The “New BRICS” to Re-route the Global Oil Supply

The “New BRICS” to Re-route the Global Oil Supply

On August 24, the BRICS group of big emerging economies (Brazil, Russia, India, China and South Africa), founded in 2010, welcomed six new members, in an endeavor to reshape the global world order. The new countries, including Argentina, Egypt, Iran, Ethiopia, the Kingdom of Saudi Arabia (KSA), and the United Arab Emirates (UAE), will formally become members on January 1, 2024.

This expansion is considered a starting point for BRICS as it will add a new spark to its mechanism as well as strengthen its global development efforts. In this context, this analysis shows the expansion’s great impact on both the group and global economy as well as the pattern of petroleum supply and trade.

Spotlight on the BRICS Economy

BRICS, having China, the second largest economy in the world, constitutes around a quarter of the global gross domestic production (GDP). In 2022, the group’s total GDP reached about $25.9 trillion, contributing a share of 25.6% of the global GDP, as explained by the World Bank’s data. After the expansion, the BRICS+ GDP is forecasted to exceed $30 trillion during 2023, while its share of the global GDP will rise to 29%, according to the International Monetary Fund’s (IMF) projections.

For trade, BRICS expansion will increase the group’s share of global exports (merchandise trade) to 25.1%, up from 20.2%, calculated using the World Trade Organization’s data for 2022.

Reshaping the Oil Supply Map

After including three of the world’s largest oil exporters, the KSA, the UAE and Iran, to BRICS, the expanded group’s global oil supply would exceed 40%, up from about 20%, as explained by the US Energy Information Administration (EIA). In 2022, the three countries together contributed 21% of the world’s oil share with the KSA alone contributing 13%, according to the Statistical Review of World Energy Data.

Meanwhile, the KSA and Russia, the new group’s biggest oil producers, contributed more than a quarter of the world’s oil share.

An enlarged BRICS includes not only the largest oil and gas exporters but also two of the largest importers, China and India. In 2022, more than 30% of Chinaط’s and India’s crude oil imports came from Russia and the KSA only, according to the Statistical Review of World Energy Data.

BRICS+ Strategic Role in Oil Geopolitics

The inclusion of Iran together with the UAE in the BRICS+ bloc adds a permanent political dimension to the trading institution, the Organization of the Petroleum Exporting Countries (OPEC+), and boosts the control of the emerging geopolitical challenger over crucial raw materials, explained in bne IntelliNews website.

Moreover, for years, OPEC+ countries have complained that Western sanctions have enclosed investment flows and exports. The recent European Union (EU) ban on Russian crude oil and seaborne petroleum products, and price caps imposed by the EU and G7, have generated a new sanctions mechanism that targets more revenues rather than export volumes.

Intra-BRICS trade has suddenly gained an unprecedented strategic role in oil geopolitics as the global energy order gets divided into two blocs; some support the Western sanctions on Russia while others do not.

Russia and China would like to see a geopolitical BRICS+ that can confront the G7. Yet, most of the other members simply strive to just improve their economies, according to the United States Institute of Peace

De-dollarization: A Long Way Off

Besides BRICS expansion, reducing dependence on the US dollar was one of the summit’s objectives. Leaders of the BRICS countries have asked their countries’ finance ministries and central banks to consider the possibility of launching national currencies-based payment instruments and platforms, stated South African President Cyril Ramaphosa at the briefing on August 22, 2023.

The inclusion of Iran, the UAE, Egypt and the KSA will be a heavyweight in energy exports, particularly oil, suggesting that a basket of commodities backed by gold and oil could emerge from the new group, BNY Mellon stated in a note.

The Western sanctions on Russia have given a push to this trend, with India settling its transactions in UAE dirhams, Chinese yuan, in addition to local rupees to avoid Indian banks’ concerns about dollar transactions.

In July, Indian refiners also started paying for some Russian oil imports in Chinese yuan, stated a senior government official. In mid-August, India, for the first time, bought 1 million barrels (mmbbl) of crude oil from the UAE that were paid for in rupees, according to a statement issued by the Indian embassy in the UAE.

US sanctions had a greater impact, forcing both Russia and Iran to shift to alternative currencies for oil trade. Currently, China is the largest buyer of Iranian oil and is reportedly paying for it in yuan. For some, the KSA and Iran’s entry into BRICS may indicate that oil trade will easily “undergo de-dollarization,” but Riyadh is expected to proceed with caution.

The expansion of BRICS from five countries to eleven may undoubtedly result in the group gaining leverage. Having the largest crude oil and natural gas exporters and importers will make the group become a major power as far as natural resources are concerned. This expansion is seen to promote new and enhanced oil trading relationships between BRICS partners. Yet, for BRICS to be effective in the long term against OPEC’s influence, members will have to resolve their border challenges and set clear common goals and policies.

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