Chen wenling: Is Oil No Longer A Scarce Resource?

The global energy market is featured with the following five changes.

Change 1: Global energy shifts from shortage to oversupply.

In the long-term, global energy will shift from a general shortage to oversupply, and the growth of world crude oil demand will gradually slow down.

According to the “World Energy Outlook 2019” report, released by the International Energy Agency on November 13, who have  2019, global energy demand will grow at a rate of 1% every year before 2040, which is far lower than the 2.3% in 2018. As more energy-efficient cars and electric vehicles come to the market, demand for global crude oil is expected to reach its peak by 2030.

Research conducted by the Organization for Economic Cooperation and Development (OECD) shows that global energy demand has been weak since 2012 and the world will generate a 36% increase in energy by 2035. During the same period, the global GDP will increase by 17%, which means that the total increase in energy will be more than double than the GDP increase.

Generally speaking, the global energy market will show a trend of oversupply.

Based on the “BP World Energy Outlook” released in February 2019, global energy consumption will increase from 2017 to 2040 and global energy demand will increase by about 1/3 by 2040, of which 2/3 will be contributed by India, China and other Asian countries.

The main energy importers in the Asia-Pacific region are China and India, which have the biggest energy demand in the world. This is a major change in the global energy landscape. In the past, the United States was the largest energy importer and the global energy trading center, energy market and demand are concentrated in North America. Now, however, the energy demand has shifted to the Asia-Pacific region, and 2/3 of the population live in countries that have a lower energy consumption per capita.

This trend is likely to change the oil from a scarce, strategic and unique commodity to a relatively normal commodity and realize its value and usage through transactions and exchanges.

Therefore, the change in energy supply and demand will allow buyers to play a bigger role and become a decisive force in energy pricing.

Change 2: Acceleration of energy structural adjustment.

The adjustment of energy supply has never stopped. The proportion of fossil energy continues to decline while the use of renewable energy continues to rise. The use of coal and oil has experienced the fastest decline. At present, the supply-side structural adjustment is accelerating and the global energy structure has become more diversified, low-carbon, efficient and safer.

The changes in energy structure will lead to the evolution of the global economic structure, especially the global governance structure.

For example, the global coal reserves have fallen from 1 trillion tons at the end of the 20th century to the current 0.9 trillion. Over the past decade, almost half of global energy growth are satisfied by coal. Meanwhile, part of the demand for coal has been replaced by oil and currently, oil accounts for 33% of the global energy market.

Natural gas is increasing at a rate of more than 15% per year and the growth will be faster than oil in the future. A report released by the International Energy Agency states that natural gas will replace coal by 2030 and become the second-largest energy source after oil.

By 2050, coal, oil, gas and non-fossil energy will become the three major players of the global energy market. The supply-side structure of the energy market will undergo significant changes.

95% of the future increase in energy demand will be clean energy, of which renewable energy such as lithium batteries will experience the fastest growth.

According to the BP forecast, the average annual growth rate of renewable energy will reach 6.6%, faster than all other energy sources. By 2035, renewable energy will account for 16% of global power generation and will provide one-third of the world’s power generation increase.

Nuclear power, hydropower, biomass energy and other renewable energy sources such as tidal energy and solar energy have huge reserves. These renewable energy sources will account for 23% of primary energy by 2035, of which solar energy will increase 8 times compared to 2016 and wind energy will increase 4 times.

Change 3: Energy supply will shift to the west while energy demand shifts to the east.

Energy production and demand have also undergone major adjustments. Generally speaking, energy production is moving westward and energy demand is moving eastward.

The energy supply is moving towards North America, led by the United States. In September 2018, the daily output of US natural gas and oil surpassed Saudi Arabia and Russia, making it the biggest producer. In September 2019, the United States became a net oil exporter for the first time.

At the same time, technological advances in the United States such as the shale gas revolution have drastically reduced the cost of energy development. The price of shale gas has dropped from about $75 per barrel two years ago to the current $50 to $65 per barrel, even $15 a barrel in some places, which is a very competitive price. In addition, the output of the United States exceeds that of Saudi Arabia and Russia, making the United States a very competitive supplier of oil and gas.

After 2035, the energy demand of Europe and America will reach stagnation but China and India will become the top buyers in the global energy market. In addition, Japan, South Korea and other countries that rely almost exclusively on energy imports will become the global center for oil and gas consumption and trade.

In March 2018, China launched RMB-priced crude oil futures, which is a major event in the global energy futures market. The British Brent oil futures market originally accounted for 60% of the global market but fell to 52% at the end of 2018. The share of New York’s crude oil futures market also declined from 38% to 32% during the same period. At present, China’s share of the RMB-priced crude oil futures has reached 14%.

China has become an increasingly important “stabilizer” in crude oil pricing. It has surpassed the United States to become the world’s largest importer of crude oil and thus, smooth import channels and stable oil prices are vital for the sustainable growth of China’s economy and national interests. With its increasing voice in the crude oil import market, China will play an active role in international crude oil pricing.

Change 4: Generally speaking, oil prices will decline in the future.

The oil price has been very unstable in recent decades. The impact of petro-dollar, geopolitics, economy, military, war and other factors have made oil a special commodity with the most fluctuating and unstable prices.

