Taiwan's Greatest Defense: Oil

Relative energy advantages are the major reason for Russia's aggressiveness and China's hesitancy

The parallels between the Russo-Ukrainian War and the Taiwan Question have been written about and discussed at length. A revisionist power intent on remaking the world order sets its sights on a small neighboring country with immense strategic, cultural, and historical significance. In both cases, NATO opposes violations of sovereignty and attempts at expansionism. So far, Russia has decided to disregard western wishes and embark on its “special military operation”; the world anxiously watches China for signs that it may follow suit.

With so many clear parallels, it can be easy to assume that it will just be a matter of time before China pursues its own military adventure. When dealing with historical and geopolitical parallels, however, the differences can be just as important as the similarities. In this case, one major difference between these two conflicts is the relative energy advantage that each of the aggressors has.

Whereas Europe’s reliance on Russian natural gas has allowed Russia to use energy as a weapon in its conflict, China’s reliance on foreign oil imports both removes energy from its arsenal and adds a significant layer of protection to Taiwan’s defensive strategy. From an energy perspective, these two conflicts couldn’t be further apart, and China’s poor energy footing could ultimately prove to be Taiwan’s saving grace.

The timing of Russia’s invasion of Ukraine as a function of macroeconomic energy conditions has been well-documented. 45% of Russia's federal budget for 2021 came from oil and gas revenues, and as John McCain famously stated in 2014, “Russia is a gas station masquerading as a country.”

With so much of Russia’s economy tied to oil and gas commodity prices, it’s no wonder that Vladimir Putin chose to launch his invasion at a high point in the commodity cycle. In late January 2022, a full month before the full-scale invasion commenced, oil prices had almost quadrupled from their Covid-lows and were the highest they had been since 2014. 2014 was the last high point in the commodity cycle and was also the year Putin embarked on another military operation, the annexation of Crimea. Prior to 2014, the last time oil prices had spiked was 2008, which was also the year that Putin invaded Georgia. The clear pattern of Russian military action tied to high oil prices can be seen in the graph below showing oil prices since 2006.

Of course, many other geopolitical factors were in play during each of these invasions, but the Kremlin is no doubt fully aware of the economic bulwark that high energy prices provide against any potential economic consequences imposed as a result of their military actions.

In addition to filling Moscow’s coffers, the energy landscape leading up to the Russian invasion of Ukraine has also weakened the European response. Prior to the invasion, Germany, the largest European economy, received 40% of its natural gas from Russia. The United States and other European allies, already reeling from higher energy costs and associated inflation prior to the war, ultimately declined to impose immediate energy sanctions on Russia, instead opting for a delayed oil embargo that wouldn’t ultimately go into effect until December 2022, 10 months after the invasion began.

With both increased domestic revenues due to higher commodity prices and considerable leverage over Europe due to dependence on Russian oil and gas, Russia clearly has enjoyed an advantage from an energy perspective during the war. Of course, an energy advantage doesn’t always translate to battlefield success, but it can help to explain the timing and risk/reward calculus of a potential aggressor.

China’s energy position, on the other hand, affords no such advantage. Instead, China’s energy position poses a serious threat to the Chinese ability to sustain long-term military operations. Whereas Russia’s status as a net energy exporter gives it considerable optionality during periods of global energy shortages, China’s status as the largest energy importer in the world drastically reduces its strategic flexibility.

As clearly shown by both Japan and Germany during World War II, lack of access to oil can severely cripple a country’s ability to fight a total war, and the need for oil often dictates strategic decisions. China, which imports roughly 75% of its oil, has correctly identified its oil reliance as a major area of strategic concern. Further complicating Beijing’s position is the fact that the majority of China’s oil suppliers are in the Middle East and Africa, meaning that more than 70% of China’s petroleum imports pass through the narrow Strait of Malacca, off the coast of Singapore.

The Strait of Malacca is arguably the most critical shipping lane in the world and undoubtedly the most critical shipping lane for China, handling the second largest amount of oil and LNG traffic after the Strait of Hormuz, as well as roughly 20% of global maritime trade and 60% of China’s total trade flows.

The natural chokepoint of the Strait provides the U.S. Navy the opportunity for an easy blockade of Chinese shipping should China make an aggressive move towards Taiwan. In fact, this threat of a tit-for-tat response is likely the main reason China hasn’t more aggressively pursued reunification.

The obvious risk of high casualties in a full invasion scenario is reason enough to avoid that type of confrontation, but why hasn’t China simply implemented a naval blockade of Taiwan and threatened to sink any American ships that attempt to break the blockade? China certainly has the technology to make good on this threat. The reason is that this low-casualty “siege” of Taiwan would immediately be met with a cutting of the Malacca Strait.

The vulnerability of the Strait of Malacca to a U.S. Naval blockade has caused Beijing strategic headaches for years. In 2003, then President Hu Jintao described China’s situation as the “Malacca Dilemma”, owing to their lack of strategic alternatives when it comes to sourcing the lifeblood of the Chinese economy and military.

Given the concerns over the Malacca Dilemma, many of the reasons for China’s recent strategic initiatives become clearer. The continued fostering of positive relations with the Russians, for instance, is no longer driven by ideological conformity but instead by oil and gas. Likewise, China’s continued investment into Pakistan through the Belt and Road Initiative, which would open up naval and shipping access for the Chinese on the far side of India, is clearly not a result of Chinese altruism, but instead a naked attempt to circumvent their constrained energy supply lines.

Despite these initiatives to diversify, the realities posed by the magnitude of the trade flows that traverse the Malacca Strait and the South China Sea and the relatively limited relief that can be found in these alternative routes means that the Malacca Dilemma will remain a major strategic concern for Beijing for years or decades to come.

From an energy perspective, Russia’s energy advantage pushed it towards its invasion decision. The energy advantage in the China-Taiwan struggle, however, rests solely with Taiwan and its western supporters. Time will tell whether the threat of the United States’ ability to sever the energy lifeline of the Chinese will be enough to stay their hand in attacking Taiwan. For now, the pressure point of the Malacca Dilemma looks to be one of Taiwan’s most effective defensive weapons.