IEEJ:November 2002

The 375th Regular Research Meeting
The Summary of Research Results

November 26, 2002

Proposals on Measures for Reducing
Asian Premium of Crude Oil-- Changes in Pricing, Unity among Consuming Countries
and Preparation of Oil Market -Yoshiki Ogawa, Ph. D.
General Manager, the Second Research Department
The Institute of Energy Economics, Japan<The Purpose of Research>
Crude oil prices for the Asian market remained higher than those of European and U.S.
markets by $1 ~ 1.5/barrel from about 1992 up to now.
This problem has a far-reachingeffect not only on oil but also on all areas where energy prices are linked to crude oil prices.
The financial burden extra costs due to relatively higher crude oil prices is expected toeventually suppress economic and industrial activities in Asia.
This is also believed to have anegative effect on oil-producing countries in the long-term.
Such a problem caused by highcrude oil prices over the extended period cannot be overlooked, when taking into account theadverse impact it will have on the international competitiveness of the Asian economy andsociety as a whole.
The purpose of this report is to examine several concrete proposals aimed
at reducing the Asian premium and to consider medium- and long-term objectives to beachieved by oil-producing and oil-consuming countries.

<The Major Conclusions>
1. Prices of Middle Eastern crude for the Asian market have been higher than those for the U.S./
European markets by $0.94/barrel on average over the period from 1991 to the first half of2002, with a yearly average increasing sometimes to the $1.5/barrel level.
Judging fromthe netback values in the Singaporean market, the refining margins in Singapore haveremained at around minus $1/barrel in and after 1999.
These higher oil prices for the
Asian market – the “Asian Premium” – have imposed an additional burden reaching $4-8
billion on the Asian market, thus posing a serious problem as it badly weakens theinternational competitiveness of the Asian economy and society.
The higher crude oil
prices are not limited to oil but have a far-reaching impact on the whole energy-related areas.
2. As production of Dubai crude, which is currently the marker crude for the Asian market, hasdecreased considerably in recent years and hence the market has lost confidence in its priceforming capability, it is necessary to change the marker crude.
In this connection, thefollowing two short-term measures of crude oil pricing aimed at reducing the Asian Premium
are proposed: (a) pricing in reference to Brent crude; and (b) pricing by adopting the averageof formula prices for the U.S. and European markets.
As far as top priority is given to
reducing the Asian Premium, the change in the marker crude to Oman crude cannot offer asatisfactory solution.

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IEEJ:November 2002

3. For the purpose of supporting the short-term measures aimed at reducing the Asian Premiumand strengthening the influential power of the Singaporean market, it is essential to increaseoil products trading in Asian countries as a whole and streamline/expand the oil products
market.
Asian oil-consuming countries are urged to endeavor to streamline the oil market
so that reliable information concerning the competitive relations and other subject matters in
the market can be dispatched to the oil-producing countries.
Moreover, the united actions
by the oil-consuming countries are necessary to strengthen their power of bargaining with the
Middle Eastern oil-producing countries.
4. The task to be addressed by both oil-producing and oil-consuming countries from mediumand long-term perspectives is to realize spot trading of crude and formation of crude oil prices
by the Middle Eastern oil-producing countries themselves – proposal (c) under which the
Asian Premium can be eliminated – and build up a global link of crude oil and oil products
markets by strength-ening the market functions, in which U.S., European and Asian markets
as well as Middle Eastern oil-producing countries are linked together on a worldwide basis.
Such a global link, once built up, is expected to establish the prices of Middle Eastern crude
oil which is leading the world crude oil market and thus contribute to stabilizing crude oil
prices, which would fluctuate wildly in case supply cushions are weakened.

