Situating Gulf's Oil and Gas Supply to Asia: Implications of US Shale Boom, Iran Sanctions and Trade War with China

Abstract

The Middle Eastern Gulf region is Asias traditional supplier of oil and gas. However, in the past two years, record oil and gas oil volumes from United States have headed into Asia, riding high on the shale boom. While US has emerged as worlds top oil and gas producer in 2018, it should not obscure the fact that Gulf still accounts for one-third of global oil production, one-sixth of gas production, 48 percent of proved oil reserves, and 38 percent of proved gas reserves. However, Gulf oil and gas markets are facing an unprecedented wave of political-economic currents. With the re-imposition of sanctions, the Trump administration is seeking to drive Irans oil exports to zero, an unintended consequence of which has been to moderate the impact of bumper US output on oil prices. Yet, as the United States ratchets up trade war with China and the two countries impose tit-for-tat tariffs, crude prices are declining amidst trade tensions and fears of a global recession. Beijing has imposed retaliatory tariff on LNG from United States, but has so far avoided an outright tariff on oil, opting instead to taper these purchases. US crude oil producers nonetheless continue to find eager market in Korea, Japan and India - all importing record volumes to make up for the loss from Iran. Asian buyers, except China, are also importing LNG from the United States in a big way. The jump in US oil and gas exports to India, South Korea and Japan is also supported by another implicit aspect. It comes as the Trump administration continues to push Asian consumers to buy more, so that United States can reduce trade deficit with them through larger sales. Consequently, Asias biggest consumers, including China, are left to grapple with challenges emanating from the loss of crude under sanctions, escalating trade antagonism between Washington and Beijing, and having to agree to narrow their trade surpluses through the purchase of oil and gas from US suppliers. Given this scenario, the following is argued: First, Asian consumers must keep their supply sources expanded to the widest possible extent, to hedge their bets in case of supply shocks emanating from political decisions. Secondly, the best possible supply option for the Asian consumers come from the Gulf states, as they collectively produce and export more than US suppliers. Thirdly, oil and gas supply from the Gulf region to Asia is highly facile, given geographical proximity that translates into low freight charges and cost of insurance. Fourthly, the US shale boom is vulnerable to drilling intensity and oil pricing shifts. Any sudden decline in oil prices can make intensive drilling less competitive, leading to a rapid decline in production. Lastly, in terms of price, crude from the Gulf region suits the large consumers in Asia better than that supplied from the US fields, as American crude being sweet and light, is more expensive. This problem is especially acute for Indian refiners inured to Gulfs heavy crude.