An invitation to Saudi Arabia, the United Arab Emirates, and Iran – among other countries – to become full members of BRICS emphasizes the Gulf’s growing linkages with global economic heavyweights like China. While a less conspicuous undertaking, the August 16 launch of the Saudi-China Business Forum in Beijing, under the patronage of Minister of Municipal, Rural Affairs, and Housing Majid bin Abdullah Al-Hogail, coincided with the signing of 12 agreements totaling approximately $1.33 billion in pledged investments. Such flurries of firm-level commercial activity and the expansion of institutional linkages contribute to a growing sense of economic momentum between Gulf countries and China.

Yet energy ties remain the primary driver of China-Gulf economic relations. Indeed, the immediate results of the August forum look paltry against recent energy deals. In March, for example, Saudi Aramco spent $3.6 billion acquiring a 10% stake in a Chinese mega-refinery. The deal set the stage for increases in Chinese imports of Saudi crude oil, with an expected 40% rise in September, though the extension of Saudi Arabia’s voluntary oil production cut until the end of 2023 may shift buying patterns over the short term. Beyond serving as the dominant pillar in China-Gulf economic ties, energy dynamics also play a pervasive role in key regional issues impacting U.S. interests.

Slick Economic Ties

Energy ties reign supreme in most Gulf states’ economic relations with China, and this dynamic is unlikely to change radically for the foreseeable future. Saudi Arabia is China’s most important Gulf energy partner, but this is neither just a Saudi story nor one revolving only around crude oil exports and refinery deals. In June, China National Petroleum Corporation and QatarEnergy signed a 27-year supply deal for 4 million metric tons of liquefied natural gas, and CNPC assumed a 5% equity stake in Qatar’s LNG expansion project. This came after a similar 27-year LNG deal inked with Sinopec in 2022.

Meanwhile, a high-level Omani delegation visited China in June to explore opportunities for enhanced cooperation in the energy and mineral sectors. In February, Oman LNG signed a binding term-sheet agreement to supply China International United Petroleum and Chemical Co. with 1 million metric tons of LNG annually beginning in 2025. Oman already ships around 80% – or more in some months – of its crude oil exports to China, and Omani oil exports accounted for 42.5% of the value of all Omani exports in 2021. These data points reveal just snapshots of a broader, moving picture concerning energy relations.

Overall trade and investment flows between China and Gulf countries are heavily weighted toward the energy domain. Despite ongoing economic diversification efforts across the region, Gulf exports to China are highly undiversified, consisting mostly of crude oil and LNG. This trend line has remained quite consistent over past years, despite some minor changes to the value of commodity exports and the relative significance of export partners.

Chinese investment flows into Gulf countries likewise reveal a strong energy focus. According to data from the American Enterprise Institute’s China Global Investment Tracker, the energy sector accounts for the largest segment of the cumulative value of China’s investment and construction in most Gulf states. While transportation and real estate are other important sectors, they typically remain secondary to the energy sector.

Any U.S. efforts to check China’s economic influence in Gulf states must contend with the challenging realities of these energy commodity and investment flows. Gulf energy-focused relationships with China are skewed in the latter’s favor: China’s importance to Gulf suppliers largely outweighs the Gulf’s significance to Chinese buyers, especially on the level of bilateral energy relations. Beijing’s energy security approach involves a diversified importation strategy – in terms of both suppliers and commodities – and ensuring availability of domestic energy sources that can be relied upon in the case of any disruptions. Russia and Australia, for example, are top suppliers of crude oil and natural gas to China.

China’s diversity of energy partnerships enables opportunistic engagements. Chinese imports of discounted Russian crude in the aftermath of the invasion of Ukraine permitted Russia to displace Saudi Arabia as China’s largest crude oil supplier in early 2023. Stiffer competition with India for Russian crude, however, has pushed Chinese buyers to boost imports of Iranian crude oil, which are expected to reach 1.5 million barrels per day in August – among the highest levels in approximately a decade. One estimate suggested that this level of oil exports to China would generate around $3.30 billion in monthly revenue for Iran. Multiple U.S. administrations have sought to calibrate an appropriate degree of pressure on the Iranian regime, and the ability for Iran’s government to generate income from the energy sector remains an important calculation in the U.S. foreign policy stance toward Iran as well as a hot-button topic in domestic U.S. politics. Those purchasing Iranian oil, such as refiners in China, still run the risk of becoming targets for U.S. sanctions authorities, even if the political will to enforce sanctions wanes.

