Best of the Week
Most Popular
1.Spain Ignores Scotland Lesson as Catalan Independence Referendum Could Spark Civil War - Nadeem_Walayat
2.Used Car Buying From UK Dealer Top Tips, CarMotion.co.uk Real Customer Experience - N_Walayat
3.Spanish New Civil War Begins as Madrid Regime Storm Troopers Quell Catalan Independence Rebellion - Nadeem_Walayat
4.Virgin Media Broadband Down, Catastrophic UK Wide Failure! - Nadeem_Walayat
5.Are the US Markets setting up for an Early October Surprise? - Chris_Vermeulen
6.The Pension Storm Is Coming To Europe—It May Be The End Of Europe As We Know It -John_Mauldin
7.Stock Market Crash 2018; Will it Prove to be Another Buying Opportunity - Sol_Palha
8.The Profoundly Personal Impact Of The National Debt On Our Retirements - Dan_Amerman
9.Stock Market as Good as it Gets; Like 2000 With a Twist -Gary_Tanashian
10.1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - Nadeem_Walayat
Last 7 days
Bitcoin Hits $6,000, $100 Billion Market Cap As Helicopter Ben and Jamie Demon Warn The End Is Near! - 22nd Oct 17
Time for Caution in Gold Miners - 22nd Oct 17
“Great Rotation” Ahead; Will it Be Inflationary or Deflationary? - 21st Oct 17
The Trigger for Volatility, Rates and the Next Crisis - 21st Oct 17
Perks to Consider an Agent for Auto Insurance - 21st Oct 17
Emerging Megatrends Hurting Consumers - 21st Oct 17
A Catalyst of the Stock Market Bubble Bust - 21st Oct 17
Silver Stocks Comatose - 21st Oct 17
Stock Investors Ignore What May Be The Biggest Policy Error In History - 20th Oct 17
Gold Up 74% Since Last Stock Market Peak 10 Years Ago - 20th Oct 17
Labour Sheffield City Council Employs Army of Spy's to Track Down Tree Campaigners / Felling's Watchers - 20th Oct 17
Stock Market Calm Before The Storm - 20th Oct 17
GOLD Price Creates Bullish Higher Low - 20th Oct 17
Here’s the US’s Biggest Vulnerability in NAFTA Negotiations - 20th Oct 17
The Greatest Investing Lesson Learned from the 1987 Stock Market Crash - 20th Oct 17
Stock Market Time to Go All-in. Short, That Is - 19th Oct 17
How Gold Bullion Protects From Conflict And War - 19th Oct 17
Stock Market Super Cycle Wave C May Have Started - 19th Oct 17
Negative Expectations, Will the Stock Market Correct? - 19th Oct 17
Knowing the Factors Affect your Car Insurance Premium - 19th Oct 17
Getting Your Feet Wet In Crypto Currencies - 19th Oct 17
10 Years Ago Today a Stocks Bear Market Started - 19th Oct 17
1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - 19th Oct 17
Virgin Media Broadband Down, Catastrophic UK Wide Failure! - 19th Oct 17
The Passive Investing Bubble May Trigger A Massive Exodus from Stocks - 18th Oct 17
Gold Is In A Dangerous Spot - 18th Oct 17
History Says Global Debt Levels Will Lead to Another Crisis - 18th Oct 17
Deflation Basics Series: The Quantity Theory of Money - 18th Oct 17
Attractive European Countries for Foreign Investors - 18th Oct 17
Financial Transcription Services – What investors should know about them - 18th Oct 17
Brexit UK Vulnerable As Gold Bar Exports Distort UK Trade Figures - 18th Oct 17
Surge in UK Race Hate Crimes, Micro-Racism, Sheffield, Millhouses Park, Black on Asian - 18th Oct 17
Comfortably Numb: Surviving the Assault on Silver - 17th Oct 17
Are Amey Street Tree Felling's Devaluing Sheffield House Prices? - 17th Oct 17
12 Real-Life Techniques That Will Make You a Better Trader Now - 17th Oct 17
Warren Buffett Predicting Dow One Million - Being Bold Or Overly Cautious? - 17th Oct 17
Globalization is Poverty - 17th Oct 17
Boomers Are Not Saving Enough for Retirement, Neither Is the Government - 16th Oct 17
Stock Market Trading Dow Theory - 16th Oct 17
Stocks Slightly Higher as They Set New Record Highs - 16th Oct 17
Why is Big Data is so Important for Casino Player Acquisition and Retention - 16th Oct 17
How Investors Can Play The Bitcoin Boom - 16th Oct 17
Who Will Be the Next Fed Chief - And Why It Matters  - 16th Oct 17
Stock Market Only Minor Top Ahead - 16th Oct 17
Precious Metals Sector is on Major Buy Signal - 16th Oct 17
Really Bad Ideas - The Fed Should Have And Defend An Inflation Target - 16th Oct 17
The Bullish Chartology for Gold - 15th Oct 17
Wikileaks Mocking US Government Over Bitcoin Shows Why There Is No Stopping Bitcoin - 15th Oct 17
How to Wipe Out Puerto Rico's Debt Without Hurting Bondholders - 15th Oct 17
Gold And Silver – Think Prices Are Manipulated? Look In The Mirror! - 15th Oct 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

2 Choke Points That Threaten Oil Trade Between Persian Gulf And East Asia

Commodities / Crude Oil Apr 20, 2017 - 10:26 AM GMT

By: John_Mauldin

Commodities

BY GEORGE FRIEDMAN : The flow of international trade has always been subject to geopolitical risk and conflicts. At all stages of the supply chain, trade inherently faces challenges posed by the geopolitical realities along a given route.