1. Higher -Priced Crude Oil for the Asian Market and Its Cause
Formula prices of Arabian Light crude for the Asian market have been higher than those forEuropean/U.S. markets by $1 ~ 1.5 / barrel over the period of ten years or so in and after 1992
(Fig. 1).
This premium is not a temporary one - seen on the basis of yearly averages - andshould be taken up as an important problem as it has an adverse impact on the economic
competitiveness of the countries involved.
On the other hand, the formula prices of ArabianLight crude for the European market had been almost identical with those of the U.S. market
through the end of 1999.
Price differentials (premiums), which were seen during the period of more than ten years
from 1991 till June 2002, averaged $0.94/barrel.
(a) The price differentials widened toaround $1.5/barrel during the period 1997 ~ 1998, (b) the price differentials remained at around$1/barrel during the period 1999 ~ 2000, and (c) the price differentials are widening again
during the period from 2001 into 2002.
When considering them, it can be assumed thatoil-producing countries have continued to maintain and/or widen these price differentials inrecent years.
The largest factor for these premiums lies in the oil-producing countries’ failure to havetheir adjustment factors respond accordingly, even when the price differential between Dubai
crude, the marker crude, and Brent crude narrows rapidly, in which case the adjustment factors
should be such that the effect of narrowed price differentials between Dubai and Brent be
nullified. When pricing Dubai crude whose destination was limited to the Asian market
because of oil demand increase in Asia and production decrease of Dubai, the transportation
cost between the Middle East and Singapore is the only factor to be considered.
This is oneof the structural factors leading to relatively higher crude oil prices for the Asian market.

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IEEJ:November 2002

Fig. 1

Changes in Formula Prices of Arabian Light Crude and Asian Premiums(FOB basis at the timing of shipment, twelve-month moving averages)

($/B)

($/B)

2.5

AL Formula Price to Asia

2.0

AL Formula Price to Europe

1.5

AL Formula Price to USA

30
Premium Average 0.94 $/B

28
26
24

1.0
AL to Asia AL to Europe

0.5

22

0.0

20

-0.5

18

-1.0

16

-1.5

14

-2.0

12

-2.5

10
1

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1991

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The fact that the price of Middle Eastern crude for the Asian market is relatively higher byaround $1-1.5/barrel has been confirmed by not only IEEJ’s analysis but also the Korean Energy
Institute [1] as well as Facts Inc. by Dr. Fesharaki [2]. It can be said that international
understanding on the existence of Asian premium on oil was already in accord and established.

2. Influences of Higher -Priced Crude Oil for the Asian Market
Oil imports by Asian countries as a whole totaled 15 million B/D in 2000.
Assuming thatcrude oil prices for the Asian market are higher than those for other markets by $1 ~ 1.5/barrel,
this means that there was a income transfer totaling $5.5 ~ 8.2 billion (¥687.5 ~ 1,025 billion,
assumed at 125 ¥/$) from oil-consuming countries to oil-producing countries.
It should be
noted that Asian oil-consuming countries have shouldered the burden of such a high extra cost
as shown above over the past decade or so.
Judging from the netback value of Arabian Light in the Singapore market, Arabian Light toAsia has experienced such a higher formula price that the refining margins become negative

to around minus $1/barrel since 1999 (Fig. 2). If this situation is common to all
oil-consuming countries in Asia, neither oil-consuming countries nor oil industries in
Asia should keep quiet at the existence of the higher formula prices of crude, causing
economic losses such as this.
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IEEJ:November 2002

Fig. 2

Changes in Formula Prices of Arabian Light Crude for Asian Market
and Refining Margins in Singapore(Twelve-month moving averages)

