SINGAPORE – East Asia’s three top industrial powers, all heavily dependent on imports of Middle East oil, have moved quickly to try to secure their supplies as the West tightens sanctions on Iran over its nuclear program.
China, Japan and South Korea sent ministers to Arab oil-exporting neighbors of Iran earlier this month to check whether alternative supplies to fuel their economies and transport systems would be available in case Iranian oil sales are curtailed. China’s Premier Wen Jiabao was the latest diplomatic visitor to the Persian Gulf, traveling to Saudi Arabia, Qatar and the United Arab Emirates from Jan. 14 to 19.
The visits are part of a new attempt by leading Asian economies to balance their need for energy security with growing pressure from the United States and the European Union for more effective steps to deter what they suspect is Iran’s covert program to acquire nuclear weapons capability — a development that could cause a dangerous arms race and instability in the gulf.
In an attempt to prevent Arab oil exporters from taking advantage of the tension to increase their sales at Tehran’s expense, Iran has warned that it would regard such a move as an unfriendly act.
The EU has agreed in principle to embargo imports of Iranian oil, while the U.S. has put pressure on Asian buyers to reduce imports to starve Tehran of revenue for its nuclear program. Ira has threatened to block the vital Strait of Hormuz oil export route from the gulf if further sanctions prevent it from selling oil.
China must navigate particularly treacherous waters in the Persian Gulf. It is expected to surpass the U.S. as the world’s biggest oil importer in the next 18 months. China already imports 55 percent of the oil it consumers and at least half comes from the Middle East.
Together, China, Japan and South Korea buy nearly half Iran’s oil. Japan and South Korea, both U.S. allies, indicated recently that they would reduce their purchases. China publicly rebuffed U.S. pressure to do the same. It imports about 11 percent of its crude oil from Iran, making Tehran its number three supplier after Saudi Arabia and Angola.
For China and other Asian energy importers, the reliability of shipments from Saudi Arabia and other gulf suppliers has become an acute concern following warnings from some Iranian officials that Iran would block the Strait if prevented by Western sanctions from selling its oil.
The narrow strait is the only way into and out of the gulf by sea. An average of almost 17 million barrels of oil each day is carried through the strait by tankers, one-fifth of all traded worldwide.
With China projected to overtake the U.S. soon as the biggest buyer of Saudi oil, Wen is seeking reassurances that the world’s top oil exporter has substantial spare capacity that could help make up for any shortfall in Iranian oil supplies.
The kingdom is pumping near its record rate of 10 million barrels per day (bpd). Since June, Saudi Arabia and its gulf allies, Kuwait and the UAE, have upped output after failing to convince Iran and other members of OPEC, the Organization of Petroleum Exporting Countries, to agree to a coordinated increase to cover the supply disruption from Libya’s civil war. Despite the revival of Libyan oil sales, the trio has sustained the pace to meet rising demand from Asia and try to bring oil prices below $100 per barrel to help fuel global economic growth.
Although Saudi officials have said the kingdom has at least 1.5 million bpd in spare capacity, oil analysts say that Saudi Arabia, Kuwait and the UAE combined would only be able to replace up to two-thirds of Iran’s 2.2 million bpd in oil exports.
They say that the trio, plus affiliated Arab Gulf producers, could replace Iranian oil for about a month. Then the strategic oil reserves of the West, coordinated by the International Energy Agency (IEA), would have to kick in to prevent a supply disruption and rocketing energy prices.
The bigger question for Asia, the region of the world most dependent on gulf oil supplies, is whether in the event of a prolonged Strait of Hormuz blockage there would be enough readily available alternative ways of moving the 17 million bpd of gulf oil exports onto the world market, even though such a closure is seen as unlikely because it would gravely harm Iran’s economy as well as those of other countries.
The IEA has a plan to release up to 14 million bpd of government-owned oil stored by its 28 member states, including Japan. The rate of release could be continued for up to a month, offsetting most of the gulf oil loss. It would allow time to activate overland pipeline transport to export terminals outside the gulf while the Hormuz Strait remained shut or only partially open.
However, the U.S. Energy Information Administration warned recently that this would involve use of longer alternative routes with increased transportation costs.
Moreover, current or soon-to-be-available overland pipeline capacity amounts to no more than 9 million bpd, a shortfall of around 8 million bpd. Removing such a big chunk of the world’s daily oil consumption of 89 million bpd would create panic buying and acute competition for limited supplies, especially among Asian energy importers.
The result: a global economic crisis aggravated by geopolitical tensions.
Michael Richardson is a visiting senior research fellow at the Institute of Southeast Asian Studies in Singapore.