FEBRUARY 23, 2010
Saudi Arabia Shifts its Focus to China as the United States Falls Out of Favor 

BY JASON SIMPKINS, Managing Editor, Money Morning

Saudi Arabia, the world's largest oil producer, last year shipped more oil to China than it did the United States for the first time ever - a shift that highlights China's ascension to the ranks of the world's economic elite, as well as its position as the new focal point for the world's energy producers.

The flow of oil from Saudi Arabia to China rose to more than 1 million barrels per day (bpd) last year, just as demand in the United States fell below that level for the first time in more than two decades.

China in December alone imported a record-high 1.2 million bpd of Saudi oil, as its economy rode the momentum of Beijing's $585 billion (2 trillion yuan) stimulus package. U.S. imports of Saudi oil, on the other hand, fell to a 22-year low of 998,000 bpd in the first 11 months of 2009, as the world's largest oil consumer clawed its way back from its worst recession in 70 years.

"This is a reflection of the global economy," Jim Burkhard, managing director of global oil at IHS Cambridge Energy Research Associates, told The Financial Times. "China has been growing. The U.S. hasn't. We've seen that reflected in oil demand figures."

China's economy grew by 10.7% year-over-year in the fourth quarter of 2009, compared to 5.7% growth for the United States.

On top of that, China last year supplanted the United States as the world's largest auto market with 13.6 million vehicles sold. Roughly 10.4 million light vehicles were sold in the United States in 2009 - the lowest total since 1982 and a 21% decline from 2008.

China's purchases of Saudi Arabian oil rose about 14% last year, as a result. U.S. demand peaked above 10 million bpd in 2005 but has fallen 9% in the past two years. Saudi Arabia has reacted by striking new refining deals with Beijing and moving storage facilities from the Caribbean to Japan.

Saudi Arabian Oil Co. (Saudi Aramco), the world's biggest crude producer, already owns a 25% interest in a refinery in China's Fujian province, and is in talks with China Petroleum & Chemical Corp. (NYSE ADR: SNP) to take a stake in a 200,000 bpd plant in Shandong.

"We are already exporting more to China than to the U.S.," Saudi Arabian Oil Co. Chief Executive Officer Khalid A. Al-Falih said in an interview with BusinessWeek. "We are prudent and careful about where to invest but our eyes are focused on China and we will continue to look for all opportunities."

Many refiners have been forced to postpone expansion projects and idle plants in the past year as the global recession eroded fuel demand. But Al-Falih said his company is investing in refining capacity even regardless of current poor returns.

"Long term there will be a lot of consolidation and retirement of old and inefficient refineries," he said. "We are building refineries that are going to be the most efficient, well-configured and able to deliver the products and we are comfortable that over their life cycle they will be very profitable. We are not designing them for the markets of 2008, 2009 but we are putting them in place for the next three to four decades."

China and Saudi Arabia aim to boost trade 50% to $60 billion by 2015, the state-owned Saudi Press Agency reported last month, citing Chinese Trade Minister Chen Deming.

"China offers demand security, something that for a long time the oil-producing countries including Saudi Arabia have called for," John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh, told The FT. "As global demand has been picking up in the east... Saudi Arabia has been looking east."