Cincinnati Insurance Narrator (2:30)

oil is going in or out.

Wan Ha (2:31)

China's government telling the country's largest oil refiners to suspend exports of diesel and gasoline. The confrontation between the United States, Israel and Iran has entered a volatile new phase, one that puts oil reserves and critical infrastructure directly in the crosshairs.

Daniel Tan Kait (2:48)

Iran is widening its response now aiming to paralyze the economic lifeblood of this

Wan Ha (2:53)

region, oil and gas production. Very interesting announcement from the President saying that the US Are looking to provide

Daniel Tan Kait (2:59)

naval escorts and to lower insurance costs for any vessels and tankers looking to

Wan Ha (3:05)

pass through the straits. The Strait of Hormuz is one of the world's most critical choke points. As much as 20% of the world's oil passes through the strait each day and it's remained effectively closed since the conflict began.

Faradin Fesheraki (3:19)

Nobody can close the Straits of Hormuz for too long. So you close that, you have a global crisis.

Wan Ha (3:25)

Faradin Fesheraki is the founder and chairman of energy consulting group fge.

Faradin Fesheraki (3:30)

If you keep it closed, then the price of oil will go through the roof. The French and the British will surely get involved and I think maybe Chinese get involved too. Everybody has to military get involved because that is creating a crisis. Worst possible, recession, global recession. And Iran is just too small fish to be able to close the Strait of Hormones.

Wan Ha (3:52)

But even if the fighting never reaches that worst case scenario for oil markets, countries across Asia, the world's biggest buyers of Middle Eastern energy, are bracing for potential shockwaves.

Daniel Tan Kait (4:04)

Japan is very exposed. South Korea is exposed. China buys a lot of Iran's oil. Taiwan, India, Pakistan has most of its gas coming from Qatar.

Wan Ha (4:15)

Daniel Tan Kait oversees Bloomberg's political and economic coverage in Asia.

Daniel Tan Kait (4:21)

It's pretty much affecting every economy in Asia. Not just yet because it's still early days, but if you do have prolonged sustained rise in oil prices that is inherently going to affect most economies in Asia because they they buy a lot of oil.

Wan Ha (4:47)

This is the big Take Asia from Bloomberg News. Hi, I'm Wan Ha. Every week we take you inside some of the world's biggest and most powerful economies and we explore the markets, tycoons and businesses that drive this ever shifting region. Today on the show, Asia's biggest economies react to war in the Middle East. How the Iran war is rippling through global oil markets and which Asian economies are most at risk to a large scale disruption. Since last year, China has been factoring in the uncertainty surrounding Iranian oil quietly stockpiling crude at onshore sites. While China buys up some 90% of Iran's oil. Those barrels account for less than 15% of Beijing's overall oil imports. Russia and Saudi Arabia remain China's biggest suppliers and that's unlikely to change anytime soon. But there's a big reason why China's concerned. About half of its crude imports pass through the strait of Hormuz.

Faradin Fesheraki (5:48)

20% of the global supply. Crude oil and refined products go through the Straits of Hormuz. Saudis have a pipeline to the Red sea of around 2 million barrels per day. Abu Dhabi has a pipeline of about a million and a half barrels per day outside the Gulf. But beyond that there are no other pipelines. Beyond that is only the stress of Hormuz.

Wan Ha (6:13)

When the US and Israel attacked Iran late last week, China's response was immediate and pointed. My colleague Daniel Tin Kait, who covers China's economy and political landscape for Bloomberg, says it underscored just how dependent China is on Gulf oil.

Daniel Tan Kait (6:30)

Beijing has basically come out and opposed what's going on. We had very strong words from Chinese Foreign Minister Wang Yi. He called it unacceptable to openly kill the leader of a sovereign country and institute regime change. So that's very frank, very strong language from China opposing this. At the same time, they really want to calm things down. So after that statement, we had another statement from China saying that Iran also needed to respect the reasonable interests of its neighboring states.

Wan Ha (7:04)

Iran's oil influence has diminished due to prolonged sanctions and limited foreign investment. Today, the country accounts for just about 3% of global oil supply, producing about 3.3 million barrels a day. Dr. Fisheraqi, you're originally from Iran and you spent many years living and working there. Broadly speaking, how important is Iranian oil to the rest of the world?

Faradin Fesheraki (7:28)

Iranian oil production is three and a half million barrels per day, but all the liquids combined are more than 5 million barrels per day. So it's quite important. But the oil sales only go to China crude oil sales. So it is important only for China. But Chinese can replace the Iranian oil right away with other Middle Eastern crudes, except that they can't receive any discount. They have to pay the real market price for it. But it is not the case that somehow if the Iranian crude is not there, there would be a damage to the Chinese security of energy supplies. Oil is available in the market.