($/B)
2.5

($/B)
30

2.0

Netback Value in Singapore

28

1.5

Formula Price to Asia

26

1.0

24

0.5

22

0.0

20

-0.5

18

-1.0

16
Refinery Margin

-1.5

14

-2.0

12

-2.5

10
1

7 1 7 1 7 1 7 1 7 1 71991 1992 1993 1994 1995 1996

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Since energy prices are established in reference to crude oil prices in Asia, the issue ofhigher prices is not only limited to oil but also applies to all other energy sources.
In fact,
Japan’s LNG import prices are determined by a formula, with Japan’s average crude oil importprice (CIF basis) as the marker.
Coal import prices are also determined in reference to crude
oil import prices in negotiations between major coal-exporting companies and Japan’s coalusers.
Should Asia’s crude oil import price differentials widen against the Asian interests inthe future, it will become a problem of grave concern as the matter threatens to undermine
Asia’s international competitive power.
As the prices of LNG for the Asian market are determined on calorific value parity with
crude oil, unlike the prices of LNG for the U.S./European markets where they are set at levels
competitive with pipeline gas prices, LNG for the Asian market has to face the premium
problem of its own.
Meanwhile, LPG prices have been notified unilaterally by Saudi Arabia
to buyers under the system employed by Saudi Arabia at the end of 1994 and LPG consumers inAsia are currently suffering from high prices raised to the level that prevailed at the time of the
Gulf crisis.
LNG and LPG prices for the Asian market, which are set in the way outlined
above, are also leading to higher energy prices as a whole.

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IEEJ:November 2002

3. Loss of Reliability on Dubai Crude and Inevitable Marker Change
Production of Dubai crude was more than 400,000 b/d in the latter half of the 1980s, butbegan decreasing in the 1990s to drop to the current level of merely 170,000 b/d.
It takessome difficulties to determine the price of Dubai crude on spot trading at present because of thedecline in Dubai production.
In reality, the spot price of Dubai crude is determined by Platt’s
assessment, in consideration of the price of Brent and the spread between Brent and Dubai
prices, based on the spread trading of both on the forward market.
Table 1

Alternative Candidates of Marker Crude and Their Strong/Weak Points

Alternative Candidates
Idealistic crude
Daqing crude

Arabian light

Price index for M.E.
crude

Realistic crude
Oman

IPE Brent

Strong/Weak Points
Although China is a large consumer market, the oil market isunder administrative control and is not free.
Spot exports are limited and the market is localized, ruling out
dealings with U.S. and European traders.
Greatly differ in properties from Middle Eastern crude oil.
Large in production scale, allowing trading on a global scale. Can
represent M.E. crude for Asian market.
Saudi Arabia bans spot trading to keep prices from falling.
Destinations for exports are restricted.
Saudi Arabia monopolizes sellers’ market.
It is necessary to expand oil products trading in East Asia andstreamline spot trading market.
It is necessary to streamline products futures trading market andto post price index for M.E. crude.
Streamlining of various aspects is necessary, making its
immediate realization difficult.
Spot trading to some extent already exists. Larger in production
scale than Dubai crude.
Shell holds 40 percent concession interests, leading toapprehension of price manipulation by Shell.
Large-scale trading in international market. High liquidity ofmarket and high transparency of prices.
Having marker crude in common, the verification of pricedifferentials for European market becomes easy.
Price fluctuations reflecting supply and demand in
U.S./European markets constitute new risks. None of actual
trading in Asian market.,In this connection, the price formation mechanism of Dubai crude was always in question
due to its low liquidity and transparency and hence is beginning to lose the confidence of themarket completely.
Both sellers and buyers of Middle Eastern crude are now reaching thelimit of tolerance of the vulnerability of the very foundation on which the crude oil prices are
determined to begin with.
Against this backdrop, Japanese and East Asian oil companies are-5-

IEEJ:November 2002

set to begin negotiations with Middle Eastern oil-producing countries to change the marker
crude for the Asian market.
Idealistic alternative candidate marker crudes for the Asian market include: Daqing as
viewed as representing the consuming area; Arabian Light as viewed as representing the oilproducing countries; and the price index for the Middle Eastern crude (on the futures market)
based on product prices on the spot market as viewed as representing the market (Table 1).
All of these candidates, however, have their respective bottlenecks greatly hampering theiractual employment as a marker crude. In this connection, the more realistic candidate marker
crude is either Oman or IPE Brent (on the futures market), despite their respective problems.
Now that an abnormal movement of Dubai crude has become salient, it is believed to be aprocess that cannot be avoided to have negotiations with oil-producing countries for changing
the marker crude.
Since the shipment of Oman crude is also limited to the Asian market, the problem of
relatively higher crude oil prices for the Asian market with Dubai as the marker crude is also
seen even when Oman is selected as the marker crude. This means that a shift from Dubai to
Oman as the marker crude will not greatly contribute to reducing the Asian premium, although
it may contribute to recovering the reliability of prices.
So long as the reduction of the Asianpremium remains an important issue with higher priority, shifting of the marker crude to Oman
is not necessarily an appropriate measure.

