We have got used to worrying about which volatile region our energy supplies come from. Now change is afoot, new worries for different people. The world oil trade is moving from west to east, with demand growing in a region with few supplies. New balances are developing which will shape the oil market and change its geopolitics. Asia's oil will largely come from the Middle East, an area on which it has little expertise. Atlantic countries need to look to Russia and Central Asia.
The rise of Asia in the world economy is not a new phenomenon. This growth has been reflected in energy and oil demand, while oil production in the region has grown more slowly, supplying less than a third of consumption by 2008. Since 1995 the Asia-Pacific oil deficit - the shortfall of production over consumption - has exceeded that of the rest of the world outside the exporting countries of Russia, Central Asia and the Middle East: the Atlantic region on the map ....
The shift of the oil deficits to the east is massive and clear. By 2030 the Asia-Pacific oil deficit will be seven times that of the Atlantic, where demand will grow more slowly, even without the Copenhagen climate change targets. Production will increase in the deep Atlantic and, controversially, from the heavy oil and tar sands in Canada and Venezuela. By 2030 the Asia-Pacific deficit will be around seventy percent of consumption, compared to ten percent in the Atlantic.
Map that matters
To understand the eastward tilt it is helpful to look at the world in the broad geographical and logistic regions rather than the usual presentations of the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC, the Organisation for Economic Co-operation and Development (OECD) and non-OECD. In this map, the Atlantic and Asia-Pacific regions are structurally and permanently in oil deficit, while the Middle East and Russia-Eurasia regions are - at least to 2030 - in structural surplus.
Broadly speaking, the Atlantic region is the basis of the world oil market: private sector companies are responsible for most imports and probably about half the exports. There is an active, free oil trade between countries in the region, open to all, with a unified price structure based on the commodity markets in London and New York. In the Atlantic region the market offers the security of diversity.
The Asia-Pacific region is rather different. Although it is a quantity leader, Asia is a pricefollower. Imports to China, Indonesia and India are mainly in the hands of state-owned or state controlled companies, Middle East export contracts - from the small number of national oil companies - normally prohibit reselling.
There is not enough 'free oil' to support a liquid commodity exchange and a competitive Asian benchmark price. In this imperfect market, prices have typically been benchmarked on those in the Atlantic commodity market, at a premium above the amount paid by Atlantic importers.
Deficits are matched with surpluses through trade. There is trade between countries within these broad regions as well as between surplus and deficit regions; the total volume of trade is roughly double the big regional imbalances. There is also cross trade between the Atlantic and the Asia-Pacific. Trade ensures that prices in the two regions are closely connected.
There are striking contrasts between the dependence of the various regions in 2008. The table below shows clearly that even today:
- The Atlantic region is far more self-sufficient than the Asia-Pacific.
- Half of Atlantic imports are from other countries in the region, which includes north and West Africa: the integrity of this market is important.
- The Asia-Pacific region's oil supply depends far more on the Middle East than the Atlantic region's does.
In 2008, seventy percent of Middle East oil was actually exported to the Asia-Pacific, while only thirty percent came to the Atlantic, whose share has steadily shrunk. By around 2015, there will be an entirely new situation - a tipping point - because the structural deficit of the Asia-Pacific will outgrow the surplus of the Middle East. By 2030 a quarter of the Asia-Pacific deficit will be met from outside the Middle East - essentially from west Africa - with some supplies from eastern Russia and Central Asia.
Apart from cross-trading, the Atlantic deficits will no longer depend on Middle East surpluses, but on the surpluses of Russia and Central Asia. This shift will have consequences which are being anticipated in strategic geopolitical and commercial developments today.
Oil may lose markets to gas. The Asia-Pacific region may consume more gas than the conservative projection of ten to twelve percent of energy demand, similar to today's, and less than half the share achieved and projected for the United States and the European Union.
However, without an increase in the gas share of the Asia-Pacific energy market, the gas deficits in the Asia-Pacific could continue to be matched by surpluses in the Middle East; a different story from that for oil. There are and will be connections between the markets through the liquefied natural gas trade and the pipeline being built from Turkmenistan to China, so prices should not move too far apart for too long.
The eastern oil markets, however imperfect, will remain connected to the Atlantic by 'pivot zones' where exporters - or importers - can choose between west and east. Whether state or private sector, they are unlikely to choose to sell - or buy - outside the competitive alternative for long. It helps that private sector companies are important in the pivot zone and that there is already infrastructure to keep options open: eastward export pipelines from Central Asia and east Siberia, export pipelines from Iraq to the Mediterranean, and the open seas of the south Atlantic and the sea of Okhotsk.
Investment in these pivot zones has a commercial strategic value: companies will compete for the most valuable permanent options, and seek support from governments interested in the security given by the diversity and flexibility of the world oil market.
Finally, there are geopolitical questions. As the Atlantic dependence on the Middle East disappears, the fear of a major physical disruption of supplies also disappears: the Asian-Pacific market would absorb the first shock, though prices everywhere would be affected.
The idea - already unrealistic - of Islamic countries using an 'oil weapon' against western states implicated in the Israel-Palestine question would be off the agenda. Those trapped in the Middle East maze need to review their options. The Middle East's Asian customers need not worry: their governments have no history in the complex origins of Middle East conflicts, and no immediate role in their resolution.
The Middle East will always be important in the oil trade, but its influence will cascade through its interdependence with the Asia-Pacific region. Atlantic importers need to focus attention on the interests of Russia, Central Asia, and Atlantic Africa, where global oil markets, and oil security, will balance in future.