Asian economies in the global arena
Asian economies in the global arena
The following article is an excerpt of a paper presented by Dr. Subroto at the first annual Asian-Pacific Chemical Industry Meeting on Feb. 27 in Singapore. This is the second of two articles.
SINGAPORE: Since oil and gas are the most important feedstock for the chemical industry, the petrochemical industry in particular, they merit a brief discussion on the global and regional energy outlook.
Many energy industry observers argued that the perturbations of the past 22 years, the price shocks in 1973, 1980 and 1990, have been an aberration and that the underlying problems have been more or less solved, and the pressures that led to violent price fluctuations in oil and other energy prices over the past two decades have now been addressed. The perception is that there is enough energy in the world to satisfy the growing energy needs of the developed world and the rapidly developing world everywhere at roughly current prices. There is definitely a feeling of complacency in the industrialized world that there will not be any energy security problem in the immediate future. While the abundance of potential energy resources is not in dispute, the present combination of high energy demand and low energy prices may, however, not be sustainable.
In the event of flat real energy prices persisting under the macroeconomic assumption of world economy growing by 3 percent annually and world population growing by one billion people every 10 years, the demand for oil, natural gas, coal and electricity will grow very rapidly. World total primary energy demand is projected to increase by more than 44 percent between now and 2010, or at an average annual rate of 2.1 percent, to about 11500 million tons of oil equivalents (Mtoe). There is some doubt that sufficient investment in world energy production and transportation would be forthcoming at current prices over the next 15 years in order to meet such increased demand.
For the period 1995 to 2000, world oil demand in OPEC's reference case, is expected to grow by an average of 0.9 percent per annum, from 66,96 million barrels a day (mb/d) to 72.3 mb/d, representing an increase of 5.34 mb/d. World demand in 2010 and 2020 is estimated at 80.4 mb/d and 86 mb/d respectively.
The oil demand in non-OECD countries will be dramatic. For every barrel of oil demand growth in the OECD countries, the demand growth in the non-OECD countries, will be 4.7 barrels. Such a high proportion of growth in oil demand will have important consequences in the oil market.
For the supply side, our median projection for non-OPEC oil supply is in the range of 42 to 47 mb/d for the period from 1995 to 2020. OPEC is expected to meet extra demand of around 14 mb/d, from 25 mb/d in 1995 to 39 in 2020. This 14 mb/d addition in OPEC production is given as a yardstick, since in fact it depends very much on the non-OPEC supply. Although the discovery of giant-size oil reserve is considered unlikely, the combined evolution of small non-OPEC supplies can have appreciable effects on the future level of production by OPEC.
In order to meet the above supply and demand scenario, OPEC member countries would have to expand production by more than 50 percent or 25 mb/d to around 39 mb/d in the span of 25 years. The oil reserve base of OPEC, estimated at around 787 billion barrels, out of a world total of 1043 billion barrels at the end of 1993, is not going to limit increased production in the future. However, the availability of geophysical capabilities, though a prerequisite, cannot guarantee timely development and supply of the required levels. It needs the right price and sufficient stability on top of geophysical potentialities to get regular and steady flow of oil. It needs capital to finance the doubling of production capacity. Even if capital is available, the question is whether investment will be done in time. In view of the lackluster oil prices, rising environmental costs, increasing interest rates and a worldwide shortage of capital, providing funds for these investments constitutes a major challenge for both private and government entities dealing with these decisions.
The second decade of the 21st century, based on OPEC's base case, provides the most food for thought. OPEC's capacity has to reach 40 mb/d or more to ensure market stability. In this decade the oil market's momentum of strong demand has to be met by an increasing oil dependence from OPEC.
By that time the global utilization in the upstream sector may approach 100 percent. The absence of adequate spare capacity can only raise the probability of price volatility. IEA predicts that by 2005 oil prices in real terms will have risen by 50 percent to US$28 a barrel (in 1993 prices). Forecasting energy demand, supply and prices is a risky business, but the risk is that in a tight market, a sudden shock could push prices up sharply. This mismatch in supply and demand could, however, happen sooner than the second decade of the 21st century as foreseen in the base case scenario.
A new driving force in the oil industry is the emergence of Asia as larger market than the industrialized West, because of the relatively flat demand in North America and Europe. For the first time in the history of oil, North America will not be the centerpiece of world oil demand. By 1997, oil consumption in Asia, -- including Japan -- will exceed that of North America. By 2000, total consumption in Asia (including Japan) will already be 18.47 and 21.63 mb/d by 2005, compared with 14.20 mb/d in 1993, an increase of 7 mb/d, slightly less than the production of Saudi Arabia.
Crude oil production in the Asia-Pacific region totaled 6.76 mb/d in 1993. There have been increased exploration activities in the region, using foreign oil firms' capital and technology, making it possible for some countries in the region to expect an increase in crude oil production. Compared with other areas of the world, however, crude oil reserves, the reserves to production ratio and productivity of oil wells in the Asia- Pacific region are at low levels and crude oil production is unlikely to show a sharp increase in the coming years. Maybe only China and Vietnam are projected to increase their oil production, judging from their current exploration and development activities, but Indonesia and Australia are expected to show a decrease, while production in Malaysia and Brunei will level off. As a result, crude oil production in the region will not increase very much from the present production of 6.76 mb/d, to 7.0-7.2 mb/d in 2000 and 6.9-7.1 mb/d in 2005.