4. Pricing based on IPE Brent as the New Marker (Proposal 1)
The first proposal aimed at reducing the Asian premium of oil is to adopt IPE Brent , themarker for the European market, as the marker for the Asian market.
Since importance is
attached to Asia’s international competitiveness vis-à-vis Europe and the U.S., it is essential toplace the crude oil price level, which is a representative criterion for energy costs, in one
consuming area at the same level as close as possible as those in other consuming areas.
Since the basic idea is an identical price level in all consuming areas, the transport cost of Brent
is not considered here.
The basic crude oil price formula designed to determine selling prices for the Asian market,
with the price of Brent crude as a reference, is as follows: (Selling price of crude oil for the
Asian market) = (Price of Brent crude) ± (Adjustment factor set by oil-producing country).
The adjustment factor in the formula shown above is estimated from (a) the quality differential
between the marker crude and the crude oil in question in the consuming market; and (b) the
cost of transportation from the oil-producing country to the Asian consuming market.
Newly estimated formula prices for the Asian market, with Brent crude prices as the marker,
are obviously lower than the current formula prices for the Asian market (Fig. 3). The
differentials between the estimated prices for the Asian market and the current formula prices
for the European market are reduced to average +$0.06/barrel in and after 1997.
The
refinery margin is also improved to average +$0.18/barrel in 3 years since 1999.
This

method of pricing can be proposed as one of the effective methods of reducing the
Asian premium.
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IEEJ:November 2002

Fig. 4
Relationship between Newly Estimated Formula Prices for Asian Market
with Brent Crude as Marker (“Estimation 1”) and Current Formula Prices(Arabian Light crude, Twelve-month moving averages)
($/B)

($/B)

2.5

30

2.0

AL Formula Price to Asia

28

1.5

AL Formula Price to Europe

26

1.0

AL Trial Calc. Price to Asia (Based Brent)

24

0.5

22

0.0

20

-0.5

18

-1.0

16
14

-1.5
Trial AL to Asia
- AL to Europe

-2.0

12
10

-2.5
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Nevertheless, this method is not without problems.
First, Brent crude prices are
determined by supply and demand of oil in the European market and hence they are notnecessarily in conformity with supply and demand in the Asian market.
Second, Brent crude
is not entirely free from artificial pricing, since it is subjected to notorious market operations.
When selecting a marker crude, careful studies of these problems should be made.
Of course,
it is important to be remembered that there is no perfect marker crude.

5. Pricing by the Average of Formula Prices for Europe and U. S. (Proposal 2)
The second proposal aimed at reducing the Asian premium of oil is a method of determining
the selling price for the Asian market by using the average of the current formula prices for theEuropean market and the U.S. market. A method is proposed, under which prices of ArabianLight crude determined daily at the timing of shipment from Saudi Arabia for the European and
U.S. markets are averaged monthly and the average of both is used to determine the selling
price for the Asian market.
Based on these formula prices obtained by averaging monthly formula prices for theEuropean market and those for the U.S. market, the Asian premium can be virtuallyeliminated over the entire decade from 1991 to 2000 (Fig. 4). The differentials between the-7-

IEEJ:November 2002

estimated prices for the Asian market and the current formula prices for the European market
are reduced to average -$0.10/barrel in and after 1997.
The refinery margin is also improved
to average +$0.45/barrel in 3 years since 1999.
This method of pricing can beproposed as one of the effective methods of reducing the Asian premium.
Fig. 4
Relationship of Current Formula Prices for Asian Market and Corresponding
Newly Esti-mated Prices (Estimation 2) by Using Average of Formula Prices for
European Market and U.S. Market(Arabian Light crude, Twelve-month moving averages)
($/B)

