How ASEAN Should Respond to Oil Price Hike May 31, 2018 | by

In Southeast Asia, the first oil discovery was in Sumatra, Indonesia, in 1883. Since then, crude oil exploration has expanded and commercially produced by ASEAN major players in the industry, namely Brunei Darussalam, Indonesia, and Malaysia. The oil drilling activities are necessary to provide ASEAN Member States’ (AMS) energy demand to support the industrial, transport and residential sectors. According to the 5th ASEAN Energy Outlook by the ASEAN Centre for Energy (ACE), the demand for oil will increase from 168 Mtoe in 2015 to 472 Mtoe in 2040, dominated by the transport sector. The share of oil in total primary energy supply by 2015 was 409 Mtoe and by projection, it will maintain similar share in 2040.

ASEAN Oil – Production vs. Requirements (ACE, 2017)

 

In the late 2014, global crude oil price plummeted below $28/barrel, it is the lowest since 2003. The first reason is the breakthrough in shale formation exploration and production in the U.S. and Canada. Oil production in the U.S. escalated by shale fracking, as Canada squeezed their oil sands. These local efforts were able to lessen oil imports for both countries. The second reason is the geopolitics tension in Middle East and Africa.  Saudi Arabia and other Organization of the Petroleum Exporting Countries (OPEC) members agreed to maintain their oil production despite the global need to trim oil supply. Third, shrinking market of energy especially in emerging large economies, such as China, Russia, India, and Brazil. Albeit their economic activities that maintains substantial use of energy, the economic growth slowed down after 2010.

ASEAN holds the smallest oil reserves globally with no giant oil discovery since 2016. ASEAN, a net oil importer, is vulnerable to the supply disruption and oil price fluctuation. On 22 May 2018, crude oil price peaked at $80.49/barrel, the highest level since 2014. To outrun an increase in oil price, ASEAN needs to suppress arising energy problems due to its oil dependency. For the net oil importing Member States, surging oil price means increasing importing bill, which triggers fuel price to escalate. Nevertheless, for net exporting countries, higher oil price attributed to significant additional revenues.

Global Proven Oil Reserves in 2016 (BP Energy Outlook, 2016)

 

According to AEO5, Member States like Cambodia, Lao PDR, the Philippines, and Singapore, have limited or no domestic oil production. For these Member States, the urgency to import crude oil burden their economies. However, it is forecasted that ASEAN oil production will decline at an average rate of 1.4% per year up to 2040. It will land at 1.6 Mbbl/d in 2040, only 70% of the 2015 level. To overcome ASEAN dependency on oil import, following actions are recommended to narrow the gap between supply and demand:

Securing the Oil Supply

  • Oil Stockpiling Stock Draw

The ASEAN+3 (plus China, Japan, South Korea) agreed upon the necessity to implement oil stockpiling to minimise the impact of oil supply disruption and highly volatile oil market. By gathering and storing oil in strategic locations, ASEAN could promptly release oil during times of turmoil. To support the idea, ASEAN Member States (AMS) need to enhance their oil infrastructures and policies to control the consequences of oil supply and price disruption with oil stockpiles, and adjust with the new situation.

  • Boosting Exploration & Production Efforts

Upon the rising oil price, oil-producing AMS such as Brunei Darussalam, Indonesia, and Malaysia have an opportunity to increase their income through oil exports. The investment could be allocated to oil exploration and development, not only domestic but also in overseas. The activity will help to increase oil supply.

Reducing Oil Demand

  • Restraining Demand

In order to reduce oil dependency, oil consumption by end-users has to be diminished. Increasing public awareness on EE would help to lower energy demand, through e.g. implementation of low-energy AC and lighting and development of green buildings. The governments could also implement some campaigns to encourage behavioural change in the long run.

  • Utilising Alternative or Renewable Energy

The diversification resources in energy mix would certainly reduce oil dependency. The utilisation of biofuel or natural gas and the development of renewable energy (RE) for example could support the AMS’ commitment to reach 23% of RE share in their energy mix by 2040.

Enhancing Regional Cooperation

  • Ticket and Regional Stockpiling

Ticket system stockpiling is a common practice in Europe and East Asia. It is considered as one of the most flexible and cheapest stockpiling systems, as it minimises the construction and storage cost of stockpiling. It is an agreement of countries to supply oil products in emergency situations. An accessible yet strategic location of regional oil stockpiling infrastructures would be beneficial for ASEAN region from the economic perspective. The AMS could collectively invest in constructing the regional stockpiling which later be used to pool their oil.

  • ASEAN Petroleum Security Agreement (APSA)

APSA is an agreement between ASEAN Member States to enhance the energy security within the region. An agreement in oil stockpiling would bridge the oil gap between Member States. The AMS are discussing ways to implement a practical and operable APSA including to facilitate the development of infrastructures, establishment of APSA permanent secretariat, formulation of regional regulations, and funding. (RAP and TSO)

 

 

 

References

BP Energy Outlook. 2017. BP Statistical Review of World Energy: June 2017.

(https://www.bp.com/content/dam/bp/en/corporate/pdf/energy-economics/statistical-review-2017/bp-statistical-review-of-world-energy-2017-full-report.pdf)

ACE, 2017. The 5th ASEAN Energy Outlook (AEO5). ASEAN Centre for Energy (ACE), Jakarta. (http://www.aseanenergy.org/resources/the-5th-asean-energy-outlook/)

ACE. 2016. Oil Stockpiling Roadmap in ASEAN: Energy Security on Oil. Tokyo.

Yanagisawa, Akira, 2012, Impact of Rising Oil Price on the Macro Economy, IEEJ.  (https://eneken.ieej.or.jp/data/4338.pdf)

 

Featured photo credit:  CCO Creative Commons

 

The views, opinions, and information expressed in this article were compiled from sources believed to be reliable for information and sharing purposes only, and are solely those of the writer/s.  They do not necessarily reflect the views and opinions of the ASEAN Centre for Energy (ACE) and/or ASEAN Member States.  Any use of this article’s content should be by ACE’s permission.