International Herald Tribune
Oil-thirsty Asia looks to calm Gulf waters
DOHA, Qatar The Arab Gulf states may fear the potential of a politically militant Iran, with or without nuclear capability. But they and their oil clients - especially in Asia, which is much more dependent on Gulf oil than America is - fear that U.S. political preoccupations may be a greater threat to the region, and its ability to supply energy, than Iran is.

In his State of the Union address, President George W. Bush referred to the need for America to reduce its dependence on imported energy. The unsaid assumption was that it especially wants to reduce reliance on Middle Eastern suppliers. Meanwhile, few in Washington are ruling out military action against Iran.

The address and the noises over Iran sent two messages to the Gulf, and its clients. The most immediate one, received loud and clear by the global oil market, is that there is a real danger of an interruption of Gulf supply if Iran retaliates against air strikes on its nuclear facilities. For sure, such action would drive the oil price over $100 a barrel, a level at which damage to the U.S. economy would be severe. But it would be a much bigger hit to rising Asia.

It is often assumed, not only by its critics, that the United States is in the Gulf to protect its oil supplies and the interests of its oil companies. But most of the region's hydrocarbons are in the hands of state-owned companies, not multinationals, and the U.S. reliance on Gulf oil is low. The United States imports 60 percent of its oil but only 20 percent of that - 12 percent of oil total demand - comes from the Gulf. Even Europe is only 30 percent dependent on the Gulf.

By comparison, Japan, South Korea and Taiwan import all their oil, of which 75 percent is from the Gulf. India imports 75 percent, of which 80 percent is from the Gulf. China imports 35 percent, of which 60 percent is from the Gulf. Imports into India and China are expected to grow by 8 percent to 10 percent a year.

In theory these countries could shift to buying from other regions. But neither China nor India have the reserve capacity to withstand a significant interruption in supply.

The economic consequences of oil that costs $100 a barrel could also be crippling. China may have the foreign exchange and budgetary resources to cushion the blow. But India's trade balance is already under strain with oil at $60 a barrel, and its budget deficit is too high to bear an oil subsidy. Economic growth in both countries leans heavily on the transport and power sectors.

Gas supplies are not quite so vulnerable. East Asia buys most of its gas from Indonesia, Malaysia and Australia. But it is still vulnerable compared with the United States, which is largely self-reliant, and Europe, which buys from Russia and North Africa.

All in all, it is easy to see why Asian countries, and particularly India and China, are determined to keep the Iran nuclear issue at the level of endless diplomacy - as with North Korea. King Abdullah of Saudi Arabia will have received that message on his recent landmark visits to Beijing and New Delhi.

The longer term message from Bush to Gulf producers was: We need to escape from your clutches. That is a sensible enough thing to tell Americans. But what all global hydrocarbon consumers need in the medium term is more production, and that will only come about with more investment, which demands higher levels of security (and price certainty) than now exist in Latin America and Africa as well as the Gulf.

Gas, now eagerly sought as one answer to pollution and global warming issues, is particularly vulnerable. Russia has the largest reserves, but has damaged its own reputation for reliability by threatening Ukraine's supply. Next are Iran and Qatar, who share a giant field that straddles the Gulf. But will there be enough investment in costly liquefaction and tanker installations if the Gulf is dangerous and the West is trying to lever China and India into isolating Iran?

China is looking to Russia, as well as Australia and Indonesia, for gas supplies. India, too, is investing in Russia and hopes to buy gas from Myanmar and Bangladesh. But both China and India know that all global projections show that the Gulf is expected to supply an increasing share of global oil and gas. In the case of oil, the Gulf's share is forecast to rise from a current 25 percent of the total to 35 percent by 2016 - even if conservation and alternative energy sources keep annual oil demand growth under 2 percent.

In short, the Asians are already the piper's main paymasters and are looking to have greater control of the tune. Ultimately they are as likely to ignore Western pressures over Iran as they did over Sudan. But meanwhile producers and consumers face high prices and little enthusiasm for investing in the future.