- NBR - The National Bureau of Asian Research

Cheap Oil in the Asia-Pacific: Implications for Energy and Environmental Security

By Laura A. Schwartz

December 22, 2015

In early 2015, the global average price of oil hit a six-year low, following a dramatic decline in average prices by 50% over the course of just one year. Prices declined due to falling demand reflecting a weak economic recovery across the world, increased commitment to alternative fuels in some economies, and unprecedented increases in unconventional production in North America. Oil market volatility can have dramatic political, economic, and environmental implications. Structural changes in oil markets have a particularly strong impact on the Asia-Pacific because the region is home to the world’s top five oil-consuming countries and four of the five top oil-producing countries.

The Impact of Low Oil Prices on the Asia-Pacific

Countries that import large amounts of oil, such as China, Japan, South Korea, and Pakistan, have seen dramatic improvements to their account balances as a result of cheap oil. Compounding this effect is the fact that falling oil prices also affect the pricing of other energy sources. Significantly for many countries in the Asia-Pacific, contracts for liquefied natural gas (LNG) frequently peg the price of LNG to the price of oil. Lower LNG prices have been welcomed by top Asian importers such as Japan, which dramatically increased its natural gas imports following the nuclear shutdown in 2011. Additionally, some countries, including China and India, have moved to take advantage of the current price environment to more affordably supplement their strategic petroleum reserves. Thus, for many countries, lower oil prices have led to eased budgetary constraints and overall enhanced energy security. On the other side of the coin, reduced revenue as a result of lower oil prices negatively affected major energy producers and exporters in the region, both as a direct result of lost revenue and indirectly by prompting reduced investment, which can temper future growth in production. This effect is particularly pertinent for companies that specialize in unconventional production of oil and gas, like many in the United States and Canada, which can require much greater investment than conventional production in the Middle East. Thus far, however, U.S. production has been remarkably resilient, though investors may reassess their commitments if prices remain at low levels for an extended period.

Low oil prices have been of particular concern in Russia, a country that has expressed strong desire to increase energy exports to Northeast Asia. The Russian economy is reeling both from reduced energy revenues and as a result of economic sanctions imposed by the European Union and the United States. Russian energy companies are struggling to fund large-scale development projects, many of which are intended to boost supply to Asian energy consumers. If Russia is unable to make progress on these projects, major oil consumers such as China are likely to turn their attention toward other sources, such as the Middle East. Thus, rather than providing economic relief, low oil prices both heighten Russia’s economic instability and weaken its influence on key energy importers in Northeast Asia.

How governments and consumers react to cheap oil will affect future energy and environmental security in Asia. A number of countries in the region have seized the opportunity provided by lower oil prices to enact key policy reforms related to oil governance and consumption. For example, the Joko Widodo administration in Indonesia began the process of reducing state fuel subsidies, which had for years been draining government coffers, though fulfilling commitments to further reform may prove politically difficult. India took the opportunity to deregulate its diesel pricing system, and China raised consumption taxes on gasoline and diesel three separate times between November 2014 and January 2015. These moves toward more market-driven policies would have incurred higher political costs in the era of high prices.

On a less positive note, although low energy prices are a welcome relief for consumers, they can dissipate the pressure to invest in energy infrastructure, which is in a dire condition across the Asia-Pacific. Without structural changes, strains on energy sectors in the region will simply re-emerge once energy prices rebound. A similar effect has been predicted for environmental goals—lower oil prices could stymie attempts to promote the use of less carbon-intensive fuel sources as consumers flock toward cheaper gasoline and other petroleum products rather than more sustainable energy sources. Lower oil prices can also hinder efforts to promote energy efficiency—if energy prices are low, the financial incentives for consumers and industries to become more efficient are weakened. Thus, to avoid future energy and environmental insecurity, policymakers should embrace the opportunity that low energy prices provide by committing to much-needed infrastructure improvements as well as continued promotion of energy efficiency efforts and cleaner energy sources.

The Outlook for Oil Prices

The only certainty about global oil prices is in fact their volatility. However, there are factors to watch that could affect global markets going forward. One item of great interest to stakeholders in Asia is the United States' decision to lift its ban on crude oil exports and begin exporting oil to consumers in Asia. The region’s interest in U.S. exports of oil and LNG stems from goals surrounding supply diversification, particularly in countries like Japan, South Korea, and China that are heavily reliant on Middle East suppliers. Most analysts predict that the lifting of the U.S. crude oil export ban will only marginally affect global prices. After all, the global market has already reacted to decreasing imports in the United States as a result of the surge in U.S. production.

Another factor to consider is whether rising demand will lead to a rebound in global oil prices. Indeed, over the course of 2015, global oil demand grew as consumers increased their consumption, partially in response to lower prices. However, most forecasters do not predict major price increases in the near future, even with rising demand. For example, Facts Global Energy, the World Bank, and others predict sustained lower ranges for oil prices for years. Though markets are volatile and prices could shift at a moment’s notice, for now most stakeholders should function under the assumption that this situation will last, at least for the near term. If this is the case, the economic, environmental, and energy security effects described above are likely to continue and even be amplified going forward.

Laura A. Schwartz is a Project Manager in the Trade, Economic, and Energy Affairs group at the National Bureau of Asian Research (NBR). The views expressed are those of the author.

Strategic Asia 2015-16: Foundations of National Power in the Asia-Pacific examines how the region's major powers are building their national power as geopolitical competition intensifies. In each chapter, a leading expert analyzes a country’s economic, technological, human, and natural resources and assesses how well its political system translates those capabilities into military and diplomatic power. Learn more.