Dire Straits: China’s energy import insecurities and the ‘Malacca dilemma’
In 2003, then President of China Hu Jintao named China’s energy imports passing through south-east Asia as the “Malacca dilemma”. The dilemma refers specifically to the Strait of Malacca, 1,100 kilometres in length and at its narrowest point only 2.8 kilometres wide, which has been a persistent source of vulnerability for the Chinese economy. Located between Malaysia, Indonesia, and Singapore, this strait is a transit point for around 40 per cent of global maritime trade and, perhaps more consequentially, 80 per cent of China’s energy imports. As the main shipping channel between the Indian and Pacific oceans, this connects the largest oil and gas producers in the Middle East with their largest markets in east Asia and is a strategic chokepoint for the 16 million barrels of oil that pass through daily. The Strait of Malacca is therefore critical to China’s energy production and wider economy, yet is not under Chinese control. What makes this shipping route a particular insecurity for Beijing, and what is being done to mitigate against it?
Major risks
China’s reliance on imported hydrocarbons for energy production, mostly on oil, is at the root of this insecurity. To fuel continued industrial development, energy consumption will increase rapidly alongside a widening gap between domestic energy supply and demand- in 2017, China surpassed the United States as the world’s largest importer of crude oil. Around 70 per cent of the country’s oil requirements come from imports, with analysts estimating this dependency will increase to 80 per cent by 2030. China is thus vulnerable to external shocks, whether in the price of oil or in its supply. That the vast majority of this oil supply passes through the Strait of Malacca chokepoint adds to Chinese evaluations of a precarious overreliance.
Geographically, the strait’s narrow span is a particular threat. With strong regional security actors in Malaysia, Indonesia, and Singapore added to the projection capabilities of India or the US, the risk for China is that a country or group of countries could easily control the strait and its flows. The Indian navy is notably building its presence in the area with its base in the Great Nicobar Islands, largely in response to China’s maritime Belt and Road Initiative projects. Additionally, Singapore is a major US ally that frequently participates in joint naval drills and is located at the eastern mouth of the strait. There is a strong possibility that states other than China can control the strait and greatly hurt the Chinese economy if desired, due to its high imported oil dependence.
South-east Asia is also particularly prone to piracy. A total of 134 separate piracy incidents were identified in the Strait of Malacca in 2015, with oil tankers among those targeted. Malaysia, Indonesia, and Singapore have been able to curb this issue to a large extent, but ships will still face insurance premiums on piracy when passing through the strait. Whilst this remains a background issue when compared to China’s oil import dependency and the strait’s potential for blockades, there is an ever-present risk of losing assets to piracy.
If access to the Strait of Malacca was hindered by piracy or indeed by other states, the economic impacts would be colossal. Beyond short-to-medium-term adjustments in the Chinese economy, a shifting of supply to using longer routes through the alternative Lombok or Makassar straits would add an estimated $84 to $250 billion per year to shipping costs. Rerouting one of the most important shipping lanes would gridlock global shipping capacity and, highly likely, increase energy costs worldwide. The economic upheaval as a result of the 2021 Suez canal blockage illustrates this strongly, yet would pale in comparison to a blockage of the Strait of Malacca.
Forecasting scenarios
The above risk factors thus place China in a precarious position regarding the strait. Whilst states blockading an open seas shipping lane may seem fanciful at the moment, China’s ‘Malacca dilemma’ could become a reality very quickly, especially when considering a change in Taiwan’s status quo. Taiwan is geographically far from the strait but if tensions were to increase over its status, the Strait of Malacca could see a greater security presence in response. Tangibly the US security guarantee to Taiwan means in the event that Taiwan was invaded, or even blockaded as a precursor to invasion, the US could impose an analogous blockade in the Strait of Malacca. China’s vulnerability regarding this strait leaves it open to some proportional responses should it grow more assertive in regional security. The prospect of greater American or US-allied control over the Strait of Malacca is likely in a hypothetical wartime scenario.
On allies, the wider Indo-Pacific region is seeing greater security cooperation as a reaction to increasing Chinese presence. The recent AUKUS military alliance between Australia, the United Kingdom, and the US entrenches American security interests in the region and provides new capabilities for Australia. The Quad grouping between Australia, the US, India, and Japan does not yet have a concrete security element, but could rapidly become an important player in the Strait of Malacca if the threat perception from China changes. Overall the expectation is for these budding Indo-Pacific alliances to gain a stronger strategic focus on the Strait of Malacca and the oil passing through it, critical to China’s economy.
Supply chain mitigation
Beijing is attempting to decrease its vulnerability to the risks and scenarios identified above. Above all other strategies, the China-Pakistan Economic Corridor (CPEC), a part of the Belt and Road Initiative, seeks to mitigate against the ‘Malacca dilemma’. CPEC is an opportunity for China to have an access point to the Indian Ocean through the construction of a new pipeline from western China to the new port of Gwadar in Pakistan. The overall infrastructure investment is valued at $62 billion, with the Gwadar port expected to be fully operational between 2025 to 2030. However, CPEC faces various problems. The difficult topography of the Himalayas means high transit costs for the pipeline, far beyond that of shipping through the Strait of Malacca. Passing through unstable regions adds to the logistical difficulties, with terrorist activity reported in regions the CPEC passes.
The recent China-Myanmar Economic Corridor (CMEC) can be evaluated in a similar manner. The Kyaukpyu Port developed by the Chinese government will send 420,000 barrels of oil a day via the Myanmar-Yunnan pipeline. This nevertheless pales in comparison to the 6.5 million China-bound barrels per day that pass through the Strait of Malacca. In addition, Myanmar’s military coup and the future possibility of high-intensity civil war puts CMEC in peril. Chinese investments have been damaged, with serious doubts about CMEC’s security evidenced by fighting along the infrastructure route.
It is therefore clear that while China is developing alternatives to the Strait of Malacca, these remain woefully inadequate and there is no single replacement for the importance of the strait. Because of their respective political instabilities, ensuring that CPEC and CMEC are successful can only be one part of a solution. Diversifying away from crude oil shipping is another, and land-based pipelines will continue to be developed with central Asian countries and Russia. Of course, avoiding foreign control of the Strait of Malacca is preferable, but China is beginning to hedge on other sources for its imported oil.
In summary, it seems likely that China will continue to heavily depend on the Strait of Malacca to meet its energy needs. The strait remains a vulnerability, especially in the regional context of increasing security competition with other states. Various mitigating measures are being taken to lessen the impact of any change to this strategic chokepoint, but no cure-all solution exists. The geographic production centres and transit lanes for oil are one of the most significant issues for China and its economy and are sure to command the attention of all parties involved.
Image credit: dronepicr via Flickr