In October 1973, the fourth Middle East war broke out and oil price rose sharply, from $3 per barrel in October 1973 to $13, which is the first major oil crisis.

During the second oil crisis from 1979 to 1981, the price of oil rose to 36.83 dollars per barrel.

With the increase in crude oil output from non-OPEC oil-producing countries and the development of energy conservation and alternative energy sources, the price of oil dropped to about $10 per barrel in the mid-1980s. From 1986 to 1997, the average price of Brent crude oil fluctuated between 14.3 and 20 dollars per barrel. However, serious fluctuations occurred during the Gulf War from 1990 to 1991.

Affected by the Asian financial crisis, declining demand and increasing production of the OPEC, oil prices fell to 9.25 per barrel in December 1998 but started to rise since March 1999 and reached a record high of nearly $150 per barrel in July 2008. Due to the 2008 international financial crisis, the oil price reduced to less than $40.

The international oil price has gradually stabilized since the end of 2016 except in 2017 and 2018, during which period oil prices reached 86 dollars and then dropped to 40 dollars.

The trade dispute provoked by the United States has weakened market expectations of global economic growth and crude oil demand. In the mid-/long- term, this will continue to suppress oil prices.

According to the Bank of America Merrill Lynch, the slowdown in global economic growth has had a significant impact on oil demand. From the third quarter of 2018 to the second quarter of 2019, the average increase in global oil demand was 720,000 barrels per day, much lower than the 1.4 million barrels per day from 2011 to 2017.

In the past three quarters, the oil demand of OECD has contracted and we saw a year-on-year decrease of 200,000 barrels per day, while the oil demand of non-OECD countries has increased by 900,000 barrels per day, which is only 100,000 barrels less than the previous four quarters.

Without the influence of non-political and military factors, the oil price will decline. However, the situation in the Middle East has been tense and oil prices have fluctuated dramatically since the United States announced its withdrawal from the Iranian nuclear deal in May 2018. If there is a crisis in the Middle East, a big shock in oil price will occur.

Change 5: major changes will appear in the oil settlement system.

To maintain its hegemony, the US has tied the dollar to oil since the collapse of the Bretton Woods system. All oil transactions in the world must be settled in US dollar. The United States also dominates the Global Interbank Financial Telecommunications Association (SWIFT), which was founded in 1973 and covers more than 200 countries and regions around the world, involving more than 11,000 financial institutions.

Due to the credit depletion of the United States, the creditworthiness of the US dollar has been questioned. The sanctions and embargo imposed by the United States on Iran have caused more countries to bypass the US dollar settlement system and begin to establish a settlement system independent of the dollar, which has accelerated the development of a new global settlement system.

In 2014, Russia developed the System for the transfer of financial messages (SPFS), just in case its banks are cut off from the SWIFT. Currently, 416 companies and institutions have joined the SPFS.

Since it was launch in October 2015, 31 direct participants and 875 indirect participants have joined the Cross-Border Interbank Payment System (CIPS), including 676 in Asia (380 in China), 104 in Europe, 26 in North America, 18 in Oceania, 16 in South America and 35 in Africa.

In September 2018, the High Representative of the Union for Foreign Affairs and Security Policy and the foreign ministers of Germany, France, and Britain jointly proposed the establishment of the “Special Purpose Vehicle” (SPV) designed to help European companies to bypass SWIFT when doing trade with Iran. In January 2019, the foreign ministers of Germany, France and the United Kingdom announced the establishment of the “Instrument for Trade Support” (INSTEX) as a policy tool for implementing SPV to ensure legal trade between Europe and Iran. On November 30, 2019, Belgium, Denmark, Finland, Norway, the Netherlands and Sweden joined the INSTEX settlement mechanism.

Strengthening global energy governance.

These five major changes described above will bring great challenges to global energy governance.

We should strengthen the global energy governance system. At present, global energy governance is highly fragmented. The existing global energy governance mechanisms lack effective coordination and cannot meet the requirements of building new global energy governance.

On the one hand, the mechanism adopted by OPEC to stabilize oil price is likely to cause global market failure. It is necessary to increase the coordination between resource allocation and utilization of the global energy supply.

On the other hand, the existing global energy organizations are mainly engaged in energy research and forecasting. A global energy governance system should be established under the United Nations to deal with government failures in global energy management.

Secondly, we should pay close attention to the adjustment of the North-South relation caused by a change in supply and demand. Furthermore, we should enhance the voice of developing countries and safeguard their interests. Developing countries are the major buyers but they do not have the pricing power. In the future, China and India, as the largest energy buyers, should work together to compete for pricing power to safeguard the interests of developing countries.

Last but not least, we should speed up the creation of a settlement system independent of the US dollar. At present, the US dollar still accounts for 62% of global foreign exchange reserves. The process of de-dollarization has begun and we should take this opportunity to establish a settlement system independent of the US dollar.

IMF officials said in June this year that they would launch a global digital currency, IMFCoin, which is similar to Bitcoin, under the special drawing rights mechanism, with the aim to replace the existing world reserve currency, the US dollar. Officials from the People’s Bank of China also stated in public that the bank is working on developing and testing a digital currency system. It is said that Japan is also working on establishing a global cryptocurrency payment system that can bypass the US dollar, similar to SWIFT, so that it can trade commodities such as oil with different countries, including Iran.