Energy

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

On the eve of the First World War, grandsons of Queen Victoria sat on the thrones of both England and Germany. That wasn't enough to stop a brutal conflict. The same goes for Louis XIII of France, who set his armies against his Habsburg cousins when he intervened in the 30 Years' War.

In theory, strategic marriages are meant to set shifting alliances in place with unbreakable bonds. In practice, foreign affairs are driven by structural factors deeper than blood, and even the firmest seals can be broken.

That's a useful framework for considering China's push to turn its sovereign wealth fund and biggest oil producer into cornerstone investors in the initial public offering of Saudi Arabian Oil Co. China Investment Corp. would be the biggest investor in the Saudi Aramco IPO, which could be worth up to $100 billion, people with knowledge of the matter told Bloomberg News. PetroChina Co. parent China National Petroleum Corp. would also take a stake under plans being discussed between the powers, the people said.

Mirror Image
China is becoming an exporter of capital just as Saudi Arabia's budget weakens
Source: Saudi Arabian Monetary Agency, Saudi Arabian Ministry of Finance, World Bank
Note: Negative net FDI indicates that inbound investment to China was greater than outbound investment from China. Relative to GDP, Saudi Arabia's budget deficits peaked in the 1980s.

There's a simple logic to a deal. Right now, what China wants most is to put its money to work on a global scale; Saudi Arabia, on the other hand, needs cash. The two desires are complementary: The Arab country is seeking to plug its fourth consecutive budget deficit, just as its Asian counterpart switches to being a net exporter of capital for the first time in its modern history.

Treasure Ships
China's crude oil imports are surging as domestic production slumps
Source: China Customs General Administration; National Bureau of Statistics of China

There's another factor. China has become more dependent on foreign crude after domestic production entered a slump last year. That surging demand, and Saudi Arabia's inability to meet it while still providing supplies to other long-term customers, has meant the kingdom losing its status as China's predominant supplier.

Russia provided about 1.5 million metric tons more crude to the country during 2016, and in the month of September -- when junior OPEC members were pumping hard to lift their baseline production targets ahead of the cartel's first output cuts in eight years -- Riyadh was briefly overtaken by both Angola and Iraq.

New Kids on the Block
Saudi Arabia used to dominate China's oil supplies. It's now fighting for its position
Source: China Customs General Administration

That dynamic is the biggest threat to the long-term health of this marriage. Equity stakes, like any other form of wasta or guanxi -- the Arab and Chinese terms for "connections" -- are an attractive way of decorating the Saudi-Chinese relationship, but it's hard economic realities that undergird ties. If Saudi's King Salman bin Abdulaziz used his current Beijing visit to ask the Chinese to stop buying crude from the Russians, he would quickly find out how much leverage Aramco's mooted marriage to China Inc. would deliver.

For the moment, the world's biggest oil importer and its biggest exporter are natural allies -- but they will always be ruthless when it comes to their national interests.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net