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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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How An Oil Supply Outage Could Paralyze Asia

Oil tankers

It’s the news of the month: Saudi Arabia’s oil industry was attacked and prices jumped as everyone worried about supply security just days after the latest reports warning about a danger of a glut. But besides the obvious, the attacks, which took off an estimated 5 million bpd from global production capacity, highlighted the vulnerability of Asian economies to supply disruptions. The silver lining: it could spur them into action to reduce this vulnerability.

The attacks on the Khurais field and the Abqaiq processing facility had analysts talking about oil at $80 and even $100 per barrel depending on how long it took the Saudis to restore normal operations at the facilities. The latest update, however, has depressed prices: more than half of the lost production has been restored. By the end of September, Energy Minister Abdulaziz bin Salman said, Saudi Arabia would have 11 million bpd in production capacity and by the end of November, it would be 12 million bpd.

Prices fell immediately and many people in Asia must have breathed a sigh of relief. Asia is the biggest consumer of Saudi oil. Taken together, Asian oil importers buy as much as 72 percent of Saudi oil, according to Wood Mackenzie, with the daily rate at 2.5 to 2.7 million barrels of light and extra light—the grades produced at the affected facilities.

Because of this reliance on imported oil, every sharp move in prices has an immediate effect on Asian economies, especially if they are slowing down, as India’s, for example, is. But besides production outages, there could be another reason for sharp prices movements governments in Asia loathe: a military conflict in the Middle East.

Right now, India, Japan, and South Korea, as well as China, are in a tough place. The U.S. has blamed Iran for the attacks and there have been strong hints of retaliation although they have so far remained at the hint stage. If they progress beyond it, the United States’ allies in Asia would have some difficult choices to make. Related: Home Energy Storage Capacity Breaks Records In US

First, they would have to pick a side, and while it’s pretty certain they wouldn’t back Iran, South Korea and Japan, for one thing, would be careful about supporting the possibility of military strikes against it.

“We expect South Korea and Japan to carefully balance between their economic interest and their alliance with the U.S. in the weeks ahead,” risk analyst Miha Hribernik from Verisk Maplecroft told Bloomberg. “Tokyo and Seoul will be wary of any attempts to directly retaliate against Iran.”

India is another Asian economy and major oil importer that will certainly try to take the safest path in balancing between different geopolitical interests. India is the closet to Iran and used to be one of its top three oil importers. The country has been the most active in trying to maintain reasonably warm relations with its neighbour despite the fact it stopped buying its oil when the sanction waivers granted by Washington expired.

China has already made its stance clear. A Foreign Ministry spokeswoman this week said “China is against any expansion and intensification of conflicts. We call on the parties concerned to refrain from taking actions that lead to escalation of regional tensions.”

China is also the only country in the region that is actively building its international oil presence as a way to safeguard supply. Now, Japan, South Korea, and India may need to follow its example after the sharp reminder of the fragility of the Middle East’s geopolitical situation. Domestic production is not an option for South Korea or Japan. It is an option for India but not the best, meaning, cheaper and faster, one. Building strategic reserves, international oil expansion and source diversification are the other options.

It sounds easier than it is. The reason Asia takes in so much Saudi oil is that it’s cheaper than alternatives originating further from their destination. International oil expansion China-style takes quite a lot of cash to organize and carry out. Finally, source diversification can be tricky, because of price considerations and availability. The good news in this complicated situation is that the likelihood of a military escalation actually taking place is limited.


By Irina Slav for Oilprice.com

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  • ronnie riveros on September 19 2019 said:
    great piece

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