Wan Ha (8:08)

On Thursday, China's government ordered its largest refiners to suspend exports of diesel and gasoline. As the Middle east crisis deepens, China,

Daniel Tan Kait (8:17)

they want to make sure that their domestic interests are not hurt first. That's the top priority and that means getting the oil to flow. Now, if the oil's flowing and you have this low level kind of fighting going on where the US has to devote a lot of attention and resources to the Middle east and military assets to the Middle east, but there's not huge economic disruption. I think that's a scenario that China would not mind seeing.

Wan Ha (8:43)

If the oil in Iran Couldn't flow to China. What would that mean for China?

Faradin Fesheraki (8:48)

China can just buy from somebody else. China has the money and the capability, financial ability to pay. Please remember, in China, Iranian oil is not used by any of the major Chinese companies. So Sinopec, PetroChina, Sinop, they don't touch Iranian crude, only the teapots use it. So if the teapots cannot get them, you know, most of these teapots are uneconomic and the Chinese government wants to close them anyway. It's a matter of time. So they don't have it. They may close earlier. And it's better for the economy of China because Chinese oil companies have so much spare capacity, they don't really need them. And the Iranian crude doesn't go into the big refineries in China because the big refineries are on the stock market. And if you are in the stock market, you don't want to go against the US sanctions.

Wan Ha (9:38)

We've seen volatility in the energy markets, which was to be expected, but it's been measured. What's something that could happen that would send oil north of $100 a barrel, which seems to be kind of the line that everybody is watching for.

Faradin Fesheraki (9:54)

I think two events can make that happen. One is that if there is an attack on the oil fields, Iran, for example, in UAE attacked Dubai, which is a commercial hub. So they hit the hotels, they hit the residential areas, but they haven't hit the oil fields of Abu Dhabi, which is so close to them that they could destroy a lot of them overnight. They have hit a Saudi refinery, but they haven't hit the oil fields. Still, if you hit the oil fields and you interfere with the flow of oil, then the prices can jump very fast. If you close the access to the Straits of Hormuz for more than a month, the prices can drop hundred dollars or more.

Wan Ha (10:41)

Now, the APAC region where we are now, is deeply dependent on Middle Eastern oil. China, for example, buys 80%, 90% of Iranian crude. Japan imports nearly all of its oil from the Middle east, and India gets roughly half of its oil from the region. Singapore has said it may reassess its GDP depending on how long this conflict lasts. And I wonder, when you look at the region broadly, where do you see the biggest vulnerabilities?

Faradin Fesheraki (11:14)

Everything is dependent on the price. If the price of oil is $9,000, then GDP may go down, but at the price of 77, $78, no impact on GDP even at $80. I mean, we've had $80 oil a long time. And it was totally absorbed. Even in India, $80 oil is easily absorbable. In China, 80, $90 easily absorbable. The issue is that if there is a lack of supply so that the economy cannot be run and the prices go through the roof, yes, it has an impact. But I think people are jumping the gun out of abundance of caution.

Wan Ha (11:54)

Now India is hugely reliant on Middle Eastern crude. At what oil price does this war become a real problem for India?

Faradin Fesheraki (12:04)

Well, India has done a study several years ago that $80 a barrel oil is okay with them. They can manage. If that was three years ago, I think today $85, $90 would be tolerable. So India has a good ability to pay. There is a huge amount of strategic petroleum reserves in the world, in the iea, OECD countries, in the United States, China has a huge amount of strategic reserves. Japanese have 270 days of strategic reserve so they can go for a whole year without any imports. So nobody else in the world has that level of COVID And the Saudis and UAE have huge reserves of oil inside of Japan that they are obligated to sell to Japan first if there is a global crisis. The Koreans have far less reserves, but they can manage. These reserves have not been opened yet. And then the first indication for you to find out if this is serious is if the strategic reserves are ordered to be opened.

Wan Ha (13:20)

So what scenario does Beijing hope to see out of this war? And could the US actions be driving American allies in Asia closer to President Xi Jinping? That's coming up after the break.

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Wan Ha (15:57)

Later this month, Trump is set to sit down with Chinese President Xi Jinping at a major summit, and their teams are already laying the groundwork. U.S. treasury Secretary Scott Besant and Chinese Vice Premier He Lufeng are expected to gather in Paris in a few weeks to hash out possible deals. And despite recent U.S. strikes on Iran, Bloomberg's Daniel ten Kait says Washington and Beijing have plenty of reasons to keep the conversation going.

