Navigating Asia’s energy sector

The markets appear to have adjusted to the unprecedented amount of international trade sanctions imposed on Russia over the course of 2022. Crude oil initially surged to US$140/bbl as a result of panic buying, but has since fallen by half to the US$70/bbl range. However, Asia is not taking the current lull for granted, with China and India leading the region’s rush to build oil stockpiles.

In 2023, China’s oil consumption will rise by 4.8% to reach another record high of 15.85 million bpd, according to the US Energy Information Administration (EIA)’s latest forecast. Asia’s other developing economies, led by India, will boost their combined consumption by nearly 2.6% to 14.06 million bpd. By comparison, the EIA predicts that the world’s oil appetite will edge up by a mere 1.1% this year.

These forecasts are made on the key assumptions that the global economy will not slump into recession, and that the war in Ukraine will not escalate. Both assumptions could prove optimistic. For Asia, energy disruption is a huge worry, as the energy-deficit region would be directly impacted if a shooting war broke out between China and the US.

Will Saudi Arabia buy Xi Jinping’s petroyuan pitch?

Emerging from three years of a self-imposed COVID-19 lockdown, China was widely expected to lead the surge in the world’s oil consumption growth in 2023. Instead, the markets responded with a collective yawn. In the weeks that followed Beijing’s lifting of anti-pandemic restrictions on 8 January 2023, the benchmark Brent crude price held within a range of US$75 – 85/bbl. For now, Brent looks unlikely to reclaim the US$100/bbl level last seen in mid-August 2022. China’s projected oil demand may not be the energy markets’ biggest concern this year. Last December, President Xi Jinping travelled to Saudi Arabia to personally push for a weakening of the US’s grip on the world’s financial system. He wants Saudi Arabia and other Middle Eastern countries to price their oil exports to China in the Chinese currency, the yuan.

At the inaugural China-Gulf Cooperation Council (GCC) Summit, Xi personally appealed to the Arab world to use the yuan at the expense of the dollar to price oil exports. This is emerging as one of the most intriguing ideas in financial circles. Following the first oil shock in 1974, Saudi Arabia acceded to the US demand that oil revenues be used to purchase US Treasuries and assets. Oil was to be priced and traded exclusively in the dollar, where previously it could also be pegged to the British pound. In return, the US would guarantee the security of the ruling Saudi family and the Kingdom. Saudi Arabia and OPEC members complied by recycling their enormous oil windfall into the US assets and debts. This provided the US with a constant long-term infusion of funds to cover its mounting budget deficit caused mostly by the Vietnam War, and costly domestic welfare programmes.

The deal worked so well that other countries joined in, thus entrenching the petrodollar’s status as the world’s first truly global currency. OPEC’s revenues helped finance US debt spending, which became free to grow virtually without limits. The dollar’s position as the world’s reserve currency became key to the global infrastructure of payments to support world trade, further enhancing the US as a superpower.

In recent years, the system has been challenged by China, Russia, India and other developing countries wary of the US’ ability to impose unilateral trade sanctions on others.

In pitching the petroyuan, China has taken the boldest gamble by any country so far to undermine the dollar’s position. At the China-GCC Summit, Xi officially presented the idea to de facto Saudi Arabian ruler, Crown Prince Mohamed Bin Salman, and the other GCC leaders from Kuwait, the UAE, Qatar, Bahrain and Oman. Xi tabled five proposals, starting with the petroyuan. In exchange, China promised to increase the import of Middle East energy, and expand investment in the region. While the petroyuan idea has been around for years, this was the first time that China had formally proposed it at an international event...

This article was originally published in the May 2023 issue of Hydrocarbon Engineering magazine. To read the full article, sign in or register for a free subscription.

Written by Ng Weng Hoong, Contributing Editor.

Read the article online at: https://www.hydrocarbonengineering.com/special-reports/15052023/navigating-asias-energy-sector/