Geopolitics and Asia’s growing role in the Oil Markets

British Petroleum’s annual energy outlook published this week (BP -energy-outlook-2018.pdf) highlights the enormous shifts taking place in the supply and demand for oil and other fuels. Energy consumption drives development and higher living standards, and, over the past 100 years, oil politics have heavily influenced international relations. Much of Post WW II geopolitics has been influenced by the growing dependence of the industrialized world on unstable sources of oil supplies from the Middle East. But the future is now starting to look very different, as dependence on the Persian Gulf oil  is moving from the U.S. and Europe to China and India.

Long the dominant oil importer, the U.S. will soon be self-sufficient, because of rising shale oil production. As shown in the charts below, U.S. oil output is returning to levels last seen in the early 1970s, and imports are approaching zero compared to a peak of 12.5 million barrels per day 15 years ago.

On the other hand, Asian demand, mainly from China and India, is ramping up.  China started to have a significant impact on oil markets in the early 2000s, and now  it is India’s turn. Asia’s growing share of global imports is shown below in a chart from the BP report.

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As I discussed in a previous blog ( India-urbanization-and-a-new-commodity-bull-market), India is having  growing impact on commodity markets. Indian oil consumption has increased by nearly 5% a year since 1990, growing from 1.2 million barrels/day to 4.2 million b/d. In 2016, India surpassed China has the largest contributor to marginal global demand for oil. India’s production meanwhile it around 700,000 b/d, and not expected to grow much, so India’s impact on the oil market will only increase with time. China and India are expected to import 9.5 million  and 3.7 million b/d in 2018, respectively.

Over the next twenty years, according to BP, demand for oil will start to decline in the OECD countries. As shown in the chart below, almost all demand growth will come from Asia.

The global oil market over the next decade will become almost completely Asia-centric. With its geographical proximity to the Persian Gulf and its historical and cultural ties, it is highly likely that India will become increasingly influential in the region. Both India and China will step into the vacuum left by the U.S. as it loses interest in the region, and this may lead to fascinating developments in our increasingly multi-polar world.

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