Photo: Kristian Helgesen/Bloomberg
The US shale revolution is making waves in world energy markets. The benefits are first being felt in oil, which will spread to gas in a few years.
While sluggish global demand and waning political risk premium have played a role, the tectonic upward shift in oil supply has been a key factor behind the 30% slump in Brent crude oil prices between June and November to a four-year low of $79 per barrel.
The supply jump was partly due to higher than average Organization of Petroleum Exporting Countries (Opec) output but more importantly surging US shale-induced oil production, from five million barrels per day (mbd) in 2008 to currently nine mbd, which is set to further grow over the medium term.
Meanwhile, the fear of production disruptions in Libya and Iraq has abated, and a partial easing of sanctions has increased the supply from Iran.
Faced with these supply and demand shifts, Opec appears unlikely to make the significant production cutbacks required to balance the oil market and lift prices. Moreover, oil producers such as Iran, Iraq, Libya, Russia and Venezuela are financially constrained, and Saudi Arabia is unwilling to oblige.
Accordingly, global oil prices may remain around current low levels over an extended period.
Low oil prices are a boon for emerging Asia, especially China, India and Korea with large energy imports. One positive impact is falling oil import bills resulting in smaller current account deficits or larger surpluses.
Although the strong dollar could be a partly offsetting factor, the fall in oil and other commodity prices also helps bring down inflation. Typically, energy accounts for around 10% of consumer price indices in Asia. Meanwhile, consumption and investment may get a further lift as room opens up for monetary easing.
Another benefit is lower subsidy bills or reduced domestic fuel price increases, as recently observed for India and Indonesia. The savings could be used for spurring needed development spending and productivity gains. In sum, low oil prices serve to strengthen the balance of payments and give domestic demand, the supply side and growth a lift.
However, oil is only part of the story. Natural gas may prove to be even more important, but take time to bear fruit because of market fragmentation and trade barriers. The US sits on 665 trillion cubic feet of recoverable shale gas. Due to favourable factors, including drilling technology, financing and private land rights, shale gas production has skyrocketed from about two trillion cubic feet in 2007 to more than 13 trillion in 2013. By 2025, US shale gas production may reach 16 trillion cubic feet.
Abundant shale gas supply has already dramatically reduced US gas prices to only around $4.4 per mbtu. The manufacturing sector, particularly in the chemicals, fertilizers and petrochemical industries which heavily rely on gas as a feedstock, has been reinvigorated. Power costs are also sharply lower due to gas-based electricity generation.
Unlike oil, the fragmented gas market means that the positive global impact of US shale supply is not immediate.
Natural gas can only be transported through pipelines, as in the case of Russian supply to Europe, or transformed into liquefied natural gas (LNG) before being shipped, as in the case of supply to Asia from Qatar or Australia.
Restrictions on US gas exports to non-free trade area countries (China, India and Japan), and because gas cannot be sent to Europe or Asia via pipeline and needed LNG export terminals are yet to be built, have led to a large differential between US and global prices.
Asian importers pay around $14 per mbtu for LNG, which is well above US prices.
Over the next several years, the US is set to gradually become a major gas exporter as LNG terminals are built and export restrictions scaled back. Investors from Europe and Japan have already begun to invest in LNG export terminals and in US manufacturing, looking to reduce energy dependence on Russia and seeking alternatives to nuclear power in Japan.
Emerging Asia too can secure future supply that is a reliable, more environmentally-friendly energy source at a fraction of current costs. Asia, which accounts for 75% of global LNG demand, would benefit immensely as would India, forecast to become the third largest LNG importer by 2020. Partnering with the US makes sense and would induce competition among high cost producers, shifting the balance of power back to Asia.
Bejoy Das Gupta and Hussein Anooshah are respectively, chief economist for Asia/Pacific, and research associate at the Institute of International Finance, Washington DC.
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