Asia at Risk of Oil Supply Disruption

Asia is more at risk from a disruption in oil supplies than either Europe or the United States. That is according to a new report from Chatham House, which found that China and India are poorly positioned to handle such a supply crisis.

The paper looked at what would happen in the event of a major supply disruption, such as the loss of 10 million barrels per day through the Strait of Hormuz. More than 40% of Asia’s crude oil supplies transits through the narrow strait in the Persian Gulf. How would Asian countries handle such a calamity?

The obvious surge in oil prices would be the biggest threat, as opposed to a shortage of oil. High oil prices would inflict more damage on energy hungry nations of China and India, whereas the United States and Europe have improved fuel efficiency significantly.

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IEA member countries, which include the U.S., the EU, as well as South Korea and Japan, have all agreed to store 90 days’ worth of oil supply in strategic reserves, which would be deployed in the event of a supply shortage. China, although not a member, has developed its own reserve. India, on the other hand, has not, and thus would be severely impacted.

Moreover, the response by Asian governments would be unpredictable, adding a risk premium to the price of oil. For example, if India decided to ban exports of refined products in an attempt to conserve supplies for domestic consumption, it would lead to shortages elsewhere in Asia, pushing up prices further.

The report calls on Asian governments to develop strategic oil reserves and to coordinate their policies with the IEA, even if they are not members. It also says that Asian countries should clarify how they intend to allocate scarce fuel supplies in the event of an outage.

By Charles Kennedy of Oilprice.com