US-Iran row makes oil market volatile

One of the fallouts of the killing of Iranian general Qassem Soleimani in a US drone attack in Baghdad on Jan 3 is the wildly fluctuating international oil prices. Both the Brent Crude and West Texas Intermediate, two most widely used crude pricing benchmarks, increased about 3 percent on Jan 6. Oil prices surged again with the two benchmarks rising more than 4 percent after Iran fired more than a dozen missiles at US military bases in Al-Assad and Irbil in Iraq on Jan 7.

However, oil prices dropped on Jan 8 when Washington and Teheran retracted from their belligerent stand and the situation appeared to cool down somewhat. With the growth in China's demand for oil decelerating and no new growth points emerging, the fundamentals of global oil demand and supply remain stable.

Sitting on 60 percent of the world's total oil reserves and accounting for nearly one-third of global supply, the Middle East is a heavyweight in the international oil market. Although the United States and Iran have stepped back from their bellicose stance, the risk of a confrontation cannot be fully ruled out. Combined with that, the geopolitical games being played by different parties in the region will continue to influence oil prices at least in the short term.

China gets nearly 43 percent of its oil imports from the Middle East, especially through the Persian Gulf. Therefore, the volatile situation in the region poses a big risk to China's oil imports. Needless to say, China's oil imports and energy security would be greatly undermined if the situation in the Middle East worsens.

For instance, a direct military conflict between the US and Iran could lead to a blockade of the Strait of Hormuz through which most of China's oil imports from the Middle East pass. Also, the new round of sanctions imposed on Iran by the US, and Turkey's military intervention in Libya and the instability in Iraq all add to the geopolitical risks in the region, causing uncertainties in the oil market.

China imported 462 million tons of oil (about 3.3 billion barrels) in 2018. An increase of every one dollar in oil price will cost China 23 billion yuan ($3.34 billion) more each year. And scholars have forecast an increase of 0.19 percentage point in China's consumer price index with every 10 percent increase in the price of oil. If oil price rises sharply, China will suffer from more serious inflation, with the consequences being far-reaching.

The US' efforts to strengthen its energy security, which is a major factor for its conflict with Iran, has also contributed to the increasing instability in the Middle East. The US could become a net exporter of natural gas and its oil imports will fall below 30 percent by 2035 if it achieves basic energy security, the International Energy Agency has said, while China would depend on foreign trade to meet 80 percent of its oil demand. Given the effects of US' energy production and consumption on the global market, its self-sufficiency in energy would have a massive impact on global oil supply, energy prices and geopolitics.

Traditional wisdom says the security of one country's oil and gas import depends on the stability of the place of origin and the safety of transportation corridors.

So how will the US' self-sufficiency in energy have an impact on China? The US could further deviate from its basic strategy of maintaining stability and deal heavier blows to Iran, a major oil exporter to China.

Besides, China's excessive and seemingly rising dependence on the Strait of Hormuz for its oil imports could leave it at risk as the US gradually distances itself from the waterway on way to becoming self-sufficient in energy. Therefore, China should take precautions and work out ways to prevent becoming a victim of the turbulence in the Middle East.

China is the biggest oil importer in the world, and its oil security is key to its energy security, especially because the addition of 25 million vehicles to its traffic fleet every year will make it more dependent on oil imports to meet the rising domestic demand for oil.

New energy vehicles cannot replace gasoline-powered cars in the short term nor could they reduce the traffic jams in the cities even though their development is conducive to reducing smog. Yet improving the urban mass transit system and increasing the use of electricity could help reduce oil consumption and toxic gas emissions.

As such, apart from increasing its strategic oil reserve and diversifying its oil imports, China should also try to reduce the use of oil in its energy mix.

The author is dean of China Institute for Energy Studies of Xiamen University. The views don't necessarily represent those of China Daily.