War in Iran Is Exposing Oil Risks Across Asia

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2:11Daniel Ten Kate:Bloomberg Audio Studios. Podcasts. Radio. News. For much of the past week, oil and gas traders have been bracing for a worst-case scenario. and they're now watching it unfold. Iran effectively shutting down the Strait of Hormuz. It is at a standstill, so no oil is going in or out. China's government telling the country's largest oil refiners to suspend exports of diesel and gasoline. The confrontation between the United States, Israel and Iran has entered a volatile new phase, one that puts oil reserves and critical infrastructure directly in the crosshairs. Iran is widening its response, now aiming to paralyze the economic lifeblood of this region, oil and gas production.

2:55Daniel Ten Kate:Very interesting announcement from the president saying that the U.S. are looking to provide naval escorts and to lower insurance costs for any vessels and tankers looking to pass through the strait. The Strait of Hormuz is one of the world's most critical choke points. As much as 20 percent of the world's oil passes through the strait each day. And it's remained effectively closed since the conflict began.

3:19Fereidun Fesharaki:Nobody can close the Straits of Hormones for too long. So you close that, you have a global crisis.

3:24Daniel Ten Kate:Faridin Feshiraki is the founder and chairman of energy consulting group FGE.

3:30Fereidun Fesharaki:If you keep it closed, then the price of oil will go through the roof. The French and the British will surely get involved. And I think maybe Chinese get involved too. Everybody has to be able to get involved because that is creating a crisis, worst possible recession, global recession, and Iran is just too small fish to be able to close the Strait of Warhol.

3:51Daniel Ten Kate:But even if the fighting never reaches that worst case scenario for oil markets, countries across Asia, the world's biggest buyers of Middle Eastern energy, are bracing for potential shockwaves.

4:03K. Oanh Ha:Japan is very exposed, South Korea is exposed, China buys a lot of Iran's oil, Taiwan, India, Pakistan has most of its gas coming from Qatar.

4:15Daniel Ten Kate:Daniel Tan-Kate oversees Bloomberg's political and economic coverage in Asia.

4:20K. Oanh Ha:It's pretty much affecting every economy in Asia, not just yet because it's still early days. But if you do have prolonged, sustained rise in oil prices, that is inherently going to affect most economies in Asia because they buy a lot of oil.

4:46Daniel Ten Kate:This is The Big Tech Asia from Bloomberg News. I'm Wan Ha. Every week, we take you inside some of the world's biggest and most powerful economies, and we explore the markets, tycoons, and businesses that drive this ever-shifting region. Today on the show, Asia's biggest economies react to war in the Middle East, how the Iran war is rippling through global oil markets, and which Asian economies are most at risk to a large-scale disruption.

5:17Daniel Ten Kate:Since last year, China has been factoring in the uncertainty surrounding Iranian oil, quietly stockpiling crude at onshore sites. While China buys up some 90 percent of Iran's oil, those barrels account for less than 15 percent of Beijing's overall oil imports. Russia and Saudi Arabia remain China's biggest suppliers. And that's unlikely to change anytime soon. But there's a big reason why China's concerned. About half of its crude imports pass through the Strait of Hormuz. 20 % of the global supply of crude oil and refined products

5:54Fereidun Fesharaki:go through the Strait of Hormuz. Saudis have a pipeline to the Red Sea of around 2 million barrels per day. Abu Dhabi has a pipeline of about a million day and a half barrels per day outside the Gulf. But beyond that, there are no other pipelines. Beyond that is only the Straits of Hormuz.

6:13Daniel Ten Kate:When the U.S. and Israel attacked Iran late last week, China's response was immediate and pointed. My colleague Daniel Tenkate, who covers China's economy and political landscape for Bloomberg, says it underscored just how dependent China is on Gulf oil.

6:29K. Oanh Ha:Beijing has basically come out and opposed what's going on. And we had very strong words from Chinese Foreign Minister Wang Yi. He called it unacceptable to openly kill the leader of a sovereign country and institute regime change. So that's very frank, very strong language from China opposing this. At the same time, they really want to calm things down. So after that statement, we had another statement from China saying that Iran also needed to respect the reasonable interests of its neighboring states.

7:04Daniel Ten Kate:Iran's oil influence has diminished due to prolonged sanctions and limited foreign investment. Today, the country accounts for just about 3 % of global oil supply, producing about 3.3 million barrels a day. Dr. Feshiraki, you're originally from Iran and you spent many years living and working there. Broadly speaking, how important is Iranian oil to the rest of the world?

7:28Fereidun Fesharaki:Iranian oil production is 3.5 million barras per day, but all the liquids combined are more than 5 million barras per day, so it's quite important. But the oil sales only go through China, crude oil sales. So it is important only for China. But Chinese can replace the Iranian oil right away with other Middle Eastern crudes, except that they can't receive any discount. They have to pay the real market price for it. But it is not the case that somehow if the Iranian crude is not there, there would be damage to the Chinese security of energy supplies. Oil is available in the markets.

