Asia's fragile oil dependence on the Mideast

[Ray]

Wednesday, Feb. 16, 2011

Asia's fragile oil dependence on the Mideast

By MICHAEL RICHARDSON

SINGAPORE — The prospect of continuing Mideast political instability is widely portrayed as a geostrategic problem for the West, particularly the United States. For years, the U.S. has worked with a de facto coalition of authoritarian Arab regimes to contain Iran and protect Israel. The "people power" protests in Tunisia, Egypt and other parts of the region challenge this arrangement.

But the rippling unrest and uncertainty in the Middle East also expose the heavy dependence of China, Japan, India, South Korea and other leading Asian economies on the flow of oil from the volatile Persian Gulf. After 30 years in power, the resignation of Egyptian President Hosni Mubarak last Friday, following 18 days of street protests, has done little to reduce fears that tensions in the Middle East will help keep oil prices high and may lead to disruption of key oil-supply routes.

The narrow Strait of Hormuz between Iran and Oman is the only way into and out of the gulf by sea. It is ranked by the U.S. energy department as "the world's most important oil choke point." The average daily oil flow through this strait, which Iran has threatened to close if its nuclear facilities are attacked, was 15.5 million barrels in 2009, approximately one-third of world trade in seaborne oil.

More than 75 percent of crude oil exports from the Gulf went to Asian markets, not to the West. Many of the giant tankers carrying the oil crossed the Indian Ocean and passed through the Straits of Malacca and Singapore on their way to refineries in Southeast Asia as well as to China, Japan and other parts of Northeast Asia.

Asia has become the mainspring of global economic growth. Its surging energy demand and reliance on oil imported from the Middle East have contributed to the forces pushing the price of oil up by 25 percent since September and feeding inflation. With demand from China and other Asian importers rising and constraints on supply, oil for delivery later this year still costs over $100 a barrel.

The International Energy Agency reported Feb. 10 that world oil demand in 2010 had risen more strongly than previously thought and would increase further to exceed 90 million barrels per day for the first time by the end of this year. The U.S. predicts that oil prices could average about $93 a barrel in 2011.

All the Asian oil-importing economies are hostage to developments in the Middle East, but none more so than China given its size and ambition to surpass the U.S. as the world's biggest economy later this century. But will this happen when so much of China's oil comes from volatile suppliers in the Middle East and Africa? China's demand for oil, mainly to fuel its transport system, has more than doubled in the past decade, far outstripping home production.

Unlike Japan, China has not been able to curb oil consumption through energy conservation and efficiency. As a result, it has gone from being a net oil exporter in the early 1990s to the much more precarious position of having to import 55 percent of its oil in 2010. Half came from the Middle East and 30 percent from Africa, nearly all of it via the Malacca and Singapore straits.

Realizing the strategic importance of the straits to China, Japan and other users, the coastal states — Indonesia, Malaysia and Singapore — have increased surveillance to keep the waterway safe for shipping.

China's dependence on foreign oil is expected to keep rising, reaching 65 percent by 2015 and 70 percent by 2020. China is already second only to the U.S. as an oil consumer and third in imports, after America and Japan.

However, U.S. reliance on imported oil has been declining since 2005. Its dependence on oil from abroad is projected to fall to 45 percent by 2035, from 51 percent in 2009, as domestic production expands, biofuel and coal-to-liquids output increases and energy efficiency improves.

Moreover, the majority of U.S. oil imports come from its own hemisphere, with next-door Canada supplying over 23 percent. Only 17 percent of U.S. oil imports came from the Persian Gulf in 2009, while 22 percent were from Africa.

Rapidly growing dependence on imported oil is a strategic vulnerability for China. It is elevating supply concerns into an increasingly prominent position in Chinese foreign and defense policy.

As China seeks to secure oil in the Middle East and Africa, it finds itself at odds with the U.S., which has the leeway to promote nonenergy interests. "Indeed, the risk for Washington is that China's growing dependence on imported oil will increasingly prompt Beijing to give higher priority to oil than to international issues such as the protection of human rights, nuclear nonproliferation, and good governance," says Erica Downs, China Energy Fellow at the Brookings Institution.

China's energy diplomacy is a mix of positive and negative. Positive actions include major investment and supply orders in energy exporting countries, such as Russia, Indonesia and Myanmar. China is increasing oil production abroad and diversifying suppliers. At home, it is improving energy efficiency, expanding renewable and nuclear power, and building a strategic petroleum reserve that is planned to total 85 million tons, equivalent to 90 days of oil imports, by 2020.

On the negative side, China's quest for energy security is being extended offshore in Asia into actual or prospective oil and gas zones that are also claimed by Japan and other Asian states. If backed by China's increasingly strong armed forces, this push will heighten the potential for conflict.

Michael Richardson is a visiting senior research fellow at the Institute of Southeast Asian Studies in Singapore.

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The instability in the Middle East is a reason for worry for all countries dependent on its development on Middle East oil.

The interruption in oil flow will raise the oil prices with serious consequences not only on the economic front, but also on the social and political front. This could lead to instability in such countries which are developing and which will be badly affected trying to balance the high international oil prices with that that the domestic consumers will be able to weather.

That apart, China which is the largest consumer, will naturally attempt to discover oil blocks in waters closer to home and that will lead to clashes with its neighbours.

The situation indeed is turning grim.