In a move that reflects the growing importance of the Kingdom’s relationship with Japan, Saudi Arabia’s King Salman is visiting the East Asian country this week. Saudi Arabia is Japan’s top oil supplier and a strong trading partner, and both countries are keen to push the relations to higher levels.
Japan is considered the world’s third largest economy and is also the third largest “industrial” economy behind China and the US. Yet the country lacks natural resources necessary to sustain its technological and industrial development. Japan was the fourth-largest oil consumer and oil importer (behind the US, China and India) in the world in 2016, according to the International Energy Agency (IEA). In contrast, Saudi Arabia largely depends on oil exports in financing its economic development.
Top oil supplier
Japan is primarily dependent on the Middle East for its oil imports of nearly 2.87 million barrels per day (mbpd), with around 87 percent of Japanese crude oil imports originating from the region, with Saudi Arabia ranking as its top oil supplier.
Japan is perhaps one of the brightest spots in Riyadh’s strategy of maintaining its market share in key Asian markets. Indeed, Saudi Arabia’s market share in Japan increased from 33.48 percent in 2015 to nearly 36 percent last year, marking the third consecutive year-on-year rise. The Kingdom’s oil supplies to Japan in 2016 averaged 1.182 mbpd, up 4.7 percent year-on-year, and accounted for 35.7 percent of Japan’s total imports of 3.311 mbpd, based on Japanese official data.
However, despite the increase in Saudi oil volumes bound for Japan, the value of trade between both sides declined in recent years.
As for the future, the Economist Intelligence Unit (EIU) expects Japan’s economy will struggle to grow by faster than 1 percent in any of the next five years. A shrinking population and excess capacity will conspire to constrain economic growth over the medium and long term. In this context, BMI research projects that Japan will remain Asia’s third-largest net importer of crude oil over the next decade, though it expects import volumes to fall gradually as sluggish economic performance and refining-capacity cuts drag on demand.
Potential cooperation between the two countries covers a broad range of areas including solar energy, waste power generation, cultivation of industrial human resources and finance.
Dr. Naser Al-Tamimi
Even more worryingly for Riyadh, the competition in the short- to medium-term could heat up again in Asian markets, as other producers inside and outside the Organization of Petroleum Exporting Countries (OPEC) are expected to add millions of barrels to the market in the coming years. OPEC is expected to raise its output capacity by nearly 2 million barrels a day from 2016 to 2022, with over 56 percent of the gains concentrated in Iraq and Iran, according to the IEA.
Given Riyadh’s plans to reduce the dependence on oil and to diversify its national economy, Japan offers opportunities for Saudi Arabia to make strategic investments in the high-tech sector, one of the Kingdom’s top priorities. Japan’s SoftBank Group last year agreed to launch a $100 billion investment fund together with Saudi Arabia’s Public Investment Fund (PIF). This fund will launch in a few weeks, with around 10 other investors, including Apple, Oracle, Qualcomm, and Hon Hai Precision Industry, the Financial Times reported last week. Saudi Arabia’s PIF will be the largest investor in the new fund, putting in $45 billion, while Japan’s SoftBank plans to invest $25 billion over five years.
The Kingdom also plans to launch a renewable energy program this year requiring investment of $30-50 billion by 2023, and is in the early stages of feasibility and design studies for two nuclear power plants with a combined capacity of 2.8GW, according to Saudi Arabia’s Energy Minster Khalid Al-Falih. The Renewable Energy Projects Development Office (Repdo) of the Saudi Ministry of Energy has already issued its first requests for qualification for the Kingdom’s National Renewable Energy Program (NREP), intended to develop 3.45GW of capacity by 2020 and 9.5GW by 2023.
From the Saudi perspective, Japan would be a very attractive partner to build such an industry and the country will be very useful to address a broad range of issues including solar energy, energy efficiency, cultivation of industrial human resources and finance. The Kingdom needs to adopt advanced technologies, attract foreign investment and manufacturers, promote small and midsize enterprises, and develop human resources in order to diversify the economy. Interestingly, Saudi Arabia is posting a military attaché to its embassy in Tokyo to coincide with King Salman’s visit to Japan, paving the way for greater cooperation on defense and security.
Perhaps the most important issue under discussion during King Salman’s visit to Japan is Saudi Aramco’s preparations for the world’s biggest initial public offering, which could happen in the second half of 2018. As the Financial Times put it bluntly: “Luring the Saudi group to the Tokyo Stock Exchange, the third largest equity market by capitalization after the NYSE and Nasdaq, would help boost the ‘Abenomics’ economic revival plans of Prime Minister Shinzo Abe.”
• Dr. Naser Al-Tamimi is a UK-based Middle East researcher, political analyst and commentator with interests in energy politics and Gulf-Asia relations. Al-Tamimi is author of the book “China-Saudi Arabia Relations, 1990-2012: Marriage of Convenience orStrategic Alliance?” He can be reachedon Twitter @nasertamimi and e-mail: [email protected]