John V Mitchell
Associate Fellow, Energy, Environment and Resources

Asia is more at risk from disruption of Middle East oil supplies than is either Europe or the United States, yet as a whole it is less prepared to deal with such an upheaval. This paper analyses the risks that major Asian importers would face if oil supplies through the Strait of Hormuz were disrupted on a large scale.

Photo: 4FR Nils Kahle / iStockPhoto: 4FR Nils Kahle / iStock

Asia is more at risk from disruption of Middle East oil supplies than is either Europe or the United States, yet as a whole it is less prepared to deal with such an upheaval.

This paper analyses the risks that major Asian importers would face if oil supplies through the Strait of Hormuz were disrupted on a large scale – for example, if 10 million barrels a day (mbd) were interrupted for 90 days. It does not discuss the many possible causes of such a disruption, nor does it speculate on political or other responses in the Gulf or explore what might be the various medium-term developments in price, demand and supply. But it does discuss the capacity of Asian countries to maintain oil supplies for longer periods of disruption by drawing down stocks or using financial reserves to outbid competing importers for the limited supplies available. Every Asian government would inevitably respond to a major disruption of oil supplies. Uncertainty about governments’ interventions would add to the risk premium generated by uncertainty about physical supplies.

This paper identifies priorities for policies to mitigate these uncertainties. The supply risk for liquefied natural gas (LNG) is different from the oil supply risk for Asia and is touched on only briefly in this paper.

This paper identifies five priorities in the development of policies to mitigate these uncertainties:

  • Establishing a process involving the IEA, China and India to facilitate a very rapid and convincing announcement of a coherent response to any major disruption in Middle East oil supplies;
     
  • Further developing schemes by which exporting national oil companies (NOCs) hold stocks in importing countries;
     
  • Clarifying the policies of crude and oil-product exporters for allocating supplies between domestic consumption, exports and bunkers when those supplies are curtailed by disruption, especially in Asian product-exporting countries;
     
  • Developing mechanisms to target a rapid release of emergency stocks to companies affected by force majeure disruptions; and
     
  • Promoting government and industry cooperation at the national level to ensure continuity of supply to consumers in the event of disruption.