Oil Shock Unites China with Asia Rivals Worried About Supply

If anything could distract Asia’s top powers from sparring over disputed territory and crimes committed during World War II, it’s the need for cheap oil.

Asia accounts for more than 70% of Saudi Arabia’s crude exports, with the four biggest economies – China, Japan, India and South Korea – leading the pack, according to consultancy Wood Mackenzie. That leaves them particularly vulnerable to rising geopolitical tensions in the Middle East that are now causing global crude prices to soar.

With the U.S. already blaming Iran for a devastating drone strike on a key oil facility in Saudi Arabia, American allies in the region like Japan and South Korea – as well as emerging partners such as India – may find themselves under pressure to go along with whatever President Donald Trump decides to do next. But their main goal will be to ensure any response is measured.

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“The governments of China, India, Japan and South Korea are certainly united in their dependence on Saudi exports and will wish to avoid any escalation of the crisis,” said Miha Hribernik, head of Asia Research at Verisk Maplecroft, which advises companies on risk.

“We expect South Korea and Japan to carefully balance between their economic interest and their alliance with the U.S. in the weeks ahead,” he added. “Tokyo and Seoul will be wary of any attempts to directly retaliate against Iran.”

While all four of Asia’s biggest economies have sought to balance ties between Saudi Arabia and Iran, only China isn’t strictly complying with American sanctions against the country. India, previously one of the world’s biggest importers of Iranian crude, had already reluctantly curtailed oil shipments from Tehran — a painful choice given Iran’s close proximity to its western coast.

Fueling Asia’s Growth

Official responses to the Saudi crisis have so far been restrained. China has been the most vocal, with foreign ministry spokeswoman Hua Chunying saying “it’s irresponsible to think about who is responsible” before a conclusive investigation is complete.

“China is against any expansion and intensification of conflicts,” she said on Monday. “We call on the parties concerned to refrain from taking actions that lead to escalation of regional tensions.”

Countries React

Although strategists in Beijing believe the unfolding drama shows Trump’s efforts in the Middle East have failed, China still wants to avoid rising geopolitical tensions in the Middle East and will attempt to mediate or promote talks, said Li Guofu, a former Chinese diplomat to the U.S. and director of the Center for Middle East Studies at the China Institute of International Studies, which falls under the foreign ministry.

“The U.S. has long pressured its allies to take sides and threatened other countries to cut business ties with Iran,” Li said. “It is the one which plays a key role to defuse the tension of its own creation.”

In South Korea, the foreign ministry said the attack on Saudi Arabia undermined global energy security and stability in the region. The country’s president, Moon Jae-In, ordered an emergency meeting to minimize the impact on supplies and domestic prices, the government said in a statement.

The situation is slightly more complicated in Japan, the region’s second-biggest economy. The foreign ministry in Tokyo released a statement Sunday night strongly denouncing the attack and saying it would engage with the region to maintain peace and stability in the Middle East.

Prime Minister Shinzo Abe has already been under pressure from U.S. Secretary of State Mike Pompeo to join naval patrols in the Strait of Hormuz, a demand that risks prompting renewed attacks that Abe was deadset on undermining Japan’s pacifist constitution. Around 57% of the public were against any Japanese deployment to Hormuz compared to just 28% in favor, according to a poll published by Kyodo News.

Abe’s previous attempts to broker a resolution to the Iran crisis have gone nowhere. His visit to Tehran in June to ease tensions was undermined by Trump, who wrote afterward that neither side was ready to make a deal.

“Japan will probably try to stay on the sidelines until things clear up,” said Kazuo Takahashi, an emeritus professor at the Open University of Japan. “I think Abe will try to play a role in smoothing things over, but whether he can really do much, I don’t know.”

India’s oil ministry said Riyadh has assured them there would be no shortage of supplies, while the foreign ministry said it condemned the attacks on Saudi Arabia. Prime Minister Narendra Modi, who won re-election in May but is now struggling with a sharp economic slowdown, is one of the most vulnerable in Asia to a sudden spike in oil prices.

India imports nearly 85% of its total crude requirements, with Riyadh accounting for about 18% of crude imported in 2018-19. Rising fuel prices can often cause political headaches for leaders in price-sensitive India, where growth is at the slowest pace since March 2013.

Long Term

There is a chance the attack on Saudi Arabia’s oil facilities could prompt countries to try and coordinate policies, but any such efforts are likely to break down, said Nick Bisley, a professor of international relations at La Trobe University in Australia.

“Everyone who is on the wrong end of this, such as oil importers, might coordinate their policy to try to influence the U.S.,” Bisley said. “But given that even his closest advisers have difficulty shaping Trump’s behavior, this is more than likely a forlorn hope.”

Over the long term, the current crisis may steer Japan, South Korea and India more toward China’s model of building strategic infrastructure around the globe to ensure steady energy supplies, said Alexander Neill, a Shangri-La Dialogue senior fellow for Asia-Pacific Security at the International Institute for Strategic Studies in Singapore.

“China will be arguing that the U.S. is a fickle, unreliable partner who strikes up unrest and instability in a key strategic region, and the Chinese narrative will be that if you strive to align yourself with the U.S., you’ll be associated with that,” he said.

“If you’re in a cabinet office in any one of these countries in Northeast Asia, you’re going to think about diversification,” he added. “This is exactly the sort of contingency that China will say it’s been strategically hedging by creating this sort of infrastructure.”

Source: www.worldoil.com

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