(EnergyAsia, January 10, 2018, Wednesday) — Asia’s oil expenditure could rise another 9% in 2018 after surging by an estimated 25% last year, according to calculations based on US government data and projections.


But analysts warn these numbers could prove conservative if new and bigger conflicts break out in the Middle East and North Asia.

According to the US Energy Information Administration (EIA), Asia’s economies, covering the geography from Japan and China in the north to Pakistan in the west and New Zealand in the south, paid an estimated total of US$1.633 trillion in 2017 for their oil supplies, based on Brent crude averaging US$53.88 a barrel. This was 25.9% higher than the 2017 oil bill of US$1.297 trillion.

The sharp increase was due to the combination of the 23% rise in Brent crude price over the course of 2017, and the continued growth in Asian oil consumption.

Asia’s oil market grew by 2.2% to reach a new high of 30.31 million b/d in 2017. The region’s strong energy appetite was underpinned by its economies collectively expanding by 5.7% last year.

For 2018, the EIA expects Asia to pay nearly US$1.8 trillion for its oil, an increase of over 8.8% year-on-year, based on a projected consumption of 31.04 million b/d. The Brent crude price is expected to rise to average US$57.26 a barrel in 2018, said the EIA.

 

Asia’s Oil Expenditure

2016    2017*   2018**

Brent crude price US$            43.74   53.88   57.26

Consumption (Million b/d)       29.66   30.31   31.04

Asia Oil Bill US$                      1,297   1,633   1,777

% change                                                   -10.4%  25.9%    8.8%

*estimate                **projected

Source: Calculations based on data from US EIA

 

For now, economists do not think rising oil prices will derail or even slow down Asia’s economic expansion.

The Asian Development Bank (ADB) expects the developing economies of Asia (excluding Japan, South Korea, Australia and New Zealand) to grow by a combined 5.8% in 2018.

 

The return of energy-related risks

But the spectre of geopolitical risks is returning to haunt the world’s energy markets, with Asia’s energy-deficit economies most at risk. The world was able to contain the threat to oil supplies posed by the rise of the Islamic State (ISIS) from mid-2014 along with conflicts in Iraq, Syria and Libya.

Now, instead of enjoying the respite from ISIS’s recent defeat in the Middle East, the world faces possibly greater threats from new schisms emerging in the region as well as North Asia. Those grim prospects are clearly beyond the scope of mainstream economists. In its December market report, the Organisation of Petroleum Exporting Countries (OPEC) had just one sentence on the possibility of geopolitical events disrupting the oil markets in the coming year.

The second half of 2017 provided a preview of what’s coming. In the last days of December, Iran was suddenly rocked by deadly anti-government protests in several major cities including Tehran. In November, the Saudi Arabia government shocked the world by announcing the arrests of more than 10 powerful princes and politicians opposed to Crown Prince Mohamed bin Salman. Infighting within the ruling family has now spilled out into the open.

It comes on the heels of Saudi Arabia’s worsening quarrels with Qatar since the two energy powerhouses cut diplomatic ties with each other in July. Military conflict between the two self-proclaimed leaders of Sunni Islam cannot be ruled out.

North Korea’s brewing nuclear confrontation with the West could also blow away Asia’s rosy scenario through a potentially massive disruption of oil and gas flows throughout the region.

According to consultant Wood Mackenzie, a North Korea-focused conflict could disrupt up to 13 million b/d, or a third of the world’s seaborne crude trade.

“Significant refining and petrochemical capacity across North Asia could be at risk from either damage or pre-emptive safety shut-ins. The region represents about 50% or 17 million b/d of Asia’s refining capacity and 60-65 million tonnes of capacity in both olefins (ethylene and propylene), and aromatics,” said Wood Mackenzie.

Also at risk are around 55% or 2.2 million b/d of China’s crude oil production located near the likely conflict zone, up to 1.4 million b/d of Russia’s crude export to North Asia, and upstream production in the Russian Far East.

Some traders are once again placing speculative bets on the crude price exploding to US$200 a barrel. A decade ago, as crude broke through the US$100 barrier for the first time, US$200 oil was deemed a possibility. The rise of US shale-based oil and gas supplies helped stop the momentum.

The new geopolitical threats have reinstated the risk of a sharp oil surge. If these supply-threatening conflicts do break out in 2018, Asia’s oil expenditure could be course to again break the US$2 trillion barrier last breached in 2014.