With oil demand growing sharply and sluggish oil production, the Asia-Pacific region's oil imports is projected to increase, raising the dependence on oil imports from 59 percent in 1993, to 62-64 percent in 2000 and 68-69 percent in 2005. Indonesia, at present the largest net oil exporter in the region, is expected to become a net oil importer by 2005.
The logical oil supply for this region will be the Middle East, where production capacity has to be increased. This relationship will strengthen the economic linkage between these two regions. Asian countries will be more and more involved in the financial and technical requirements of developing Middle East production capacity, while the Middle East oil producing countries will enhance their interest to be active in downstream development of Asia.
For the world as a whole, the demand for gas is expected to increase by 2.5 percent from 1992 to 2010. Global demand for gas in 2010 is projected by IEA to be more than 50 percent higher than in 1992, and, in absolute terms, world natural gas consumption will rise to 2708 Mtoe in 2010. This projected increase raises the question: From where and at what cost this demand can be met?
Although the gas resource base worldwide is immense and reserves are abundant, something like 141,024 billion cubic meters (BCM), gas is not necessarily easily available in any market or at any time. In contrast to the oil market, there is no world market for gas, primarily because transportation of natural gas is difficult and costly. In relation to its volume, the energy content of natural gas is relatively low. Transportation is the limiting factor and explains why only 16 percent of the global gas production is traded internationally.
Gas markets are regionalized because transportation is expensive. In 1994 the average price of gas in the U.S. was $1.70 per Million British Thermal Unit (Mbtu). The average import price of LNG to Japan was, during the same year, $2.95 per Mbtu, whereas the average import price to the European Union was estimated to be around $2.15 per Mbtu.
Demand for natural gas in the Asia-Pacific region has increased substantially during the past two decades. In 1993 the Asia-Pacific countries consumed nearly 6,2 trillion cubic feet (TCF), compared with only 1.1 TCF in 1973, an increase of almost six times increase. Japan is by far the largest consumer, accounting for 32 percent of the total gas consumption of the region. In almost all scenarios, demand for gas is projected to increase. According to a study by the East-West Center, the base case growth rate of a 6 percent annual increase will increase total gas consumption in 2010 to 16.2 TCF.
Asia-Pacific countries produced 17.3 TCF of natural gas in 1993, with Indonesia as the biggest producer, followed by Australia and Malaysia. About 7.1 percent of the proven world reserve is the Asia-Pacific region, and since production is still relatively low the reserve to production ratio is about 50 years. Malaysia has the largest reserve of the region (76.7 TCF), although Indonesia produces two times more than Malaysia.
The region is still in the early stages of finding gas. It is very likely that any significant new gas discoveries will be used domestically, and there will not be much available for export. Consequently, buyers look to other suppliers, namely towards the relatively low cost 1500 TCF reserve of the Middle East.
The Asian gas market appears to relatively well supplied, at least until the turn of the century. An apparent supply-demand gap of 3.7 million tons of LNG is forecast at the end of the century. By the year 2010 the potential gap widens to 28.8 million tons of LNG, and new projects have to be brought on stream. Malaysia and Indonesia are logical suppliers, but Qatar, Oman, Abu Dhabi and Australia will also be in the market.
It is certain that gas uses will continue to increase in the region and the power sector will be the major impetus for this growth. Under any scenario, Japan, South Korea and Taiwan will remain dependent on the natural gas imports, either in the form of LNG or through pipelines. Given the very slow progress of the pipeline projects in the region, and the cost of related infrastructure, LNG is the only option for transporting natural gas to the consuming countries.
The world economic balance in the first half of the next century will be determined, more than anything else, by what happens in Asia. The North American economy, no doubt, will remain strong, though it may in relative terms decline somewhat. Europe will inevitably have a big say in the political and economic arena, whatever difficulties it may encounter. But if growth is sustained for another generation, and it probably will be, Asia's output will almost certainly overtake both regions. This does not mean that Asia will dominate them.
Clearly, Asia will not look up to the West anymore as number one. Beijing, Tokyo and even ASEAN dare to say "no" to Washington or Brussels. In international affairs ASEAN has gone its own way, such as in engaging constructively with Myanmar and declaring the ASEAN region a nuclear free zone, which the U.S. has opposed. Asia is demanding a level playing field when interacting with Europe and the U.S. Asians do not want anybody to dictate to them, and do not ant to dictate to anybody else.
How should Asia act on the global stage? It would be unwise to struggle for supremacy over the West. If one can learn a lesson from the Asian miracle, is that it has more to gain from cooperation and partnership than from confrontation. Asia must not be a new hegemony but a catalyst for global growth. It should search for a new spirit of partnership and shared destiny with the West. It should continue to press for peace through disarmament, respect for national sovereignty, increasingly open market and development cooperation.
On the other hand, the West has much to lose by not being a partner in Asia's growth. The West should view Asia not as a threat but an immense opportunity. This partnership will shape the world in the 21st century.
Dr. Subroto, several times a cabinet member, is a former Secretary-General of the Organization of Petroleum Exporting Countries.
Window: For the first time in the history of oil, North America will not be the centerpiece of world oil demand. By 1997, oil consumption in Asia, -- including Japan -- will exceed that of North America.