Asia should contribute to reforming the global oil market

THE collapse in oil price is seen to be caused by the coronavirus pandemic and the failure of the Opec-plus agreement. However, the oil market price mechanism has not worked well, for some time now, to adjust the supply to the demand. The ongoing oil crisis points to the need for oil-consuming Asian countries to cooperate with Opec-plus to reform and stabilise the global oil market.

On March 18, 2020, the oil price plunged to its lowest level in 18 years with Western Texas Intermediate (WTI) falling to US$20.06 per barrel. Earlier in the month, Opec and Russia had failed to reach agreement on production cuts. Forecasts for global oil demand have been revised down repeatedly as the Covid-19 pandemic triggered travel restrictions and lockdowns of cities across the world. The FACTS Global Energy Group estimates that world demand for oil has decreased by a quarter, or 24 million barrel a day.

On April 9, the Opec-plus countries agreed to cut oil production by 10 million barrels per day and outside of Opec-plus, the United States, Canada, Brazil, and Norway have also agreed to cut oil output by 3.6 million barrels per day. Despite the efforts, the oil price has fallen again - to US$20.36 per barrel on April 21. The world will need to take measures to stabilise the oil market.

When the oil price drops, the dollar appreciates. This is because the two main benchmark oil prices - WTI and Brent Crude - are instruments to hedge foreign exchange risks. On top of the demand shock caused by the coronavirus crisis, the oil price stagnates because the dollar has appreciated as capital flows from emerging economies to the US intensified amid the crisis. The relationship between WTI and the dollar presents two major risks to the world economy. First, when the market changes its long position in dollar in the future, the oil price will soar and further stimulate oil production when there is already overproduction in the world; that's not a desirable outcome when we are battling climate change. On the other hand, when the oil price continues to stagnate, the instability in the Middle East and in other oil-producing countries will put the world economy at risk.

Oil production is not slowing down fast enough as many oil-producing countries rely on the commodity as their major source of income and foreign currencies. The US is also protecting its oil industry for national security reasons. WTI is not rising despite the Federal Reserve cutting the interest rate to near zero in the US. This suggests that US monetary policy is not effective in controlling the dollar and thus the oil price, and that WTI no longer functions to stabilise the market; the objective of US monetary policy and the stability of the oil market do not match. Therefore, we need new measures and policies to stabilise the oil market.

A remarkable omission in current discussions about stabilising the oil market is the fact that the oil market had undergone fundamental changes for some years long before the Covid-19 crisis. China overtook the US as the world's largest oil importer in 2013. On the other hand, the US has become the largest oil producer thanks to "shale revolution". Moreover, non-OECD countries have being consuming more oil than OECD countries since 2013. If the US, Russia, Saudi Arabia, and the other major producers cannot agree on oil pricing, we need to start thinking about adopting different prices for the US market and the rest of the world.

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While the US can set its own price to sustain its shale oil production, the rest of the world needs to agree on pricing and production cuts. The Institute of Energy Economics in Japan estimates that 60 per cent of global energy consumption growth through 2050 will originate in Asia. Therefore, it is essential that China, India, Japan, South Korea (four of the top five oil-importing countries) and Asean cooperate with Opec-plus, a group of 23 oil-producing countries that includes Russia, to stabilise the oil market. We should turn the current oil crisis into a chance for cooperation between oil consuming and producing countries.

To fill in the global leadership void, Asian countries need to show solidarity and leadership. We propose that China, India, Japan, South Korea and Asean establish a new organisation of oil-consuming countries - we may call it the Asian Energy Agency (AEA) - to stabilise energy policies in cooperation with Opec-plus countries. The interests of non-OECD countries should be represented by the AEA, just as those of OECD countries are represented by the International Energy Agency.

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