($/B)

2.5

30

2.0

AL Formula Price to Asia

28

1.5

AL Formula Price to Europe

26

1.0

AL Trial Calc. Price to Asia (Europe and US Average)

24

0.5

22

0.0

20

-0.5

18

-1.0

16
14

-1.5
AL Trial to Asia
- AL to Europe

-2.0

12
10

-2.5
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This method, however, is not flaw less.
First, the pricing reflects the current oil supply
and demand in Europe and the U. S. and hence is not necessarily in conformity with supply anddemand in Asia.
Second, the method is problematical in that it is necessary to computeaverages of formula prices for the European market and those for the U.S. market for each crudeoil, leading to complicated calculations due to the absence of the common marker crude.
However, the determination of selling prices are not delayed considerably, compared with thecurrent method of computing the average of Dubai and Oman crude prices.
In summary, the short-term measures aimed at reducing the Asian premium on oil are thefollowing two; (a) pricing by using IPE Brent, the quality differential between crude oils in the
Singapore market and the transport cost to East Asia (b) pricing by using monthly average offormula prices for European and U.S. markets.
It is necessary to add studies from businessstandpoints as quickly as possible and to prepare an achievable concrete plan.

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IEEJ:November 2002

6. Price Formation in Asia Differs from that in Europe and U. S.
and Importance of Oil Market Preparation
The oil product market in Singapore is the only such market in Asia, which is engaged in
active international trading at present.
The relationship between Singapore and Rotterdam interms of oil product prices had been such that prices of all products in Singapore were relatively
higher than those in Rotterdam until 1997 (Fig. 5).
This makes it clear that product prices in
Asia had been structurally higher and quite separated from those in European/U.S. markets.

Fig. 1

Oil Product Price Differentials between Asian and European/U.S. Markets

Singapore - Rotterdam
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US Gulf - Rotterdam
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Gasoline

KeroseneGas Oil

HS Residual

-3

-2

-1

0

1

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3

Gasoline

KeroseneGas Oil

HS Residual-34

Price Differential ($/B)

-2

-1

0

1

Price Differential ($/B)

-9-

2

3

4

IEEJ:November 2002

In and after 1998, however, price differentials for white products such as gasoline, kerosene
and gas oil narrowed, thus making prices in Singapore lower than those in Rotterdam, while
prices of high-sulfur residual oil in Singapore became even higher.
After all, the market in
Singapore is obviously making an entirely different movement from European/U.S. markets.
When these European/U.S. oil markets are compared with the Asian oil market, they differ
considerably in various aspects (Table 2).
Table 2

Crude

•
•
•

•
Products••••

Characteristics of Asian Oil Market and Differencesfrom European/U.S. Markets
Asian Oil Market

European/U.S. Markets

Futures trading market remains
underdeveloped.
Price transparency is low.
Middle Eastern crude is predominantly
used. Imports of West African crude
are increasing.
No locally produced crude is used as amarker crude.
Regulations are in force and necessity
for risk management is small.
Singapore is the only international
market.
Trading is done primarily in large-scalecargoes.
Product price is formed by adding costto crude oil price.

• Futures trading market is fully mature.
• Price transparency is high.
• Use of Middle Eastern crude is limited.
A variety of competitive crude exist.
• Locally produced crude is adopted as amarker crude.

• Free market in which keen competitionis carried on.
• Spot product trading market isdeveloped in a country and in a region.
• A variety of trading in cargoes, barges,etc.
• Product price is formed by spot andfutures trading. Crude oil prices andproduct prices mutually influence eachother.

We can presume that the high product price structure in Asia until 1997 had been supported
by a formation chain of (a) crude oil prices on a global basis in accordance with the supply anddemand balance in Europe and the U.S., first, (b) crude oil prices for Asia, next and (c) Asian
product prices, finally. As a result of surplus refining capacities and declined demand for oil,a new phase has been watched since 1998, in which oil product prices are beginning to exertpressure on crude oil prices in the Asian market.
Nevertheless, a link in which product pricerelations are loosely adjusted has not been established between Asian and European/U.S.
markets.

