Regional Conflicts in the South China Sea Could Rival the Middle East One Day

Sea Hawk helicopters maneuver over the South China Sea. Photo credit: Flickr/Official U.S. Navy Page

The South China Sea reportedly holds 11 billion barrels of oil and 190 trillion cubic feet of natural gas. That might actually only tell half of the story as the US Geological Survey estimates that as much as 22 billion barrels of oil could lie underneath the seabed. Unfortunately, there's no clear way to define who "owns" these resources, as China, Vietnam, Malaysia, Taiwan, the Philippines, Indonesia and Brunei all believe some, or all, of these resources belong to them.

What's more, these are growing countries with increasingly greater pressure being placed on the need for new natural resource supplies. Many of these countries are forced to import a considerable percentage of their overall demand.

This is in fact one reason why nearly a third of all global crude oil passes through the South China Sea each year. The combination of potentially disputed oil underneath the sea, as well as its importance in the global oil trade makes this region a potential future hotbed for conflict. Clearly, peace in the South China Sea is vital to maintain regional stability.

Peace in the region could be volatile in the years to come. This is because the Chinese, in particular, have been aggressors in many instances. For example, the country recently declared an Air Defense Identification Zone that encompasses 1 million square miles of the East China Sea. To combat these moves we're seeing countries like Japan quietly build up its military.

These regional tensions are a major catalyst for defense contractors like Boeing (NYSE: BA  ) . Its new submarine destroyer could play a big role in keeping peace in the region as countries like Japan bulk up their defenses. The U.S. Navy is already deploying several of Boeing's submarine hunters to Japan. Future orders could really fuel Boeing's stock price.

That said, while a potential conflict is a catalyst for Boeing, it represents a risk for American oil and gas producers in the region. Companies like ConocoPhillips (NYSE: COP  ) , which has operations in China's Boahi Bay as well as Malaysia, Indonesia and Brunei, could see its production from the region affected if a conflict over oil reaches the boiling point. ConocoPhillips along with partners Murphy Oil Corporation (NYSE: MUR  ) and Royal Dutch Shell plc (NYSE: RDS-A  ) see its offshore oil and gas production from Malaysia in the South China Sea being a big driver of margin expansion. Taking this high margin oil production offline would have an impact on cash flows, especially at Murphy Oil as it spent 42% of its development capital on Malaysian projects last year.

Investors need to keep an eye on Southeast Asia, and the South China Sea in particular. The oil in place under that sea, as well as its importance as a trade route, could push some nations to the boiling point as they rush to secure their supply of oil. That's a catalyst for some stocks, while a big risk for others.

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Read/Post Comments (4) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 05, 2014, at 10:15 PM, DannyBoy13 wrote:

    One more reason to develop our own energy resources.

  • Report this Comment On January 05, 2014, at 11:13 PM, Oorfeo wrote:

    The Ugly Truth About China

    For years Western investors have been unable to successfully "read" China, and they're not alone. Ever since the founding of modern China in 1949 the U.S. government has been trying, sometimes desperately, to disrupt the Chinese government to allow the influx of capitalism and profitability for the businesses the U.S. gov't represents. The U.S. efforts too have been essentially ineffectual. Unlike the Soviet Union, China has been persistently resistant to the ire of the U.S. government.

    So what exactly is it that the gov't and the investors have missed?

    China has a problem. Corruption notwithstanding, its government has made the mistake of placing people above money, the misguided priority which is of course the anathema to successful capitalism.

    Given China's priorities, it has become the world's leader for Peace as well as a pioneer in energy efficiency (both additional capitalist anathemas!) Japan's serving as an American puppet notwithstanding, all this combined with the inevitable reduction of oil consumption and production, any mining of resources in either China Sea will be limited and peaceful, and therefore not very profitable.

    That is the ugly truth about China.

  • Report this Comment On January 06, 2014, at 1:11 AM, EmilyGoodall wrote:

    China places people over money?

  • Report this Comment On January 06, 2014, at 2:08 AM, Oorfeo wrote:

    Yes. The World Bank holds up China as the prime (actually, the only) model of how a government should eradicate poverty. It moved from around 85% poverty in 1980 to less than 10% today. How's the U.S. doing in its anti-poverty quest? (And don't try the "how do you define poverty" gambit; it doesn't work! Do your homework.)

    The truth is that the Western mindset of "rugged individualism" has difficulty comprehending that it is actually possible for an entire People to collectively care for each other first on a purely human level rather than on a political or national level.

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Matt DiLallo

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries:

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