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North Korea tensions may upend Asian energy markets

Oil markets could be "severely affected" should the situation escalate further, Wood Mackenzie warned.

By Daniel J. Graeber
North Korea tensions may upend Asian energy markets
Further escalation in tensions on the Korean Peninsula could upend the regional, and potentially the global, energy markets. File photo from North Korea's official news agency. | License Photo

Aug. 30 (UPI) -- The risk of military conflict over North Korea could have severe global market impacts because of the concentration of refining capacity, Wood Mackenzie warned.

North Korean leader Kim Jong Un observed a launch drill for guided intermediate- and long-range ballistic rockets on Wednesday, following the launch of a missile over Japan earlier this week. The official Korean Central News Agency reported that the drill was conducted as part of a "muscle-flexing" exercise meant to counter joint U.S. and South Korean military exercises. The launch drill was "like a real war" and was the "first step" in a military operation targeting the U.S. island territory of Guam.

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China, Japan and South Korea are among the world's largest importers of energy resources, accounting for about 34 percent of offshore oil trade flow, 55 percent of the trade for liquefied natural gas and 46 percent of the global seaborne trade in coal.

Analysis from consultant group Wood Mackenzie said that, should the situation escalate, China would be forced to tap deeper into its own resources, while Japan and South Korea, who lack significant resources of their own, could see deep impacts on domestic supplies.

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"Oil markets would also be severely affected," Chris Graham, a research director for the Asia-Pacific, said in an emailed statement. "Around 65 percent of Asia's refining capacity is located in Japan, South Korea and China."

Photo courtesy of Wood Mackenzie

Economists at the Organization of Petroleum Exporting Countries expect Japan's economy to growth, but only slowly at 1.1 percent for next year. Growth will be gradual, but limited. For China, the second-largest economy in the world behind the United States, growth is better than expected, but at risk from rising debt and overcapacity. South Korea, meanwhile, is "performing well," OPEC said, but faces obvious challenges from escalating tensions on the Korean Peninsula.

Because members of the Organization for Economic Cooperation and Development are obligated to hold emergency stockpiles, Japan and South Korea would have enough oil on hand to last at least 90 days. China, meanwhile, could dip into its own strategic stockpiles, which it only started building up about three years ago. China, meanwhile, has domestic oil operations, though Wood Mackenzie said the proximity of oil basins to North Korea puts about 58 percent of the national capacity at risk.

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"Escalating security risks on the Korean Peninsula will drive increased price volatility across the commodities," Graham said. "A demand-side risk of this scale could put downward pressure on price globally, but regional stockpiling and increased logistics costs could equally lead to a short-term price premium."

All major crude oil and natural gas indices were moving lower early Wednesday.

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