The power to balance and adjust Asian oil product market through the global link isbelieved essential so as to curb the oil-producing countries’ one-way move to press
oil-consuming countries to accept their crude oil prices.
To achieve this objective, it isimportant to streamline and strengthen Asian oil product market, by revitalizing its international
oil product trading activities through the deregulation of each Asian country’s domestic oil
market etc.
Moreover, it is necessary to improve the liquidity and the transparency of themarket by introducing new systems such as the futures market which has been well developed
and matured in Europe and the U.S.

- 10 -IEEJ:November 2002

7. Unity among Asian Consuming Countries Required
for Intensification of Negotiating Power
Osaka hosted the Eighth International Energy Forum (IEF) during the period September
21-23, 2002, in accordance with an invitation by Japan which acted as vice-chairman country at
the Seventh IEF held in Saudi Arabia in 2000.
It was the first such dialogue between
oil-producing and oil-consuming countries to be held in Northeast Asia – one of the world’s
largest oil-consuming regions.
The forum was participated in by representatives of 70
countries and thirteen international organizations, including representatives of as many as
fifteen Asian countries.
At a meeting of “ASEAN (Association of Southeast Asian Nations) Plus 3 (Japan,
ROK and China),” the Philippines brought the Asian Premium issue up for discussion, which
was followed by the plenary session of the forum where India and Japan called the forum’s
attention to the importance of the issue. As a consequence of these moves, it was agreed that
more detailed studies be made on the premium issue among all parties concerned by the time
the next forum is held two years later.
The voice of Asia, which is increasing its dependence on Middle Eastern oil, will beabsolutely essential in the dialogue between oil-producing and oil-consuming countries in the
future. It is necessary for Asian oil-consuming countries, including Japan, ROK, China and
ASEAN countries, to be united at various stages of political parties, governmental bodies andprivate sectors in order to strengthen their bargaining power vis-à-vis the oil-producing
countries. In this connection, it is worthy of special mention that Asian oil-consuming countries
acted in concert, raising their voices against the Asian Premium.
In the absence of keen competition among a variety of crude oil supply sources in anarea such as Asia, it cannot be expected that the issue of the Asian Premium is solved within aframework of oil alone. It is necessary to have competitive relations with alternative energy
sources having abundant reserves such as coal and natural gas enter the same arena with oil. It
is also an important theme to be addressed jointly by Asian oil-consuming countries that various
devices are contrived on the consumption side in such a manner that Asia can take advantage of
its position as a large-scale oil-consuming area in the world.

8. Pricing Based on Spot Trading of Arabian Light (Proposal 3)
The third proposal is to encourage spot trading of Arabian Light crude, thus establishingspot prices of the crude, and use them as the common marker crude.
For example, when
Saudi Arabia delivers one million barrels of Arabian Light crude daily on the spot market, it isbelieved certain to establish crude oil prices as the global standard.
Major Middle Easternoil-producing countries can also deliver a certain volume of crude oil each to let the market do
spot trading, thus making it possible to establish standard prices of crude oil represented by
Arabian Light.
The estimated selling price for the Asian market based on the assumption that the average ofthe formula prices for European, U.S. and Asian markets be the spot price is obviously
calculated to be lower than the current formula price for the Asian market (Fig. 6). The- 11 -IEEJ:November 2002

differentials between the estimated prices for the Asian market and the current formula prices
The
for the European market are reduced to average +$0.33/barrel in and after 1997.
refinery margin is also improved to average +$0.07/barrel in 3 years since 1999.
This

method of pricing can be also proposed as one of the effective methods of reducing the
Asian premium.
If spot trading of Middle Eastern crude is realized and prices of Arabian Light crude as
representative of the Middle Eastern crude are established to serve as the marker for Middle
Eastern crude, the Asian premium of crude oil in the oil-producing country can be eliminated inprinciple. Therefore, this means that this is the fundamental solution to the Asian premium
problem.
Fig. 6
Relationship between Newly Estimated Formula Prices for Asian Market Basedon Spot Trading of Middle Eastern Crude (Estimation 3) and Current Formula Prices(Arabian Light crude, Twelve-month moving averages)
($/B)

