Kuala Lumpur, Malaysia – An attack in the Middle East. Oil prices surge as investors fear supply disruptions. Once it becomes clear that those disruptions are not materialising, traders calm down and so do oil prices. Life on the global markets returns to business as usual.
It’s a cycle that’s been repeated several times over the last 12 months, to varying degrees. The most recent incident happened on Wednesday, when Iran fired rockets at two Iraqi military bases that host troops from the United States. The attack was retaliation for the US’s assassination of Qassem Soleimani, the head of Iran’s Quds Force elite military wing, in a drone attack near Baghdad on Friday.
But even without the spikes, the price of oil has steadily increased over the last six months, as Iran and the US attacked each others’ interests and allies in the region.
And that has analysts in Asia worried. The region is home to some of the world’s biggest importers of foreign energy, including India, China, South Korea and Japan.
“The Middle East is a key source of Asia’s oil supply, making [Asia] particularly vulnerable in the event of a severe supply disruption, but a more likely threat is that of higher prices affecting the current account, slowing [economic] growth and fuelling inflation,” says Peter Kiernan, lead energy analyst at The Economist Intelligence Unit in Hong Kong.
“If, however, the current standoff between the US and Iran subsides, fears of economic collateral damage will be eased, but longer term [Asia] will need to look at its growing rate of oil-import dependence through the lens of threats to energy security as well as economic performance,” Kiernan told Al Jazeera.
Brent crude oil futures prices surged by up to four percent in early Wednesday trading in Asia, touching a five-month high of $71.75 a barrel, before drifting lower once it became apparent that no production, processing or transportation facilities had been affected.
In September, drone attacks on two Saudi Aramco oil installations resulted in the biggest-ever one-day jump in oil prices. But Aramco quickly repaired its facilities in Abqaiq and Khurais and resumed production, bringing prices back down.
In neither incident did the Strait of Hormuz between Iran and the United Arab Emirates become choked off for oil shipments leaving the region.
Even attacks on oil tankers last year in the Gulf failed to close off the crucially important shipping channel.
But from the lows of early August, crude prices have risen by nearly 23 percent, according to data by Refinitiv. And they’re up almost 37 percent since the end of 2018. A combination of Middle East tensions and supply cuts by major oil producers helped keep prices buoyant.
According to the International Trade Centre – a joint agency of the World Trade Organization and the United Nations – China was the world’s biggest oil importer in 2018, accounting for 20.2 percent of global crude supplies. The US was second, with 13.8 percent, followed by India, with 9.7 percent of the world’s imports. Japan and South Korea rounded out the top five.
But India is far more dependent on oil imports for domestic consumption than China is. Crude imports accounted for 83.8 percent of India’s needs in its 2018-2019 financial year, figures from the country’s oil ministry show. For China, that figure was 69.8 percent, according to a report in the state-controlled China Daily newspaper last year.
“Net crude oil-importing economies such as Singapore, Thailand, South Korea and India are the most vulnerable to higher oil prices in Asia, given their relatively higher reliance on crude oil imports,” Lloyd Chan, an economist at Oxford Economics in Hong Kong, told Al Jazeera.
“In particular, India is likely to be the most affected, as higher oil prices will raise inflation and worsen the outlook of its current account balance,” he added.
A growing energy-import bill is not something that Indian policymakers are likely to be relishing right now.
India’s Ministry of Statistics said on Tuesday that it expects its economy to grow by five percent in the year to March 2020. That would put it on course for its slowest growth rate since 2013.
And rising fuel costs could exacerbate growing anger on the streets.
On Wednesday, hundreds of thousands of workers and students across the country protested against what they described as Prime Minister Narendra Modi’s “anti-people” policies. They are angry at the government’s plans to privatise some public firms.
Elsewhere in Asia, some countries have done a better job of diversifying their energy mix than India has as they try to buffer themselves against external oil-price shocks.
China, for instance, has invested heavily in renewable energy, even though it remains the world’s top emitter of greenhouse gases. But according to energy consultancy firm Wood Mackenzie, China’s cost of producing electricity from wind and solar poweris already cheaper than gas-fired power, and will be “competitive with coal-fired power by 2026”.
Japan, though still heavily reliant on imported liquefied natural gas (LNG), is also boosting the proportion of renewable energy in its supply mix. The Institute of Energy Economics, Japan, estimates that around 11 percent of its power generation will come from renewable sources, not including hydroelectricity, this year. That’s up one percentage point from 2019. Meanwhile, the share of fossil fuels will drop from 47 percent in 2019 to 44 percent this year.
“Because energy needs [in Japan, South Korea and China] are largely fulfilled by LNG … and some renewables these days, I believe that the net impact to energy costs should be mitigated somewhat,” Lorraine Tan, Morningstar’s Asia regional director of equity research, told Al Jazeera.
But a major conflagration in the Middle East that chokes off shipments of oil and gas through the Strait of Hormuz could send energy prices much, much higher than even the recent spikes have reached.
If that happens, Asia’s economies could end up in truly uncharted waters.
Additional reporting by David Ho.