The following analysis was written by Kim Tae-Yoon, and was adapted from the World Energy Outlook 2017, released in November 2017.
The new World Energy Outlook is the story of a series of upheavals in global energy, in particular the dramatic changes in the Unites States and China and the rising role of renewables and electricity in global energy consumption. But this is by no means an exhaustive list of the changes underway. The shale revolution in the United States and new demand and investment trends in the Middle East and Asia are recasting traditional patterns of global oil trade, with global implications for energy security.
The Middle East is set to remain, by far, the largest global crude-exporting region, but the availability of additional crude from this region for international trade is being squeezed by rising domestic consumption and new refinery capacity. In the WEO’s New Policies Scenario (NPS), which incorporates existing and planned energy policies, the largest increase in crude export comes from North America, propelling the region above Russia, Africa and South America in the global rankings. On the importers side, Asia’s crude oil import requirement grows by a massive 9 mb/d, drawing in available supply from around the world. Taken together, these trends imply the need for a fresh look at oil security and how best to achieve it.
A dramatic change of fortune in the United States
The surge in tight oil output from the United States has already triggered major changes in the dynamics of global oil supply and prices. Through a decline in imports and a surge in exports, US tight oil is now having a similarly profound impact on global crude oil trade. Crude oil imports to the United States fell by more than 1.3 million barrels a day (mb/d) between 2010 and 2016, to 7.9 mb/d. At the same time, since the ban on crude oil exports was lifted in late 2015, US exports have skyrocketed to over 1 mb/d in October 2017, and have expanded their range of destinations from a single country, Canada, to more than 30 countries across Latin America, Europe and Asia.
Looking to the future, WEO projections in the New Policies Scenario suggest a continued fall in US net crude oil imports, from more than 7 mb/d today to less than 3 mb/d by 2040. Meanwhile, net product exports double from 2 mb/d to almost 4 mb/d over the same period, pushing the overall net oil trade balance of the United States into positive territory by the late-2020s, an astonishing turnaround.
But the United States is still a large exporter and a major importer of crude even in 2040. This is mainly due to limited ability of US refiners to take domestic light crude oil (which is therefore exported) and continued demand from refineries for medium-to-heavy grades (which continue to be imported). Even with the extraordinary move to a net export position, the health of the US energy economy remains intricately linked with those of its neighbours in North America and with choices made by countries further afield. In practice, no country is an island in a deeply interconnected energy world.
A refining future for the Middle East
It has been a long-standing ambition of producing countries in the Middle East to expand into the downstream sector in order to extract more value from their oil production and diversify the region’s economies – a topic that will be examined in more detail in the WEO-2018.
With the commissioning of several new refineries, the Middle East is now set to become not only the largest crude oil exporter but also the largest product exporter in the world. The Middle East is also a major oil-consuming region and, as a consequence, less than 1 mb/d of the 4.5 mb/d increase in the region’s crude oil production becomes available for exports. At present, refineries within the Middle East consume around a quarter of the region’s crude oil production, but the share rises to more than one-third by 2040 as the region adds more than 4 mb/d of net refining capacity over the Outlook period.
New refinery capacity within the Middle East is not the only factor affecting the availability of crude for exports. Major Middle East oil producers are also increasingly participating in refinery projects in other parts of the world. This introduces a degree of “tied demand,” as the crude used in the refinery tends to come from the corresponding exporter. Equity stakes held by Middle East producers in overseas refineries and the strategic reorientation in favour of refined products has significant ramifications for Asia, the final destination of an increasing share of global crude oil shipments, where import requirements are projected to continue their rapid upward path.
Asia’s inexorable appetite for crude
Asia accounts for the lion’s share of oil demand growth over the coming 25 years and, unsurprisingly, the same is true for crude oil imports. In the New Policies Scenario, Asia’s combined crude oil import needs rise by 9 mb/d to around 30 mb/d by 2040, with strong growth in China, India and Southeast Asia more than offsetting declines in Japan and Korea. Asia’s share of global crude oil imports therefore rises from 50% today to more than two-thirds by 2040.
Although the relative abundance of oil supply in recent years has made traditional exporters vie for market share in growing Asian markets, this should not necessarily be taken as a comforting sign for the longer term. The rapid increase in crude oil import needs in the New Policies Scenario along with the reduced availability of crude oil from traditional exporters point to tougher times ahead. The expanding volume of exports going through the Strait of Malacca, the world’s second-busiest trade chokepoint, adds another layer of complexity to Asian importers’ oil security concerns. In the past, Asia’s total crude oil import needs were less than the crude oil exports of the Middle East, but the gap has narrowed and the situation is reversed in the New Policies Scenario. This means that, while strengthening strategic ties with their largest suppliers in the Middle East, Asian importers increasingly tap into other sources from across the globe.
Implications for oil security
The period of low oil prices since 2014 has alleviated some concerns over oil security in many oil-importing countries. But our projections suggest some challenges ahead – especially if oil demand continues to grow strongly. Asia’s oil import needs and the Middle East’s export availability are diverging. As described in past WEO reports, including a detailed analysis in WEO-2016, there is also a significant possibility of a market imbalance in the 2020s as a result of the current low levels of investment in new conventional oil projects. There is always a risk of supply disruptions due to natural disasters or geopolitical events. The disruption caused by Hurricane Harvey in 2017 to US refining, production and pipeline facilities served as a reminder that reduced oil imports do not eliminate vulnerability to supply interruptions. And a large part of the spare production capacity to cushion the impact of potential crises continues to be concentrated in Saudi Arabia.
All this has implications for energy security. As ever, a coherent approach to oil security needs to cast its net widely to encompass the adequacy of investment in future supply, regular dialogue between producers and consumers, well-functioning markets and measures to curb demand growth via greater efficiency or fuel switching. Policies to promote greater efficiency and electrification in transport are becoming significant at tackling traditional oil security concerns. In this regard, the period of lower oil prices offers an opportunity to remove fossil-fuel subsidies, which are still prevalent in many parts of the world, in order to provide incentives for investment in more efficient technologies and to create greater demand responsiveness in times of oil shortage.
In addition, maintaining a coordinated and robust system of oil stockholding that can be used to respond to any disruptions to supply also represents a vital avenue; this is a major task for the IEA – custodian of today’s global oil security mechanism. But waning oil demand in many IEA member countries and surging demand in many emerging countries is not only changing the geography of global demand; over time it can also impact the effectiveness of the IEA system. This suggests the need to re-think the IEA oil stockholding mechanism in order to continue to cover the contingencies that might arise in tomorrow’s oil market, and to broaden the country grouping carrying that responsibility, of which one option would be to bring the rising oil-consuming countries – most of which are now Association countries of the IEA – closer to the collective oil security system in a gradual and inclusive manner. The IEA’s latest emergency response exercise that drew the largest-ever participation, with 44 countries taking part including IEA Association Member Countries such as China, India, Indonesia, Morocco and Thailand, highlights efforts underway in this direction, which will bring the share of the extended IEA family in global energy demand to more than 70%, up from less than 40% in 2015.