Potential North Korea Military Conflict Could Trigger Rise in Global Oil Prices

MOSCOW (Sputnik), Tommy Yang — Facing North Korea’s defiant pursuit of its nuclear arms program amid international condemnation, a likely military conflict on the Korean Peninsula could lead to fluctuations in global oil prices, since war usually causes speculators to bet on disruption in global markets, experts told Sputnik.

North Korea fired an intercontinental ballistic missile that flew over Japan and dropped into the Pacific Ocean 2,000 kilometers (1,242.7 miles) off the Hokkaido Island early on Friday, jusr days after the United Nations Security Council had voted unanimously in support of tougher sanctions against Pyongyang.

North Korea threatened to launch missiles toward the US territory of Guam in early August and since then has repeatedly said that the preparation for the potential strike has been completed. After such threats were voiced by the DPRK, US President Donald Trump promised a military response with “fire and fury.”

Oil Price

Amid escalating tension on the Korean Peninsula, possible military conflicts in Northeast Asia could bring serious disruption to global crude oil transport and production. UK-based energy consultancy Wood Mackenzie released a report on Friday noting that a military conflict in the region could threaten as much as one third of global crude oil supplies shipped by sea and put half of Asia’s oil refining capacity at risk.

Industry experts told Sputnik that, in the event of a military conflict on the Korean Peninsula, global oil prices could experience turbulent fluctuations.

“Different factors could cause global oil prices to fluctuate intensively. Historically, any warfare, especially when crude oil producers are involved, could cause global oil prices to rise sharply, as speculators tend to bet on disruption in global markets,” Li Li, the research director on oil markets with ICIS, a leading intelligence provider for the global petrochemicals and energy markets, in Guangzhou in Southern China, told Sputnik.

But the Guangzhou-based analyst noted that as both South Korea and Japan were major importers of crude oil and key oil refiners in the world, disruption of oil shipment and oil refining facilities could reduce demand for crude oil amid overall oversupply in the global market.

“If crude oil cannot be shipped to South Korea or Japan, because of a military conflict, these major consumers for crude oil could be shut out of the international market, which could lead to downward pressure on global oil prices,” Li said.

The industry expert believes a military conflict on the Korean Peninsula would not disrupt crude oil shipment to China, as most of the nation’s crude oil shipments come in through ports on the southeast coasts, which are far from the conflict zone.

Absorb China’s Excessive Refining Capacity

Some analysts expressed concerns that disruption of oil production capacity in South Korea and Japan, in case of a military conflict on the Korean Peninsula, could trigger a price hike in refined products such as gasoline and diesel in Asia.

However, Zhu Chunkai, an oil markets analyst at Shandong-based industry researcher SCI99, argued that excessive oil refining capacity in China would be sufficient to fill in the void left by production disruption in South Korea or Japan.

“China has an enormous amount of excessive oil refining capacity. That’s why the Chinese government started to allow exports of refined oil products. Based on my calculation, China’s oil refining capacity surplus reached almost 196 million metric tons last year, which is more than enough to meet oil products demand for all of Asia,” Zhu told Sputnik.

The analyst suggested that petrochemicals were more vulnerable to production disruption in South Korea and Japan, as Chinese refineries were still not technologically capable of producing certain petrochemicals.

Sluggish Demand for Oil Products

Rapid expansion of transportation infrastructure in China in recent years, such as new subway lines in urban centers and new high-speed railways linking different cities, has led to sluggish demand for oil products such as gasoline and diesel in the domestic market, Zhu explained.

“When new subways are built, more and more local residents would take public transportation and use their personal automobiles less to avoid traffic congestions. New high-speed railways would allow existing railway lines to be used for cargo transportation, which offers a cheaper and safer option for transporting goods compared to diesel-powered trucks,” he said.

The expert pointed out that consumption growth for gasoline and diesel had started to slow in China in recent years. Official figures showed consumption growth for refined oil products in China stayed under five percent in the past three years, while diesel consumption dropped for three consecutive years.

However, despite sluggish domestic demand for refined oil products, Chinese imports of crude oil are unlikely to decline as authorities still views crude oil as key to national energy security, Zhu suggested.

“China is still a country that has scarce crude oil resources. The government has always considered crude oil as the key to national energy security. Even if crude oil is not in high demand for domestic oil products consumption, Chinese refineries would still import crude oil as strategic reserves,” he said.

As a result, the expert believes China’s appetite for crude oil could help keep global oil prices at reasonable levels.

According to Official figures from Chinese customs, China’s crude oil imports skyrocketed to an all-time high in March to nearly 9.2 million barrels per day, overtaking the United States as the world’s top crude oil buyer.