($/B)
30

2.5
AL Formula Price to Asia

2.0

28

AL Formula to Europe

1.5

26

AL Trial Calc. Spot Price (Europe, US and Asia Average)

1.0

24

0.5

22

0.0

20

-0.5

18

-1.0

16
14

-1.5
AL Trial to Asia
- AL to Europe

-2.0

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The most controversial aspect of this method, however, is that oil-producing countries,
which had a bitter experience in spot trading in 1986 when crude oil prices crashed, will be
reluctant to accept it.
Saudi Arabia, in particular, which was caught in a downward spiralamid the crash in crude oil prices by the crude oil sales on the netback value basis, prohibited
crude oil sales on a spot basis and strictly limited destinations of crude oil exports to maintainthe current method of pricing crude oil by the price formula.
Under such circumstances, thepossibility of Saudi Arabia’s accepting such spot trading is extremely slim.

- 12 -IEEJ:November 2002

9. Global Link of Oil Price and its Stabilization (Conclusion)
The existence of the Asian premium on crude oil prices imposes a heavy cost burden on
oil-consuming countries in Asia where demand for oil is projected to grow in the future, posing
a serious problem as it has a great impact on the international competitiveness of the Asian
economy and society.
Relatively higher crude oil prices have a far-reaching effect not only
on oil but also on all energy sources which are priced in reference to crude oil prices.
While the stabilization of crude oil prices for the Asian market is certainly an important
problem, the reduction of the Asian premium on oil as small as possible is an even more
important issue from the viewpoint of Asian national economy and improvement ofinternational competitive power.
Asian consuming countries should deal with thesepremium issues in energy prices through the unity of various stages such as politics,
government and industry.
The short-term measures aimed at reducing the Asian premium on oil are the following two;(a) pricing by using IPE Brent, the quality differential between crude oils in the Singapore
market and the transport cost to East Asia (b) pricing by using monthly average of formula
prices for European and U.S. markets.
In order to support short-term measures such aschanging the marker crude or the pricing, it will become important in the future to streamline
and expand the oil product market by increasing oil product trading in a variety ofoil-consuming areas in Asia.
This will also strengthen the activities of the Singaporean market – the only international oil
product spot trading market in Asia at present. Moreover, it is important to form a global linkin respect of oil product prices in a tie up with the Rotterdam market in Europe and the Gulf
market in the U.S. When the market functions of the global link become powerful, with Asia
incorporated in it, oil-producing countries will inevitably come to play within that framework.
It is an important measures required from medium- and long-term perspectives tosubstantially solve complex problems that oil involves to realize the spot trading of Middle
Eastern crude and to improve and expand the crude oil market.
While Middle Easternoil-producing countries remain cautious about the recurrence of a collapse in crude oil prices,the possibility of having another crash does not appear to be so large, now that their surplus
production capacity has been reduced considerably.
When the spot trading of crude isrealized in the main stream by Middle Eastern oil-producing countries, thus establishingreference prices, the chronic problem of the Asian premium will automatically be eliminated.
When the oil-producing countries’ market is improved and expanded by spot and futures
trading of Middle Eastern crude, it can be expected that the Middle Eastern crude market willfunction as the very center of the global crude oil market, instead of the marginal Brent and
WTI crude markets.
When this crude oil market function is linked with the global oil product market function as
outlined above, thus establishing a mutually affecting relationship between crude oil and oil
products on a global basis, we can expect to have a large adjustment function, through which the- 13 -IEEJ:November 2002

wild fluctuations of crude oil prices, a grave problem since 1996 due to a weakened supply
cushions, can be eased on a global basis.
This is essentially a subject matter of establishing areasonable world system from medium- and long-term perspectives, with both oil-producing
and oil-consuming countries endeavoring to strengthen a global market function.