Daniel Tan Kait (16:26)

If you look at the economics of it, yes, China buys a lot of Iran's oil. It's definitely more important to Iran than China. China is pretty diversified in its energy mix, but if they lose the entire Gulf, that's a much bigger problem for China. I think the optics depend a lot on what happens in the next month. I mean, Trump has taken out two leaders in two months of countries that were friendly with China, and so oil could be hurt. You could be seeing more disruption in the global economy. We're seeing Iran still targeting a lot of economic infrastructure in the region, targeting U.S. embassies, targeting oil and gas infrastructure, blocking ships in the Strait of Hormuz, Trump threatening harder hits against the Iranian regime. So where are we in a month? I. I don't know. I mean, I think that's kind of the big question for China as well. Would they like to separate the two issues and make it go forward? Yes, I think they would. But Optically do you want to act really chummy with Trump? So I think that's the calculation there. How much do they try and signal to the rest of the world and to their own population and everything else about what they think this means for them?

Wan Ha (17:44)

How does the US's latest actions, you've got this in Venezuela earlier this year, affect its relationship with its allies in the region? Do you think it helps position China as the more reliable partner?

Daniel Tan Kait (17:56)

So you could see a lot of traditional US allies. At the very least, they're nervous about what's going on and they're uneasy about it, and we see that publicly. What they can do about it is another question. You still need the US market. The US is still the predominant military power. From the White House's point of view, it's probably like, well, who cares? What are they going to do anyway? But over the long term, that does erode American soft power. It's making countries look around beyond the US to different partners, and China is one of them. It does kind of raise questions like when you do need those partners the next time, when you're under the gun in some way, are they going to be there for you in the way that you want them to be? And that remains an open question.

Wan Ha (18:47)

What about politically? Where else in this region does Iran have close ties?

Daniel Tan Kait (18:52)

Iran maintains fairly good ties with the region, and Asia generally likes to maintain good ties with Iran. So India, for instance, had quite good ties, and they've invested a lot in a port called Chabahar, which was meant to provide an alternative route for Afghanistan to send goods out, so it didn't have to go through Pakistan, for instance. A lot of countries here would love to buy Iranian oil and probably invest in Iran as well. But they also don't want to fall afoul of US sanctions. So if you rely on dollar trade and want access to dollars, then you have to play ball. And so most Asian economies are doing that. They have no inherent dislike of Iran. I'm sure they don't like Iran pursuing a nuclear weapon. But they also probably would not support regime change. And many have expressed concern about what has happened and whether it's compliant with international law. Japan is an interesting case, too, because they've traditionally tried to position themselves as a kind of a go between, between the US and Iran. We've seen the Iranian ambassador, for instance, hold a press briefing in Tokyo. They've also done that in Indonesia, where Prabowo, the leader there, has offered himself as a mediator. And of course, he's close to Trump and joined his board of Peace and considering sending troops to Gaza. So basically everyone in Asia wants to get along with both countries. They want to keep the oil flowing and they want to end this thing as quickly as possible.

Wan Ha (20:30)

And I think what's also interesting is that the Middle Eastern hubs are actually quite important to Asia in a way that you wouldn't necessarily think at first. But Middle Eastern hubs, you know, do link Asia to Europe, to Africa and the U.S. i mean, certainly when you look at flights, thousands of flights were canceled after UAE airports closed for security reasons. How damaging is this to Asia's connectivity and commerce?

Daniel Tan Kait (20:58)

Certainly if it's prolonged, it's going to change the equation for how people get around here. I'm sure everyone knows people who are stuck in hotels in Dubai right now. And that's one example of how connected and how important the Middle east is as a hub, as a transit hub in particular. There's all sorts of questions on logistics right now that are just being worked out. I think we're in the emergency stage right now where people can sort of deal with it for a week or two and get on with life if it ends quickly. But if you're looking at prolonged disruptions to flights, to shipping, to oil supply, then your supply chains are going to need to be reworked. And anytime you do that, it's more expensive. So that means people are going to be paying more for a lot of various goods and travel.

Wan Ha (21:50)

This is the Big Tech Asia from Bloomberg News, I'm Juan Hannah. To get more from the Big Take and unlimited access to all of bloomberg.com, subscribe today@bloomberg.com podcastoffer if you liked the episode, make sure to subscribe and review the Big Take Asia. Wherever you listen to podcasts, it helps people find the show. Thanks for listening. See you next time.

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