Global Oil Supplies and Asia Pacific Economies: Dependencies and Challenges

Abstract

Globalization has prompted nations to forge economic links with their former political antagonists. This has made it difficult for a country to follow a course that is unacceptable to its trading strategic partners. In today’s world of economic realism and political pragmatism, ideals in and of themselves are not enough; in order for political decisions to make sense, they must be cost effective as well. The attack on two oil tankers in the Gulf of Oman and the Strait of Hormuz, coupled with the prior attacks on four other tankers added uncertainty regarding global oil supplies and consumer prices at the pump. Global oil markets need the Strait of Hormuz to remain open and conflict free. An estimated 17 million barrels of oil per day are transported through the Strait under the eyes of the US Navy’s Fifth Fleet. This represents an estimated 35% to 40% of global oil supplies destined to Asian consumers – China, Japan, Korea, and India – and other global consumers among G20 countries. According to President Trump, China’s dependency on Middle Eastern oil imports are estimated to represent about 90% of China’s oil needs. Japan’s oil imports are estimated at 62%. India, Korea, and Singapore are also dependent on Middle Eastern oil supplies. President Trump labeled these oil market sales between Gulf oil producers and other consumers as “free rider” transactions. Currently, the US is the leading global oil producer at over 11mbd, and we are less dependent on Middle Eastern oil than some of our leading Asian competitors. The US is the largest global oil consumer at an estimated 19mbd, out of a global daily oil market estimated at 95mbd. To guarantee the free transport of oil through the Strait of Hormuz, a new multilateral agreement is needed. The G20 should call for a new “Gulf Oil Security and Market Access Protocol on Oil and Natural Gas Exports.” The estimated production cost of a barrel of oil from the Gulf oil producers is less than $12/barrel. Adding a USD 30 – USD 40 surcharge for Persian oil exports would represent a true price for Persian Gulf oil exports. This market access security surcharge, if paid for by all Persian Gulf oil exporting countries, including Iran, could create a stable floor for the price of oil and reduce risk, stabilize the market, and provide certainty for global oil consumers. This could represent an oil price framework at an estimated $60 – $70/barrel and would truly reflect the cost of a traded barrel of Gulf oil and could be a marker for Brent and WTI oil trade. This should apply to Arab oil exports and those of Iran, the latter who would pay this surcharge and could then join global oil exporters. This suggested price framework could represent a new business model for pricing Gulf oil that incorporates both the production costs and the market access and risks and could help stabilize global oil prices. Moreover, this could create a win-win situation for US oil producers, including shale, and help protect US vital and strategic interests. Currently, the security costs for Persian oil exports are being borne by US taxpayers. This new pricing would mitigate the “free rider” advantage of all the current Gulf oil exporters. This assertive, sure-footed multilateral US policy could leverage US economic strength and its standing in global oil markets and enhance the United States’ political JOURNAL OF ASIA-PACIFIC BUSINESS 2019, VOL. 20, NO. 3, 163–165 https://doi.org/10.1080/10599231.2019.1647075