Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

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

© 2005-2019 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

6 Critical Money Making Rules