Some routes are more perilous and harder to navigate than others. One such trade route is the maritime path for transporting oil from Persian Gulf exporters to East Asian consumers. This route faces two major choke points that are unavoidable given geographic constraints.


The Persian Gulf is a leading oil-producing region. It accounts for 30% of global supply. Meanwhile, East Asia is a major oil-consuming region. It accounts for 85% of the Persian Gulf’s exports (according to the Energy Information Administration (EIA)).

The two straits are geopolitical choke points because geographic limitations and political competition threaten access.

Choke Point #1: The Strait of Hormuz

The Strait of Hormuz is the main maritime route through which Persian Gulf exporters (Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates) ship their oil to external markets. Only Iran and Saudi Arabia have alternative access routes to maritime shipping lanes. 

The strait is 21 miles wide at its narrowest point, bordered by Iran and Oman. The EIA estimates that approximately 17 million barrels of oil per day—about 35% of all seaborne oil exports—pass through the strait.

This path is also the most efficient and cost-effective route through which these producers can transport their oil to East Asia. Persian Gulf countries depend heavily on revenue from these exports.

That’s why passage through the Strait of Hormuz is both an economic and a security issue. A disruption in the strait would impede the timely shipment of oil.

This would cause exporters to lose significant revenue, and importers would face supply shortages and higher costs. The longer the disruption, the greater the losses.

Disruptions could take place when Sunni and Shiite countries threaten to deny each other passage through the strait.

Shiite-majority Iran has threatened to close the strait and plant naval mines to assert its power over Saudi Arabia and other Sunni states. Saudi Arabia and its allies have conducted naval drills to show their willingness and ability to retaliate should Iran follow through.

Persian Gulf countries that depend on oil revenues have tried to mitigate this risk in two ways.

First, they’ve established alternate export routes. But the pipeline capacity is not enough to relieve dependence on the Strait of Hormuz.

Second, Persian Gulf countries have built security alliances with countries that have a vested interest in keeping the strait open. These alliances often involve the United States.

In 2016, the US received 18% of its oil imports from the Persian Gulf. As such, the US wants to maintain safe passage of exports through the strait.

Choke Point #2: The Strait of Malacca

The Strait of Malacca is the shortest sea route to move goods from the Persian Gulf to Asian markets. It is over one-third shorter than the closest alternative sea-based route.

Roughly a quarter of all oil transported by sea (more than 15 million barrels per day) passes through the Strait of Malacca. This makes it second only to the Strait of Hormuz in oil transport by volume.

The Strait of Malacca is 550 miles long and runs past Indonesia, Malaysia, and Singapore. At its narrowest point, the strait is a mere 1.5 miles wide. This makes ships more susceptible to piracy (which is prevalent in the area) and blockades.

Both Japan and China’s economies rely heavily on oil imports that pass through the Strait of Malacca. Over 80% of China’s oil imports (by sea) and around 60% of Japan’s total oil imports currently pass through the strait. 

That means open access through the strait is key to their economic security.

Japan and China have a long history of animosity and war in their attempts to be the dominant geopolitical power in the region. But, for one of them to block access to the strait would be a double-edged sword.

On one hand, restricting trade flow through the strait could be a way to inflict economic pain on a rival. This could lead to an economic downturn and subsequent domestic political problems for the rival.

On the other hand, this type of action could set a precedent for other countries to vie for control of the strait. This could put either Japan or China’s access at risk.

To secure their economic stability, Japan and China have pursued means to guarantee safe passage of oil through the strait.

Like Persian Gulf countries, Japan relies on its alliance with the US to guarantee free navigation of goods by sea. Since the Pacific Coast of the US conducts a significant amount of trade with East Asia, the US relies on its alliance with Tokyo to offset China’s power and any other potential threats in the region.

China’s strategy involves strengthening its military and political ties in the region. Beijing has forged strong political and economic relations with the countries that surround the Strait of Malacca, particularly Indonesia.

It is also in the process of building a large navy. Its goal is to gain more control of its surrounding seas.

Mitigating Risk

For both Persian Gulf exporters and East Asian consumers, the free passage of oil shipments is vital. But, two geopolitical choke points threaten this.

In the Strait of Hormuz, the main risk comes from the conflict between Sunni and Shiite powers in the region. In the Strait of Malacca, it is the regional rivalry between China and Japan.

All of these countries must take measures to mitigate their risk and secure free passage through the respective straits. Geopolitics not only explains why such measures are necessary, but also which of them are most suitable for the countries involved.

Grab George Friedman's Exclusive eBook, The World Explained in Maps

The World Explained in Maps reveals the panorama of geopolitical landscapes influencing today's governments and global financial systems. Don't miss this chance to prepare for the year ahead with the straight facts about every major country’s and region's current geopolitical climate. You won't find political rhetoric or media hype here.

The World Explained in Maps is an essential guide for every investor as 2017 takes shape. Get your copy now—free!

John Mauldin Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife