ASEAN, China, India race for energy reserve

The International Energy Agency (IEA), which was formed in 1974 by industrialized economies to develop collective measures to offset oil supply disruptions, has just issued a report warning that today’s energy market is more prone than ever to unexpected shocks and that many Asian countries — including China, India and Southeast Asian oil importers — are particularly vulnerable because they are increasingly dependent on volatile sources of supply in the Persian Gulf and Africa, and have not yet established sufficiently large oil reserves or put in place effective emergency response arrangements.

Demand in the energy market now is often perceived to be exceeding supply.
As a result, political risks assume a higher profile for those who trade and speculate on future prices. The IEA report says that the danger of oil supply disruptions has grown in recent years and will increase in the near future for a number of reasons.

They include continued demand growth (led by Asia), the concentration of remaining oil reserves in a fewer number of countries (mainly in the Middle East, Russia and West Africa), the focus of oil use in land, air and water transport (which is expanding exponentially, especially in Asia), and not enough capacity additions (both upstream, in oil exploration, and downstream, in refining) to keep pace with demand growth.

The IEA’s ability to respond to a short-term dislocation in the oil market was tested in September 2005 when Hurricane Katrina severely damaged oil production and refining infrastructure in the Gulf of Mexico, a major energy source for the U.S. When the extent of the damage became clear, the IEA reached unanimous agreement within 24 hours to make 60 million barrels of emergency oil and products available to the market. This had the desired calming effect.

Could Asia deploy a similar response mechanism? Not yet, despite efforts of Japan and other IEA members to encourage it. In Southeast Asia, Singapore and a number of other economies are heavily reliant on oil from the Middle East. Even the region’s main oil producers — Indonesia, Malaysia and Vietnam — are planning for a future as net oil importers as their oil output declines and domestic demand rises.

Jakarta Post