(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON May 8 Asia is more at risk from any
disruption to Middle East oil supplies than Europe or the United
States but is less prepared to deal with such a scenario,
according to a new report from Britain's Royal Institute of
The Chatham House study provides a wealth of detail on the
physical flow of oil from the Middle East to Asia and the threat
of an interruption.
But the real risk to Asian consumers comes from a sharp
spike in oil prices rather than a physical shortage of crude.
While the United States, Europe and Japan have been
increasing energy efficiency, boosting oil production and
cutting their reliance on imports, the fast-growing countries of
Asia have become more dependent and vulnerable.
If another oil shock occurs in future, it will hit Asia much
harder than the United States or Europe.
For their own sake, Asian countries must hold higher oil and
product stocks, eliminate subsidies to reduce wasteful
consumption, and put in place their own mechanisms for
restraining demand in the event of a crisis.
STRAIT OF HORMUZ
The Middle East accounts for half of all crude consumed in
Asia, compared with just 15 percent in Europe and 12 percent in
the United States, according to John Mitchell, author of the
study on "Asia's oil supply: risks and pragmatic remedies".
More than 40 percent of Asia's oil imports move through the
Strait of Hormuz, a notorious chokepoint located between Iran
and Oman where the shipping lanes used by tankers are just 10 km
wide at the narrowest point and pass close to the shore of Iran.
Asia is therefore much more exposed to any disruption to oil
supplies through the strait than Europe or the United States.
However, the region is far less prepared to deal with the
fallout from a partial or total blockade of the shipping route.
Only four regional countries (Australia, New Zealand, Japan
and South Korea) are members of the International Energy Agency
(IEA) and its International Energy Program (IEP).
Under the IEP, member countries pledge to maintain emergency
oil stocks or other reserves equivalent to at least 90 days of
net oil imports, and coordinate in the event of a disruption in
Other Asian countries remain outside this critical energy
security framework. China has built its own substantial reserves
but is not a member of the IEA. India and most other countries
in the region are not members of the IEA and lack sufficient
stockpiles to withstand a prolonged disruption.
Mitchell explores a scenario in which exports through the
strait are cut by around 10 million barrels per day for 90 days.
Any interruption in the flow would have an immediate and
severe impact on the availability of oil in Asia.
In the scramble to secure replacement supplies, Asian
consumers would bid up crude and fuel prices sharply.
Asian governments would be forced to respond, but
uncertainty about the steps they might take to ensure fuel
remained available would compound the sense of crisis and push
oil and product prices even higher.
For example, if India ordered its refineries to cease
exporting and conserve gasoline, diesel and jet fuel for use at
home, it would have a major impact on the availability of
refined products in Australia and Thailand.
Singapore could find itself unable to secure sufficient
bunker fuel, severely disrupting trade across the region because
the city state is a major refuelling hub for tankers, bulkers
and container ships.
Mitchell recommends China and India, the largest consuming
countries in the region that are not IEA members, should develop
a mechanism to coordinate their emergency response with the
agency, even if they do not become full members.
He also recommends that importing countries build emergency
stocks, perhaps via agreements with exporters, like the deals
Japan and South Korea have negotiated with Saudi Arabia and Abu
Japan and South Korea lease out tank farms in which Saudi
Aramco and Abu Dhabi National Oil Co store oil stocks.
The tanks are owned by the consuming countries, but the oil
remains the property of the exporters, to be released in the
event of an emergency.
The arrangement enables Saudi Aramco and ADNOC to hold
substantial emergency reserves on the other side of the Strait
of Hormuz close to their main customers.
Crucially, Mitchell argues that importing countries should
clarify how they would allocate scarce supplies to minimise
uncertainty and panic-buying in the event of a crisis.
The scenario explored in the Mitchell report is not wholly
realistic. The price impact from an interruption of crude oil
supplies would inflict far more damage than any fuel shortage.
There has been no interruption of physical supplies since
the "tanker war" between Iran and Iraq in the 1980s.
Iran has periodically threatened to disrupt shipping through
the strait during its prolonged confrontation with the United
Most experts, however, doubt whether it has the military
capability to close the strait for more than a few days given
U.S. naval and air superiority.
The loss of 10 million barrels per day through the strait
for 90 days is an extreme scenario that seems unlikely to
But even a much smaller interruption, say 2 or 3 million
barrels per day, could produce a huge rise in prices that would
inflict severe damage on Asian economies.
Mitchell's report does not attempt to quantify the price
impact of losing 10 million barrels per day through the strait.
But it does consider the macroeconomic impact of oil prices
rising by around 50 percent to between $140 and $160 per barrel
in terms of the balance of payments, foreign exchange reserves
and the government budgets of importing countries.
In reality, such a large loss of exports would be likely to
push prices far higher and tip Asia and the rest of the world
into a deep recession. In 2001 and 2008, a much smaller
imbalance between supply and demand pushed prices to a record
$145 per barrel.
It will never be known with certainty, but the massive
escalation of oil prices probably served as one of the
contributory causes of the subsequent financial crisis and
The report points to a deeper problem. Oil-consuming
countries in Asia are vulnerable to any development that causes
a sharp rise in prices - whether it arises from the Strait of
Hormuz, broader tensions in the Middle East, or any other
But while the United States, Europe, Japan and South Korea
have made extensive preparations for dealing with the economic
fallout from an oil shock, other Asian consumers have few plans.
The world's strategic stocks are overwhelmingly held by the
advanced economies, which also have plans for restraining demand
and allocating scarce supplies. They have further improved their
resilience by encouraging much higher energy efficiency.
No such preparations have been made in developing Asia, with
the exception of China's strategic stockpiling programme.
In practice, oil and product markets are global. Any
interruption in oil supplies would drive up prices for all
customers, not just those in Asia.
Strategic stocks held by the United States and European
countries will also benefit consumers in Asia by holding prices
down in the event of a crisis.
But it is unsustainable to have most of the crisis
preparations undertaken by the United States, Europe, Japan and
South Korea while the main beneficiaries are in developing Asia.
If the costs are mostly incurred by one set of countries but
the benefits mostly accrue to another, it is unlikely that
sufficient stocks will be maintained.
In the United States, some experts have already called for a
reduction in the size of the Strategic Petroleum Reserve, now
that the country's net oil imports have fallen by half since
In future, Asian consumers will have to shoulder more of the
burden of protecting themselves from supply interruptions and
(Editing by Dale Hudson)