Asia is more at risk from disruption of Middle East oil supplies than is either Europe or the US, yet as a whole it is less prepared to deal with such an upheaval, according to UK think-tank Chatham House. The Middle East now supplies nearly 50% of Asian oil consumption, compared with 12% and 16% of the US and Europe respectively.

Half the oil consumed in Asia is supplied from the Middle East, but only Japan and Korea hold high oil stocks and are part of the OECD country’s international energy response mechanism of the International Energy Agency (IEA). Other Asian countries vary in dependence on the Middle East and their capacity to deal with disruptions of oil supply. To mitigate the effects on Asian economies and global oil markets from disruptions in oil supply, energy security expert at Chatham House, John Mitchell, proposes a “pragmatic programme” of preparations.

In his new paper, Asia’s Oil Supply: Risks and Pragmatic Remedies, Mitchell analyses the risks that major Asian oil importers would face if oil supplies through the Strait of Hormuz were disrupted on a large scale – for example, if 10 million barrels a day were interrupted for 90 days. If companies like Saudi Aramco and at KNOC chose to use their remaining supplies to favour their own downstream investments in Asia (and the US), some Asian countries would better off (and European countries worse off) than under any simple sharing based on previous trade patterns.

Disruption of supplies from Middle East would also disrupt the oil trade within Asia. Nearly 30% of Asian consumption is supplied by imports of refined products, mostly from refineries in India, Korea, and Singapore, which, in turn, are dependent on the Middle East for more than half of their crude supplies. How product-exporting companies and countries chose to allocate reduced supplies would affect Australia and Thailand in particular.

An increase in the price of oil resulting from a disruption in supplies would impact on the balance of payments of importing countries in proportion to the value of oil imports relative to that of non-oil exports. This varies considerably from country to country in Asia: in 2012, 60% of Pakistan's non-oil exports were used to pay for net oil imports, while the corresponding figure for China was just over 10%. An oil price increase would also have a fiscal impact in countries that subsidise oil consumption .

A key question, according to Mitchell, is to what extent governments can rely on the flexibility of the global oil market to respond to a major disruption. Government interventions are almost inevitable, but will be uncertain and uncoordinated. There will be confusion among governments and companies as regards their obligations; the most likely result would be a free-for-all in the market and large price increases reflecting local shortages and the uncertainties about government actions.

To minimise these consequences, the report recommends:

•Establishing a process involving the IEA, China and India to facilitate a very rapid and convincing announcement of a coherent response to any major disruption in Middle East oil supplies;

•Developing more schemes by which exporting national oil companies hold stocks in importing countries;

•Clarifying the policies of crude and oil-product exporters for allocating supplies between domestic consumption, exports and bunkers when those supplies are curtailed by disruption, especially in Asian product-exporting countries;

•Developing mechanisms to target a rapid release of emergency stocks to companies affected by force majeure disruptions; and

•Promoting government and industry cooperation at the national level to ensure continuity of supply to consumers in the event of disruption.

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