Currency Matters

Beyond export destinations, the currencies used to settle sales of Gulf oil and gas also matter. While the petrodollar remains dominant, Chinese officials have been pushing for more trade of oil and gas in yuan, especially since Chinese President Xi Jinping’s high-profile trip to the region in December 2022. In March, China completed the first yuan-settled energy deal purchasing Emirati LNG on the Shanghai Petroleum and Natural Gas Exchange. Comments by Saudi officials and media reports suggest serious considerations around reconfiguring how Saudi Arabia settles trade arrangements, though the kingdom has not yet made any definitive moves that would dent dollar dominance.

De-dollarization and prospects for creating alternative financial systems were closely watched topics during the August BRICS summit in South Africa – where members extended invitations to Saudi Arabia, the UAE, Iran, Egypt, Ethiopia, and Argentina to join the group of major emerging economies. However, no concrete initiative to rival the U.S. dollar emerged from the summit. Seeking assurances that Saudi Arabia does not implement any major policy changes to its global energy trade, especially concerning partners like China, that would be detrimental to dollar dominance may feature as part of ongoing efforts by U.S. officials to secure a U.S.-Saudi Arabia-Israel grand bargain on the normalization of relations between Israel and Saudi Arabia.

Next-Generation Energy Collaboration

Chinese actors and organizations are positioning to play a larger support role in the Gulf’s nuclear energy ambitions, heightening sensitivities associated with nuclear energy and proliferation risks in the region. In May, the UAE’s Emirates Nuclear Energy Corporation signed three agreements with Chinese nuclear energy organizations. Saudi officials are reportedly weighing a bid from China – as well as France and Russia – to build a nuclear power station. Such considerations are viewed as part of a Saudi push to secure U.S. assistance with developing civil nuclear capabilities, which also features as an important demand in a potential normalization deal between Saudi Arabia and Israel.

Gulf states’ ambitions to become top global suppliers of hydrogen likewise present new opportunities for China – through the provision of critical technologies such as electrolyzers, serving as a partner in other areas of hydrogen-related collaboration, or potentially becoming a future export market. China leads the world in hydrogen production, but in emission-intensive, dirty forms, and the China Hydrogen Alliance has an initiative to raise the share of hydrogen in China’s energy mix to 20% by 2060.

Gulf efforts to produce cleaner hydrogen may eventually support China’s target of reaching carbon neutrality by 2060. During Xi’s December 2022 visit to Riyadh, Saudi Arabia and China signed memorandums of understanding on hydrogen energy, and the Saudi Shura Council began approving the clean hydrogen energy cooperation deals in March. A key dimension of Saudi Arabia’s Neom project involves green hydrogen. Both Oman and the UAE are striving to become global leaders in the production and supply of low-carbon hydrogen.

With the United Nations Climate Change Conference, COP28, approaching in Dubai, Chinese influence within Gulf countries’ positioning on climate change and the global energy transition is likely to grow further. Chinese actors have been involved for years in the Gulf’s solar energy domain as well as influential financiers and developers in the broader renewable energy sector. Meanwhile, a new China-Arab International Research Centre for Drought, Desertification, and Land Degradation launched a first batch of collaborative projects.

Problems, Everybody’s Got ‘Em

Proceeds from Chinese imports of Gulf energy commodities will remain a critical public sector revenue source as Gulf governments manage the domestic implications of a global energy transition and advance expensive economic diversification initiatives. High-tech industries like artificial intelligence form a pillar of Gulf economic diversification efforts, especially in Saudi Arabia and the UAE, which have been racing to buy high-performance Nvidia chips. Meanwhile, the United States reportedly expanded the restriction of sophisticated AI chips beyond China to include Middle Eastern countries.

The troubled state of China’s economy poses additional concerns for Gulf producers counting on robust energy demand from China. The country’s economic recovery in 2023 has been sluggish; the real estate sector is in crisis; the declining population poses a “demographic dilemma”; and analysts speak of a “deflationary trap” and “economic long COVID.” While Chinese demand for Gulf energy commodities will not dry up overnight, none of this bodes particularly well for the China-Gulf energy partnership over the coming years. The only certainty is that China-Gulf energy relations will evolve – with varying implications for Gulf states and U.S. interests in the region.