(References)[1] Sang-Gon Lee, “Energy Security and Cooperation in North East Asia,” Proceedings on
Symposium on Pacific Energy Cooperation, 2002.
[2] Fereidun Fesharaki, Hassaan Vahidy, “Middle East Crude Oil Trade and Formula Pricing,”
Middle East Economic Survey (MEES) Vol. 44, No.43, October 2001.
[3] Yong Ho Jang, Takashi Kato, Yoshiki Ogawa, “Crude Oil Pricing in Asia and Its Future
Issues,” Energy Japan No. 142, pp. 10-32, November 1996.
[4] Yoshiki Ogawa, Tadashi Hirayama, Masayoshi Soga, Doo Sick Kim, “Changes in the Flowof Crude Oil to the West and Asia and the Isuues of Higher Prices of Eastbound Middle
East Crude,” Research Report, Homepage of the Institute of Energy Economics, Japan(IEEJ): http://eneken.ieej.or.jp/en/data/pdf/55.pdf, 2000.
[5] Yoshiki Ogawa, Tadashi Hirayama, Shigeki Kajiwara, Masakatsu Siobara, “Optimum
Option for Crude Oil Procurement and Pricing for East Asia,” Research Report, Homepageof the Institute of Energy Economics, Japan (IEEJ): http://eneken.ieej.or.jp/en/data/pdf/53.pdf , 2000.
[6] Yoshiki Ogawa, “Asia Oil Price Analysis 1: Middle Eastern Crude for Asian Market Priced
at Comparatively Higher Levels and Switchover of Marker Crude Inevitable to Gain
Market’s Confidence,” Research Report, Homepage of the Institute of Energy Economics,
Japan (IEEJ): http://eneken.ieej.or.jp/en/data/pdf/133.pdf, 2002.
[7] Yoshiki Ogawa, “Asia Oil Price Analysis 2: Stabilization of Crude Oil Prices at Reasonable
Levels and Market Expectations Running High for Fluctuations Centering on $20/Barrel,”Research Report, Homepage of the Institute of Energy Economics, Japan (IEEJ):
http://eneken.ieej.or.jp/en/data/pdf/134.pdf, 2002.
[8] Yoshiki Ogawa, “Asia Oil Price Analysis 3: Streamlining of Asian Oil Market and Global
Link of Oil Prices,” Research Report, Homepage of the Institute of Energy Economics,
Japan (IEEJ): http://eneken.ieej.or.jp/en/data/pdf/153.pdf, 2002.
[9] Yoshiki Ogawa, “Asia Oil Price Analysis 4: Values of Marker Crude Based on Oil ProductMarket Prices and Evaluation on Price Differential among Marker Crude Oils,” Research
Report, Homepage of the Institute of Energy Economics, Japan (IEEJ): http://
eneken.ieej.or.jp/en/data/pdf/160.pdf, 2002.
[10] Yoshiki Ogawa, “Asia Oil Price Analysis 5: Formula Price of Arabian Light Crude (ALC)
and Netback Value of ALC Based on Oil Product Market Prices,” Research Report,
HomepageoftheInstituteofEnergyEconomics,
Japan(IEEJ):
http://eneken.ieej.or.jp/data/pdf/156.pdf, 2002.
[11] Yoshiki Ogawa, “Asia Oil Price Analysis 6: Adjustment Factors Set by Oil-Producing
Countries and Its Constituent Elements,” Research Report, Homepage of the Institute ofEnergy Economics, Japan (IEEJ): http://eneken.ieej.or.jp/en/data/pdf/155.pdf, 2002.
[12] Yoshiki Ogawa, “Asia Oil Price Analysis 7: Several Proposals on Pricing of Crude Oil
Aimed at Reducing Asian Premium,” Research Report, Homepage of the Institute of- 14 -IEEJ:November 2002

Energy Economics, Japan (IEEJ): http://eneken.ieej.or.jp/en/data/pdf/154.pdf, 2002.
Contact: ieej-info@tky.ieej.or.jp- 15 -