Asia is most vulnerable to Mideast oil supply shock
Friday, 9 May 2014 00:00
Reuters: Asia’s growing dependence on Middle Eastern oil has amplified the risks it faces if the Strait of Hormuz is suddenly shut, making it more vulnerable to such a disruption than other regions, UK think-tank Chatham House said on Wednesday.
Asia is more at risk than Europe and the United States to a cut in Middle Eastern supplies as it buys 75% of the region’s oil exports, said Chatham House energy security expert John Mitchell in a report – Asia’s Oil Supply: Risks and Pragmatic Remedies.
Despite Iran’s threat to shut the key Strait of Hormuz shipping route for Middle East oil in 2012, Mitchell said most Asian countries have not built up sufficient reserves to cushion the impact of a disruption. A strong reliance on oil product imports in Asia has also heightened their risk, he said.
"The burden of a spike in oil import costs will be greater on South Asian countries – Pakistan, Sri Lanka and India – as more than 30% of their revenues from non-oil exports were used to pay for oil imports in 2012, the Chatham House study showed."
Asian countries import nearly 30% of their consumption needs, mostly from refineries in South Korea, Singapore and India, which are in turn dependent on the Middle East for more than half of their crude supplies.
“How product-exporting companies and countries chose to allocate reduced supplies would affect Australia and Thailand in particular,” said Mitchell, who started his career in with UK oil major BP Plc in 1966.
Australia has seen a series of refinery closures, and by 2015, it is expected to become the largest net importer of diesel and second-largest net importer of gasoline in Asia, importing more than half of its fuel needs.
Product-importing countries, particularly Australia and Thailand, could face shortfalls of 5-10% of consumption in the event of a significant disruption to Middle Eastern supplies, Mitchell said in the report.
If Middle East oil producers choose to look after their own, by supplying to joint venture refineries in Asia and the United States first, however, this could lessen the impact of a disruption at the expense of European countries, he said. China will not have a shortfall under this scenario.
China is more secure than other Asian countries “mainly because it is also a large producer of oil and has a greater diversity of oil supply,” the London-based Mitchell said later in remarks in Thomson Reuters Global Oil Forum on Wednesday.
China “already has oil pipelines from central Asia, which is expanding (output), and (it) can look forward to increasing supplies from Russia,” he said.
Yet, Western sanctions on Russia due to the Ukraine crisis may affect other investments from Asian companies, such as in new Russian gas supplies, Mitchell said.
Gazprom, with more than 15% of global gas production and reserves, is expected to sign a deal next month to begin exporting gas to China from 2018.
The push to secure long-term oil supplies in Asia has seen tensions flare up between some states over the oil and gas-rich South China Sea, which is claimed wholly or in part by six countries. Vietnam this week condemned the movement of a giant Chinese oil rig into what it said was its territorial waters.
Worry over India
Low levels of oil stocks, especially in India, remained a worry, Mitchell said in the report, adding that there needs to be greater coordination on emergency oil stocks release among the International Energy Agency (IEA), China and India.
“The Indian government is building storage for oil stocks, but this is not yet being filled. And the cost of doing so is a deterrent,” he said in the forum’s chatroom.
“At the other extreme, the Chinese government is not only building storage but is also filling it, and aims to achieve IEA levels of storage of 90 days’ worth of imports within a few years,” he said.
The burden of a spike in oil import costs will be greater on South Asian countries – Pakistan, Sri Lanka and India – as more than 30% of their revenues from non-oil exports were used to pay for oil imports in 2012, the Chatham House study showed.
“In theory China could cover a 50% increase in the price of oil imports by drawing down foreign reserves at about 3% annually for 30 years,” Mitchell said in the report.
“Pakistan’s reserves would be exhausted within one year and those of India, Australia and Sri Lanka within about five years,” he said.