Thailand needs to prepare for furture energy security

Tensions will escalate when the European countries impose sanctions on Iran’s oil exports, effective July 1. The move is in accordance with the measures employed by the West, while the US has also urged China and Japan to join a ban on oil imports from Iran. In the meantime, the US is trying to make up for the loss of Iranian crude oil by preparing an emergency plan to use the Strategic Petroleum Reserve, and is looking to import crude oil from other countries, especially Saudi Arabia.

The pressure has forced Iran to threaten to halt oil exports to the European Union. The threat, which followed the one to close the Strait of Hormuz, was dismissed, and the European Union urged its member countries to immediately ban new contracts to import Iranian oil, while all existing contracts will have to be phased out by  July 1.

So far the European Union has tended to comply with the US, though it might not be as willing now as at first. This is because of the EU’s political and economic situation, for which assistance from the US is vital, and the fact that Europe’s energy demand is declining as a result of the economic recession. 

As for China and India, no clear indications have been made by these two countries in support for or against the sanctions. They don’t want to offend the US, but cutting ties with Iran would be difficult. China depends on Iran for 11 per cent of its oil imports, around 550,000 barrels per day, while India imports 380,000 barrels per day of crude oil from Iran, amounting to around 12 per cent of its oil imports. Japan is also struggling to decrease oil imports from Iran and instead buy from Saudi Arabia and the United Arab Emirates. They can step up production by 3 million barrels per day from current capacity. However, Japan won’t dare to cut ties with a major business partner like Iran, since it depends on Iran for 6 percent of its oil imports.

The conflict over the world’s energy artery has resulted in market concern over the possible shortage of oil. Predictions are being made as to how Iran will play out its threat to close the Strait of Hormuz, which is an important factor in the rise of crude oil prices. 

The narrowest part of the Strait Hormuz is only about 30 kilometres across, and could theoretically be blocked by only 15 or 20 submerged VLCC tankers. The importance of the Strait lies in the fact that 17 million barrels, or around 35 per cent of oil traded in the global market, have to pass through it each year. A blockade of the Strait could result in oil shortages, especially in the industrial countries. 

As for Thailand, even though the volume of imported Iranian oil may be small, we have to rely on the Strait of Hormuz for the import of crude oil from other Middle-Eastern producers. Currently this is 619,000 barrels per day, or 78 per cent of our oil demand (figure from the Department of Energy Business for the year 2011). Therefore, any closure of the Strait would inevitably present difficulty for Thailand. 

If Iran was successful in closing the Strait of Hormuz, geopolitical tensions would escalate and result in tight oil supplies and the inability to find alternative oil resources to compensate for the loss. 

As for biomass (the global production capacity of which is around 1.5 million barrels per day), supply is very limited and is far from being able to replace oil promptly. If the Strait of Hormuz were closed, it seems likely that the price of Dubai biomass would increase by US$50 to reach as high as $150-$160 per barrel.    

If the Strait of Hormuz is not closed, even amidst the unclear economic situation in Europe, the abundant supply of oil currently in the market would allow the price to remain at $110-$120 per barrel. And if the tensions are lowered, the Dubai price would probably remain the same as the current price of $110 per barrel. 

Thailand depends on the United Arab Emirates (UAE), Oman, Saudi Arabia, Iraq, Iran, Qatar, Kuwait and Yemen for that 78 percent portion of its oil imports. The UAE, our main exporter, is now building a 360-kilometre long Abu Dhabi-Fujairah oil pipeline that would allow oil shipments of up to 1.5 million barrels per day from the UAE to bypass the Strait of Hormuz. Nevertheless, it is important that we look for alternative oil sources, such as from Africa, eastern Russia, Indonesia and Australia, in preparation for any possible shortage of supply from the Middle East.

A blockade of the Strait of Hormuz is possible in theory, but it would be rather difficult to achieve in reality, since the world’s most powerful countries have navy vessels and submarines in the area to prevent Iran from submerging VLCC oil tankers and thus close the Strait. This may cause some resistance and could lead to missile attacks. However, it is unlikely that the US and its allies would send armies to invade Iran, since this is an election year in the US and there is probably no country that is prepared to engage in a costly, long-running war. The European nations are in a vulnerable economic state. Russia and China, who seem to be opposed to the sanctions and have not shown any support from the beginning, would not join in any military action.

Thailand has to remain neutral on oil sanctions against Iran, as Iran is one of our important business partners. It is a major importer of Thai rice and agricultural products. A blockade of the Strait would mean the severing of the route between Thailand and Iran. 

Thailand needs to be prepared for what might happen, no matter how little the chance may be.  We also need to review our dependency on oil and the development of biomass energy. Thailand needs to strive to be a leader in agricultural energy. These plans must be pushed into effect before it is too late

 

Surong Bulakul is chief executive officer of Thai Oil Public Company Limited.