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Saudi oil attack is wake-up call for Asian economies

19 September 2019
Jun Arima

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By Prof Jun Arima, Senior Policy Fellow for Energy and Environment:  On September 14, drone attacks -- claimed by Yemen's Houthi rebels -- hit the heart of Saudi Arabia's oil production facilities. These attacks took out 5.7 million barrels per day, which is half of Saudi production and 5% of global oil production, and sent benchmark oil prices up a fifth to almost $72.

The attacks have elevated regional and global tensions, and oil prices remain higher than before. In the short term, Asian countries should not panic -- but this is a timely reminder that these economies need to prepare themselves and protect their fuel supplies in case similar attacks -- or worse -- recur.

There is plenty of oil today. The Organization of the Petroleum Exporting Countries has surplus capacity of 3.2 million barrels per day, while non-OPEC countries, such as the U.S. and Russia, can also expand their production. President Donald Trump has already authorized the release of the U.S. Strategic Petroleum Reserve.

Members of the International Energy Agency own oil stocks of more than 330 days of net imports, and the IEA is considering whether it should activate its emergency response. All of this could mitigate the impact of the supply disruption.

At the same time, we should not be complacent. Rather, Asian countries must give a fresh look at their vulnerability to external shocks.

According to the energy outlook published by the Economic Research Institute for ASEAN and East Asia, oil demand in Asia will increase 2.5 times between 2016 and 2040. Since regional production will not be able to keep pace with this demand, net oil imports will rapidly increase and most will come from the Middle East.

Currently, 68% of Saudi's crude oil export goes to the Asia-Pacific region, including 16% for Japan, a similar amount to China and 11% to India. Even taking into account the prospect of shale oil imports from the U.S., Asia will be particularly vulnerable to supply disruptions caused by events such as natural disasters, accidents, regional conflicts and terrorist attacks.

IEA member countries are obliged to hold at least 90 days' oil stock. Japan in fact has more than 200 days. China and India are building up their strategic oil stocks but the speed of growth in domestic consumption means those stocks will not necessarily last much longer than before.

The readiness of ASEAN countries is far from sufficient. They should enhance their emergency response measures by developing early warning systems, oil stockpiling, preparing measures for demand restraint and fuel switching, and establishing regional cooperative arrangements for coping with emergencies.

Stockpiling -- a lengthy and costly business -- is the typical countermeasure to address oil-supply security and resilience. A broader policy should include not only oil-related infrastructure such as refineries and pipelines but also general social infrastructure like roads and ports. This needs to include institutional and legal frameworks and education, aside from hardware.

Developing this framework is a time-consuming process so governments in ASEAN member countries should start before the next disruption happens.

It is also important to utilize or revitalize existing institutional platforms for oil-supply resilience. ASEAN member countries have been working on the ASEAN Petroleum Security Agreement since 1986, but its functionality during an emergency is questionable as thus far it is just on paper and has not been activated to date.

In addition, the future of APSA is uncertain after it expires in 2023. It may be realistic to start with an oil-sharing scheme by selected countries that are willing to participate.

Asia is the center of gravity for energy demand growth in the future. Its dependence on the Middle East, with its unpredictable geopolitical situation, will only grow. This calls for enhancing Asia's own emergency preparedness. The drone attacks in Saudi should be used as a wake-up call.


This opinion piece was  written by  ERIA's Senior Policy Fellow for Energy and Environment, Prof Jun Arima, and has been published in the Nikkei Asian Review. Click here to subscribe to the monthly newsletter.

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