8:07Daniel Ten Kate:On Thursday, China's government ordered its largest refiners to suspend exports of diesel and gasoline as the Middle East crisis deepens.

8:16K. Oanh Ha:China, they want to make sure that their domestic interests are not hurt first. That's the top priority. And that means getting the oil to flow. Now, if the oil is flowing and you have this low-level kind of fighting going on where the U.S. has to devote a lot of attention and resources to the Middle East and military assets to the Middle East, but there's not huge economic disruption, I think that's a scenario that China would not mind seeing.

8:43Daniel Ten Kate:If the oil in Iran couldn't flow to China, what would that mean for China?

8:48Fereidun Fesharaki:China can just buy from somebody else. China has the money and the capability, financial ability to pay. Please remember, in China, Iranian oil is not used by any of the major Chinese companies. So Sino-Pec, PetroChina, and Sino, they don't touch Iranian crude. Only the teapots use it. So if the teapots cannot get them, you know, most of these teapots are uneconomic and the Chinese government wants to close them anyway. It's a matter of time. So they don't have it, they may close earlier, and it's better for the economy of China because Chinese oil companies have so much spare capacity. They don't really need them.

9:26Fereidun Fesharaki:And the Iranian crew doesn't go into the big refineries in China because the big refineries are on the stock market. And if you're on the stock market, we don't want to go elicit U.S. sanctions.

9:37Daniel Ten Kate:We've seen volatility in the energy markets, which was to be expected. But it's been measured. What's something that could happen that would send oil north of$100 a barrel, which seems to be kind of the line that everybody is watching for?

9:53Fereidun Fesharaki:I think two events can make that happen. One is that if there's an attack on the oil fields, Iran, for example, in UAE, they attacked Dubai, which is a commercial hub. So they hit the hotels, they hit the residential areas, but they haven't hit the oil fields of Abu Dhabi, which is so close to them that they could destroy a lot of them overnight. They have hit a Saudi refinery, but they haven't hit the oil fields still. If you hit the oil fields and you interfere with the flow of oil, then the prices can jump very fast. If you close access to the Straits of Hormuz for more than a month, the prices can jump$100 or more.

10:40Daniel Ten Kate:Now, the AIPAC region, where we are now, is deeply dependent on Middle Eastern oil. China, for example, buys 80%, 90 % of Iranian crude. Japan imports nearly all of its oil from the Middle East. And India gets roughly half of its oil from the region. Singapore has said it may reassess its GDP, depending on how long this conflict lasts. And I wonder, when you look at the region broadly, where do you see the biggest vulnerabilities?

11:13Fereidun Fesharaki:Everything is dependent on the price. If the price of oil is$9 ,000, then GDP may go down. But at the price of$77,$78, no impact on GDP. Even at$80, I mean, we've had$80 oil a long time, and it was totally absorbed. Even in India,$80 oil is easily absorbable. In China,$80,$90 is easily absorbable. The issue is that if there is a lack of supply so that the economy cannot be run and the prices go through the roof, yes, it has an impact. But I think people are jumping the gun out of abundance of caution.

11:53Daniel Ten Kate:Now, India is hugely reliant on Middle Eastern crude. At what oil price does this war become a real problem for India?

12:03Fereidun Fesharaki:Well, India has done a study several years ago that$80 a barrel of oil is OK with them. They can manage. If that was three years ago, I think today$85,$90 would be tolerable. So India has a good ability to pay. There is a huge amount of strategic petroleum reserves in the world. In the IEA, OECD countries, in the United States, China has a huge amount of strategic reserves. Japanese have 270 days of strategic reserve. So they can go for a whole year without any imports. So nobody else in the world has that level of cover. And the Saudis and UAE have huge reserves of oil inside of Japan that they are obligated to sell to Japan first if there is a global crisis.

12:59The Koreas have far less reserves, but they can manage.

13:05Fereidun Fesharaki:These reserves have not been opened yet. And then the first indication for you to find out if this is serious is if these strategic reserves are ordered to be opened.

13:19Daniel Ten Kate:So what scenario does Beijing hope to see out of this war? And could the U.S.'s actions be driving American allies in Asia closer to President Xi Jinping? That's coming up after the break.

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16:13Daniel Ten Kate:Later this month, Trump is set to sit down with Chinese President Xi Jinping at a major summit. And their teams are already laying the groundwork. U.S. Treasury Secretary Scott Besant and Chinese Vice Premier He Lufeng are expected to gather in Paris in a few weeks to hash out possible deals. And despite recent U.S. strikes on Iran, Bloomberg's Daniel Tenkate says Washington and Beijing have plenty of reasons to keep the conversation going.