The Forex Nitty Gritty

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Forex Response to Oil and Gas Disputes in the South China Sea

Posted by TFNG Admin On April - 24 - 2012  
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Some still contend that the Vietnam War was all about oil in the South China Sea. Today there are new oil and gas finds in the Spratly Islands in the South China Sea and perhaps a threat of armed conflict. Our concern is the Forex response to oil and gas disputes in the South China Sea. Although the United States is no longer engaged in a ground war in Indochina its navy patrols the South China Sea. Toward the south of this region lie over seven hundred and fifty islands, cays, atolls, in islets called the Spratly Islands. This has long been a productive fishery with its many reefs. In the modern era the area promises to become important for extensive oil and gas deposits. The Spratly Islands lie off the West coasts of Malaysia, Brunei and the Philippines and the East Coast of Southern Vietnam. Mainland China and Taiwan are two and three times the distance from the islands. Our concern about a Forex response to oil and gas disputes in the South China Sea is similar to our concern about the Forex response to Persian Gulf Tension. It has to do with the militarization of this cluster of islands.

Just Who Owns the Spratly Islands?

Disputes over sovereignty in the Spratly islands go back years to when the French governed Indochina as a colony and pre-communist China under Chang Kai Shek argued over a French presence in the islands. Today Taiwan and mainland China each claim all of the South China Sea. Malaysia, Brunei, Vietnam and the Philippines claim parts of the islands. Mainland China, Taiwan, Vietnam, and the Philippines all have small troop garrisons in the islands. Brunei does not have troops to back up its claim. Tensions have recently risen as a Philippine company has found a new and large gas deposit. The Philippines already take natural gas from the area and pipe it to the island of Luzon. The Forex response to oil and gas disputes in the South China Sea could manifest themselves in a number of ways, both in direction and foreign currency trading volume.

Forex Response to Oil and Gas Disputes in the South China Sea

How Forex markets respond to disputes in the region will largely depend upon just how hot the situation gets. Last year a Chinese military vessel attempted to ram a Philippine oil exploration vessel. The US military has increased its presence in the area. In fact, the Philippines and other nations have sought closer ties with the USA in response to the perceived threat from China. Who gets to use the estimated twenty trillion cubic feet of natural gas just discovered could make a difference as well. When China’s industrial machine recovers from the recession and starts building again the rights to the energy wealth of the South China Sea could support their economy and the Yuan. On the other hand, overt military conflict, especially involving the USA and China could wreak havoc on the Yuan and US dollar. Some analysts expect the rhetoric to cool down once the Chinese leadership changes this year and lower level functionaries no longer feel the need to posture and appear decisive or strong. Then concern about a Forex response to oil and gas disputes in the South China Sea might diminish as well. Then traders can go back to concerns about such things as the China current account surplus or deficit and not the actions of the People’s Liberation Army.

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