Ever heard of Mischief Island? The Chinese have and we should pay closer attention as the Spratly Islands come back on the geopolitical risk radar!
Is it just a coincidence? The same week that the International Energy Agency announces that China overtook the United States as the world’s largest consumer of energy last year, the Chinese Navy is dispatched to the oil and natural gas rich South China Sea to conduct naval exercises. The Chinese defence Ministry reported that “guided missiles were fired and anti-aircraft attacks simulated”. Chief of General Staff, General Chen, was reported to say “pay close attention to changes in the development of the mission, soundly prepare for combat”. This area which includes the long disputed Spratly Islands is rumoured to have anywhere between 105 to 213 billion barrels of potential oil reserves and undetermined hundreds of billions of cubic feet of natural gas. It is interesting to note that the CIA, on their public website, declines to give any specifics about energy reserve potential in the area, as if they don’t know. But why fan the geopolitical risk fires?
Here’s a brief history of this under reported powder keg. Jurisdictional disputes have plagued the area for many years initially due to fishing rights but then as the potential for large hydrocarbon finds became more obvious, the sovereign control clashes heated up. The Spratly Islands include approximately 100 small islands and reefs that have been claimed by China, Malaysia, The Philippines, Taiwan and Vietnam.
The appropriately named Mischief Reef is one of them and has been a flash point in recent years.
It is approximately 1000 km from China and only 300kms from the Philippines. The Chinese have advanced their military presence on the reef by constructing a listening post there manned by the PLA. Subsequently. this act caused an incident in 1999 that led to the Philippines cutting off diplomatic relations with China. Since then, there have been numerous incidents of Chinese “fishermen” arrests and “pirate ships”. As recently as 2008, the Philippine government laid further claim to the islands followed by similar moves from Vietnam and Malaysia. Given the fact that these are some of the fastest growing emerging economies in the world and will require copious quantities of energy to fuel their growth, it should come as no surprise that this is an area of interest to them (especially the biggest kid on the block,China). By extension, this is a global hot spot that curiously is not on many investors’ radar screens.
Complicating the situation, and heightening the area’s global risk profile, is the Mutual defence Treaty between the US and Philippines which states that if either country is attacked by an external party they would support each other militarily.
So, this week, we have an interesting inflection point of an energy-hungry China rattling their naval sabers in a highly controversial, energy rich and volatile part of the world and at the same time they have been labelled the world’s largest energy hog! Coincidence? I’ll let the reader decide. If this recent activity near the Spratly powder keg is any indication, it seems we can add geopolitical risk to the growing list of worries with regard to the emerging Chinese Dragon.
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