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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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This Vital Oil And Gas Choke Point Could Be At Risk

Beijing is taking to task a Pentagon report, ”Military and Security Developments Involving the People’s Republic of China 2018” released last Thursday on China’s military activities.

The annual report issued by the Pentagon and presented to Congress, highlights growing Chinese naval capability, all the while underscoring the narrowing gap between China’s maritime forces and he U.S. Navy as well as China’s increased naval activity in the Western Pacific Ocean. The report states that China’s People’s Liberation Army Navy (PLAN) has global ambitions far beyond the traditional perimeters of its land-based defense systems, a claim that Beijing has always cleverly downplayed.

“The PLAN continues to develop into a global force, gradually extending its operational reach beyond East Asia and the Indo-Pacific into a sustained ability to operate at increasingly longer ranges,” the Pentagon report said, “The PLAN’s latest naval platforms enable combat operations beyond the reach of China’s land-based defenses.”

 “China’s aircraft carrier and planned follow-on carriers, once operational, will extend air defense coverage beyond the range of coastal and shipboard missile systems, and enable task group operations at increasingly longer ranges,” the report states. It adds that Chinese bombers are also likely training for “strikes" on U.S. targets. Experts agree, claiming that decades of increased investment in new technology by China’s military means it will soon have the capabilities to strike U.S. military installations in the Pacific by air.

“Furthermore, the PLAN now has a sizable force of high-capability logistical replenishment ships to support long-distance, long-duration deployments, including two new carrier operations. The expansion of naval operations beyond China’s immediate region will also facilitate non-war uses of military force.” China continues to learn lessons from operating its first aircraft carrier, Liaoning, the Pentagon said.

The report added that China has increased its military spending to around $190bn a year amid a sweeping program of modernization.

China refutes report

Beijing, not surprisingly, refutes the Pentagon report. On Monday, the English version of the China Daily said that China has voiced “strong opposition” to the report, claiming it misinterprets China's strategic intentions and “hypes a so-called Chinese military threat.”

Related: Oil Prices Jump As Saudis Cap Oil Supply

"The release of such reports year after year has harmed the mutual trust, and we ask the United States to abandon the Cold War mindset and adopt an objective and rational attitude toward China's defense and military developments," Senior Colonel Wu Qian, a spokesman for China’s Ministry of National Defense, said in a statement on Friday.

Then in a statement that was sure to set both Taiwan and other Asian countries on edge that are engaged in an ongoing struggle with China in overlapping claims in the South China Sea, Wu added that China has firmly taken the path of peaceful development and remained a contributor to world peace and international order. He added that China’s military has borne considerable international peacekeeping and disaster relief responsibilities, earning "universal praise from the international community.”

Notwithstanding, the Pentagon report begs one question: If Beijing’s South China Sea development remains unchecked, could it close off or at least seriously threaten South China Sea shipping lanes in the future?

Vital oil and gas choke point

The question takes on even more weight given that the South China Sea is one of the most important oil and natural gas choke points in the world. Around a third of global crude oil and around 40 percent of global liquefied natural gas (LNG), nearly 5 tcf, passes through the South China Sea each year, according to U.S. Energy Information Administration (EIA) estimates.

About two thirds of South Korea’s oil and LNG supplies, almost 60 percent of Japan’s and Taiwan’s energy supplies, and 80 percent of China’s crude oil imports pass through the South China Sea each year. However, unlike the Persian Gulf where only oil and gas is transported, billions of dollars of finished and unfinished goods also pass through the South China Sea.

The South China Sea also holds potential vast reserves of natural gas and to a lesser degree crude oil. One older Chinese estimate places potential oil resources in the South China Sea as high as 213 billion barrels of oil, though that estimate seems extremely high. Other reports give lower figures, but Beijing’s aggressive South China Sea push is fueled by both by its renewed sense of nationalism and potential oil and gas reserves under the troubled body of water.

While most consider the geopolitical impact and roil on global oil markets if Iran tried to close off the vital Strait of Hormuz, few have considered what could happen if China tried to restrict shipping in the South China Sea.

At first blush, some may balk at such a proposition given that the Strait of Hormuz at its narrowest point has a width of only 29 nautical miles (54 km), compared to the vastness of the South China Sea.

However, while there are several major transit routes or sea lines of communication that offer entry into the South China Sea (including the Sunda Strait and the Lombok Strait), the Strait of Malacca is by far the most widely used to carry oil, gas and other goods to Japan, Taiwan and South Korea.

The Strait of Malacca is the shortest and therefore most economical passageway between the Pacific and Indian Oceans. The Strait of Malacca is some 550 miles long (700 km), while at its narrowest point in the Phillips Channel of the Singapore Strait, the Malacca Strait is only 1.7 miles (2.7 km) wide. Related: Why China Will Continue To Buy Iranian Crude

As China continues to build on its reclaimed reefs, islets and formations in the South China Sea as well as placing military assets on these new formations, including runways, the landing of bombers, missiles, radar installations, troops and naval assets, it will, in time, also increasingly be able to threaten to close much of the South China Sea, or at least pose a lethal threat to shipping and aircraft traversing the body of water.

China has already set up a controversial Air Defense Identification Zone (ADIZ) covering most of the East China Sea, near Japan and South Korea, and could likewise do the same in the South China Sea in the future.

China has also made no secret of the fact that the artificial islands it has built out of strategically-located reefs and atolls in the South China Sea will be used as “unsinkable aircraft carriers.” Moreover, like Iran, China would likely threaten action to bring pressure against U.S. naval activity and military drills Washington conducts with its allies (the Philippines, Japan, Australia, India and others) in the region, as well as projecting its power against its smaller ASEAN neighbors, particularly Vietnam and the Philippines.

To negate this possibility would be to ignore China’s aggressive South China Sea push in the last few years, particularly since Xi Jinping took office in 2013. After being re-elected earlier this year to a second five-year term with prospects of continuing as leader for life, Xi said China will not concede "a single inch of land" and guard its sovereign territory, which includes its disputed South China Sea claims.

By Tim Daiss for Oilprice.com

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