The loss of as much as 20% of the world’s crude oil and refined fuels through the ongoing effective closure of the Strait of Hormuz gathers most of the media attention as the main fallout from the attack on Iran by the U.S. and Israel.
But of more pressing concern is the rapid tightening of refined product markets in Asia, with major importing countries such as Australia and Indonesia potentially facing an emergency situation of lower supplies and massively higher prices.
Australia is Asia’s largest importer of refined products, averaging around 900,000 barrels per day (bpd), while Indonesia ranks second with arrivals of around 600,000 bpd, according to data compiled by commodity analysts Kpler.
Diesel makes up the biggest component of Australia’s imports and the fuel is vital to keep the country’s massive mining operations going, while gasoline takes the largest slice of Indonesia’s arrivals.
The problem for these two countries, and other Asian countries relying on fuel imports such as New Zealand, the Philippines and Vietnam, is that the near total closure of the Strait of Hormuz is already leading to changes in the product markets that point to an emerging crisis.
Major refining countries are cutting runs or restricting exports, with an example being China ordering an immediate ban on refined fuel exports from March 11, according to four sources with knowledge of the issue.
China isn’t a major supplier of refined fuel to Asia, but it is the country with the largest crude stockpile and the biggest refining capacity, meaning it has the capability to supply more to market if it chose to do so.
However, the authorities have decided to prioritise domestic energy security and not use their estimated 1.2 billion barrels of crude held in commercial and strategic stockpiles.
This is perhaps an understandable perspective, but it is short-term thinking that assumes that somehow fuel-importing nations will be able to meet requirements in coming months.
Chinese refiners are cutting throughput, as are some other plants in countries such as South Korea.
If refinery runs are trimmed and fuel-exporting nations cut shipments to protect domestic energy security, then the risk of fuel shortages in importing nations rises exponentially.
Product prices have surged with Singapore gasoil, the building block for diesel, ending at $143.88 a barrel on March 13, up 57% since the U.S. and Israel attacked Iran on February 28, while jet fuel has leapt 114% to $199.66.
TIME TO RESPOND?
So far the Australian government is maintaining that the country has adequate fuel supplies and imports are expected to continue at normal levels.
However, it has released some diesel and gasoline from reserves to ease shortages after a spike in retail prices prompted consumers to rush to fill up tanks.
The problem is Australia only holds around 30 days of fuel supplies, meaning any sustained interruption to imports results in a crisis rather rapidly.
Australia is not without leverage, but the question is whether the government will be willing to effectively threaten trading partners in order to force them to keep exporting fuels, and even if they are, will they do so in sufficient time.
Australia’s major fuel suppliers are South Korea, Singapore, India and Japan, but it also takes from China, Malaysia, Taiwan and Brunei.
It also happens that Japan, South Korea and China are major buyers of Australian iron ore, coal and liquefied natural gas (LNG), while Singapore buys LNG and India imports coking coal, which is vital for its steel industry given a dearth of local supplies.
In a shortage situation, the obvious thing for Australia to do to conserve diesel would be to halt iron ore and coal mining and LNG production.
Up to 40% of Australia’s diesel is consumed by mining and if shortages eventuate the government would be forced to prioritise diesel for food production and distribution.
Imagine if China, which gets about 75% of its seaborne iron ore imports from Australia, was to stop receiving cargoes.
It may be able to get some more from number-two supplier Brazil, but it is more likely it would eat through its stockpiles within three months and would then have to cut steel production.
This in turn would hurt its key manufacturing and construction industries.
While China could survive without Australian and Indonesian coal and LNG, it’s hard to make the same argument for Japan and South Korea.
Australia and Indonesia together provided more than 80% of Japan’s coal in March, according to Kpler, while also being the source of half of its LNG.
The two resource-rich nations supplied 38% of South Korea’s LNG in March and nearly 60% of its coal.
These are levels of imports that those countries simply could not replace from other suppliers, meaning that the fuel exporters are placing themselves at massive risk if they restrict shipments and cause shortages in importers.
The question is whether governments are prepared to act to ensure that the regional economies work together and share the pain caused by U.S. President Donald Trump’s war against Iran, or whether they will allow short-term, narrow self-interest to take hold and turn a bad situation into a disaster.
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The views expressed here are those of the author, a columnist for Reuters.
(Editing by Himani Sarkar)