China’s first major public offerings. The relationship between the two countries was also strengthened greatly following the setting up of a $9 billion joint venture between the Kuwait Petroleum Corporation and Sinopec in 2005. Since then, the two companies have been jointly financing the construction of a massive 300,000 barrels per day capacity oil refinery and ethylene plant in China’s southern Guangdong province. When the project comes online in 2013 it will be China’s largest ever successful joint project. [439] 131. Associated Press , 26th June 2009. But the most innovative and symbolic aspect of the investments between the two countries has been the establishment of the Kuwait-China Investment Company. Set up in 2005 and 15 per cent owned by KIA, the KCIC now has a capital base of about $350 million, about half of which is held in cash in order to facilitate rapid responses to strategic opportunities. It has specialised in investments in Chinese agribusinesses, particularly those producing crops with a high export value such as rice, wheat, corn, and sorghum. Meanwhile Saudi Aramco now has more offices in China than in any other country, and has taken a 25 per cent stake in a major joint venture with Sinopec and the China National Petroleum Corporation’s Petrochina subsidiary in 2001. [440] 132. Lee, Henry, and Shalmon, Dan, ‘Searching for Oil: China’s Oil Initiatives in the Middle East’ discussion paper published by the Environment and Natural Resources Program, Belfer Center for Science and International Affairs Discussion Paper, Harvard University, January 2007, pp. 4–5. The venture, named the Fujian Refining and Petrochemical Company, has involved the two companies expanding an existing refinery in China’s southeastern Fujian province along with building a brand new ethylene plant. Moreover, Aramco is now the largest shareholder in the Thalin refinery project in China, and in the near future it may embark on another joint venture with the two Chinese companies to build a refinery in the Chinese coastal city of Qingdao, again with Aramco taking the majority stake. [441] 133. Saudi Gazette , 21 November 2009. This could lead to the building of one of the largest oil-refining facilities in the world and may require as much as $6 billion to complete.