IEEJ：July 2016

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Special Bulletin
A Japanese Perspective on the International Energy Landscape (281)

July 19, 2016

Discussion with OPEC on Asian Energy Outlook
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn July 18, the “2nd Technical Meeting on Asian Energy and Oil Outlook” took place at
the headquarters of the Organization of the Petroleum Exporting Countries in Vienna. Participatingin the meeting following the first one last year (see “A Japanese Perspective on the International
Energy Landscape (225)” for details) were experts from the OPEC Secretariat and OPEC member
countries and those from representative Asian think tanks such as the Economic Research Institutefor ASEAN and East Asia and the Asia Pacific Energy Research Center and four Asian countries -Japan, China, India and South Korea. Presentations were made on energy market trends, futureenergy supply and demand and policy challenges in the world, Asia and the four countries, followedby vigorous discussions. In the following, I would like to summarize some points I viewed asimportant in regard to the meeting this year.
First, discussions regarding the international oil market and crude oil price outlook focusedon if the market will steadily go in the direction of rebalancing toward 2017 due to slumping
non-OPEC oil production including falling U.S. shale oil output as oil demand in the world
including Asia increases steadily. Arguments at the meeting were not necessarily divided over thequestion. However, no one can ignore uncertainties about factors that could have short-term effects
on the market, including downside risks for the world economy, possible financial market
destabilization, shale oil production after crude oil prices’ return to around $50 per barrel and supply
interruptions in major oil producing countries. My impression was that we will remain in an unstablesituation where no one can conclude whether the international oil market will smoothly head for thedirection of rebalancing, with crude oil prices getting on a stable uptrend path.
Second, very interesting discussions came on various impacts of low oil prices under theabovementioned situation. These discussions naturally focused first on the crude oil price plunges’
impacts on energy supply, including a decline in shale and other high-cost crude oil production, asubstantial cut in upstream oil and gas sector investment and the cut’s potential great effects on thesupply-demand balance on the international oil market and the liquefied natural gas market.
However, a great matter of concern taken up at the meeting was whether the present low crude oil
prices are exerting truly positive impacts on the world economy or how the low oil prices arecontributing to stimulating energy demand.
The conventional wisdom is that the crude oil price plunges have positive impacts on oil
consuming or net oil importing countries accounting for a central part of the world economy. Thepositive impacts include a decline in oil import payments (national wealth outflow) and a drop in1

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consumers’ payments for energy (a tax cut effect), making positive contributions to the whole of theworld economy. However, participants in the meeting pointed out that they felt little positive impact
when seeing economic conditions in various countries while negative impacts were remarkable,
including stock price falls accompanying crude oil price drops, growing deflationary pressure, anddeteriorating earnings and decreasing investment at energy companies. A conclusion afterdiscussions on the oil price plunges’ impacts was that economic impacts of the crude oil priceplunges would be too complicated to be generalized or simplified or that the impacts should becarefully analyzed. The conclusion indicated the participants’ feeling that the oil price plunges andgeneral energy price falls have not stimulated energy demand as much as expected earlier.
Third, I felt growing interests in Asian emerging countries, including China, India andSoutheast Asian countries, as the driver of global energy demand growth. Asian energy demandholds the key to the future world oil and gas demand that is vitally significant for OPEC. In thisrespect, the participants in the meeting actively made questions and exchanged opinions on future
economic growth, automobile diffusion, vehicle fuel efficiency improvement, spreading alternativefuel vehicles and fuel subsidy policies in those Asian emerging countries. They also expressed highinterests in the Paris Agreement for greenhouse gas emission cuts and major Asian countries’
environmental initiatives including climate change measures, which would exert impacts on oil andgas demand over a long time.
Based on the basic recognition that energy security will grow even more significant for
Asia that is expected to increase dependence on energy imports including those from the Middle
East, Asian participants in the conference made presentations and received many questions on thepresent state and outlook of strategic oil reserve programs implemented or considered in China,
India and some Southeast Asian countries, respective oil demand outlook, initiatives to diversifyenergy import sources to reduce dependence on the Middle East, and Asian companies’ overseas
energy resources development. These presentations and questions indicated that both oil producing
and consuming countries are greatly interested in these matters.
Furthermore, interesting discussions came on the downstream oil sector. Asia, including
China and India, and the Middle East have so far played a central role in expanding global oil
refining capacity. In the future as well, oil refining capacity expansion and oil demand growth inthese regions will have great impacts on oil refining margins in Asia and the world. Presentations
came on initiatives to improve petroleum product specification (product quality) and on demand
growth differences among oil products. In China, for example, demand is expected to firmly increasefor gasoline and liquefied petroleum gas while slowing or slumping for diesel oil. These changes caninfluence the configuration of secondary oil refining equipment and the selection of crude oil forrefining and cannot be ignored by oil producing countries. Dynamic changes in the Asian
downstream oil sector will have great impacts on oil producing countries’ export expansion race andon overall oil flows and may have to be extensively analyzed in the future.
Among OPEC members are major gas and liquefied natural gas exporters including Qatar,
the United Arab Emirates, Algeria and Nigeria. In this sense, they are greatly interested in the Asiangas/LNG market outlook. How gas/LNG demand would grow amid the loosening supply-demand
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balance and gas/LNG price declines is a great matter of concern to both gas producing andconsuming countries. Long-term gas outlook presented at the meeting pointed out that while gas
demand is expected to increase over a long time, competition with other energy sources (coal,nuclear and renewable energy) is preventing gas from entering a “golden age” smoothly. Discussions
on this matter were brisk and impressive for me. The future picture of Asian energy will have to beanalyzed comprehensively and deeply from various angles.

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