Trading was hectic on the International Petroleum Exchange in London. This was the home of the Brent Crude futures contract. More than 70 per cent of the world's oil was priced off this contract (that is, the prices of all other sorts of oil traded could be related to this price, as a margin either above or below it). The IPE was the world's biggest international oil exchange. It was that size average the exchange traded oil with a value of $2.4 billion every day at offered oil companies, investors, and traders unrivalled opportunities to protect themselves and make money. First China had a seat on the IPE. In the month before Dragonstrike it had built up a position in the futures market of $600 million. This position consisted of 200,000 futures contracts, which themselves represented 200,000,000 barrels of oil. If First China could unwind its position in the futures market instantly General Zhao and Multitechnologies would reap $1 billion in profit. But getting out of 200,000 futures contracts was harder than acquiring them. As the price of oil began to rise, Damian Phillips told his traders to unwind their positions slowly. By the end of London trading they had liquidated 40,000 April contracts at various prices, and pocketed for General Zhao a $400 million profit.
The strife in the South China Sea reverberated throughout London and New York. There was an immediate impact at Lloyd's e centre of the world insurance market. That Monday morning the War Risks Rating Committee had met to assess the significance of the conflict and to decide whether extraordinary premiums should be set on ships and their cargoes, as well as commercial aircraft. It set a new schedule of rates that ranged up to 3.5 per cent for Vietnamese ports. Rates for Singapore and Hong Kong bound cargoes were set somewhat lower with a minimum level of 2.5 per cent. For ships themselves, the Lloyd's market applied a rate of 5 per cent rate not seen since the Gulf War and one which drew howls of protest from ship owners. The supertankers transiting the South China Sea had a capital cost of some $60 million and more; $3 million in premiums for a single voyage was crippling. Similarly with aviation. British Airways was quoted a war risk premium of $162,000 for each Airbus 320 flight into Hanoi and $60,000 for a Boeing 747 to Hong Kong. An airline spokesman said that a war risk surcharge of nearly $845 was imposed on each passenger to Vietnam and almost half that to Hong Kong. The airline said it would continue to offer services for as long as it was safe to do so; others stopped operating altogether.
The drama in the oil market unsettled all others. In Europe and America financial markets have a way of taking regional conflicts in their stride, but the massive wave of selling that hit East Asian stock exchanges could not have come at a worse time. European and US bourses, after five years of virtually uninterrupted gains, were looking vulnerable to a setback. Some of the older traders drew parallels with 1987: the proximate cause of the October stock market crash was the disagreement that September between the US and Germany over interest rates. The Americans wanted the Germans to lower interest rates; the Bundesbank refused. Analysts in the City and on Wall Street reasoned that the Gulf War of the 1990s — the last big regional conflict — had had very little effect on the stock markets of Britain, Germany, and the United States because oil stocks were high, the world was coming out of recession, and Saddam did not have a chance against the military might of the US and its allies. The West's response to Kuwait had been relatively simple: Saddam was a tyrant who garnered no support in the West. But China's foray into the South China Sea was perceived as more than just an East Asian version of the Gulf War grab for territory by the regional bully who, in time, would be put back in his place. Distance diminished the impact of what the Chinese were up to: Asia was a long way away and few really cared about the Vietnamese, or about the stretch of water between them and the Philippines known as the South China Sea. But the markets cared. The world economy was differently placed now. Stocks of oil were low, world output, especially in Europe and the US, was growing strongly, indeed too strongly, and China was manifestly not Iraq. China might be a tyranny, but it was also a commercial opportunity in ways which Iraq never was and never could be.
The FT-SE 100 share index shed 136 points to 6,347 and Wall Street was faring no better. The Dow Jones Industrial Average had sailed through the 8,000 barrier in January but on Monday morning it opened 300 points lower at 7,838. The rise in the oil price and the prospect of higher inflation and interest rates unnerved an already uneasy Wall Street. In the executive suites of corporate America, anxiety was growing. Reece Overhalt for one knew that that China's actions presaged ill for Boeing. The company's move into China was deeply unpopular with sections of the Boeing workforce, and the International Association of Machinists, Boeing's main union, was bound to exploit it.
Mr Stephenson, the Prime Minister:… That, Mr Speaker, is the situation as it stands right now. As I said, the Chinese have continued to attack Vietnam. There are civilian casualties, including Europeans and Americans. We do not have specific information about British subjects. We are hoping therefore that British casualties are slight. I have talked personally to my American and European colleagues and we have decided that nationals being detained on oil rigs captured by Chinese troops should be regarded as hostages, although we do not believe they are in any danger. No demands have been made for their release. We believe the Chinese are facing a logistical problem in getting them to a place where they could be freed.
Mr Andrew Dixon, Leader of the Opposition: While thanking the Prime Minister for his statement, I remain confused about his government's policy. I have heard no condemnation of the Chinese action. I see no indication that we will support Vietnam, as the French have done. I see no moral stand upholding the democratic principles which once made this country great. So could the Prime Minister, before the House, tell us whose side he is on in this conflict, and will he condemn the violence of a non-democratic, one-party state against that of new Asian democracy?
Mr Stephenson, the Prime Minister: Clearly the right honourable gentleman is unused to the responsibility of government. I understand that and should he come and sit on this side of the House, he would realize that glib comments and cheap political point-scoring are more often than not against the national interest. Often ministers must put aside their personal views and consider the wider issues. Long gone are the days when Britain sent expeditionary forces all over the world. Could he tell us if his party would support risking the lives of British servicemen in an area of the world where we have no substantive national interest and no substantive treaty obligation to the nation coming under attack? Could he tell us if he advises taking action against China which could throw British people onto the dole queues with little prospect of finding new employment? Could he not agree for once, instead of chirping like an untrained parrot, that it is right for Britain to wait and assess the South China Sea crisis and only then, after talking to our allies, to formulate a policy which could well dictate the global geopolitical structure for the next fifty years?