The oil industry is set for a revival, as the supply glut begins to diminish while prices rise with each passing day. Last week, the prices for Brent crude oil futures, the international benchmark for oil prices, touched a three-year high of $70 per barrel, and the prices have hovered over $65 for over a month.
While the recently witnessed spikes in prices have been attributed to colder than normal winters in the United States and tensions in the Middle East — the conflict between Iraq and the Kurds, as well as the conflict in Syria — the oil market balancing has been largely brought about by production cuts announced by the OPEC countries along with Russia. The production cuts, which have been extended through the end of 2018, are largely responsible for reducing the supply glut in the oil market and pushing oil prices over $60 per barrel. It is widely expected that the cuts, if they remain successful in the future, may be extended beyond 2018. Tensions in the Middle East look far from resolution, and U.S. Shale oil production is yet to impact crude oil prices in a drastic manner. All in all, this implies that the interlude era of cheap oil may be over for good.
This isn’t to say that further technological innovations may not impact prices, but that the impact of such revolutions on the oil prices in the future may be very limited and the world might witness a more balanced oil market from here on.
The upturn in crude oil prices, along with the increasing production of U.S. shale oil, will potentially have a profound impact on the geopolitics of this resource, particularly at a time when Asia is emerging as a demand hot spot. Asian economies including China, India, Japan, South Korea, and Southeast Asian countries are looking at a tremendous rise in oil demand in the next few years. Per estimates from the International Energy Agency, oil demand in Southeast Asia alone is set to rise from the current levels of 4.7 million barrels per day (bpd) to 6.6 million bpd by 2040. Increasing economic growth rates and subsequent rise in standards of living are the prime factors behind the demand push. China has already emerged as the world’s largest crude oil importer in 2017, and its oil demand is projected to rise further by 4.6 percent, hitting 600 million tonnes in 2018. Following close behind is India, with a projected increase of 4.3 percent in its oil demand in 2018. With the increase in demand and rise in prices, the scramble for affordable, accessible and secure oil supplies will fuel the geopolitics in the region.
One of the most noticeable impact of the increase in crude oil prices in 2008 was the rise in tensions in the South China Sea in the same period. The increase in tensions is attributable, in part, to resource geopolitics, wherein China sought to dominate and control the maritime trade routes in order to secure oil supplies at a time when rising prices and shortfalls in production threatened to erode the very basis of its economic growth. 2008 was an inflection point, after which both the frequency and the intensity of the face-offs in the disputed region have grown. China’s attempts at setting up oil rigs, cutting short the patrols of oil and gas survey ships from Vietnam, harassing U.S. surveillance ships and aggressively claiming islands/rocks in the South China Sea saw an unprecedented rise.
While the fall in oil prices in 2015 brought about some sort of relief to the energy insecurity of importing countries, the fact that cheap oil may now be a thing of the past threatens to exacerbate the existing geopolitical conflicts and widen the fault lines once more. It is important to underline here that with the demand hot spot for oil and gas moving to Asia the scramble for a secure access to affordable resources is expected to lead to heightened conflict between the regional powers.
More specifically, China’s flagship Belt and Road Initiative (BRI) and its energy intensive undertones is bound to impact the geopolitics around energy trade routes. The BRI is emerging to be a significant geopolitical tool through which China is rapidly expanding its naval presence and acquiring strategic ports in the Indian Ocean Region. Moreover, the projects initiated under the umbrella of the BRI are also heavily energy intensive. About 60 percent of the $50 billion investment announced under the China-Pakistan Economic Corridor (CPEC) is meant for the coal-fired power generation plants, for instance. As a part of the BRI, China is also building two oil and gas pipelines from Myanmar’s Rakhine state to Yunnan province in southwest China. The pipelines will carry oil imported from Arab countries and deliver it to Myanmar’s Kyaukphyu port on the Bay of Bengal, developed by China as another of its strategic assets in the Indian Ocean Region.
Moving to South Asia, the development and acquisition of Hambantota port in Sri Lanka by China has also been undertaken with a view to secure the critical bridge connecting the energy supply lanes in the Indian Ocean. All in all, together, the South China Sea and the Indian Ocean Region account for over 80 percent of the world’s seaborne trade, with over 70 percent of it passing through critical choke points: the Strait of Hormuz and Strait of Malacca. Against the backdrop of a regional order evolving around the BRI, it is bound to turn the South China Sea and the Indian Ocean Region into potential conflict hot spots.
The growing economic and military assertiveness of China in the two regions has already prompted national security concerns. Countries like India, Japan, and Australia, along with the United States, have reignited the Quadrilateral Security Dialogue, or the Quad, an informal alliance that seeks to maintain regular talks between the countries. However, the regional countries might still need a strategy to work out their concerns relating to secure energy supply routes and affordable energy supplies. An energy-hungry China, equipped with the energy juggernaut that is the BRI, accompanied by the sharp increase in the energy demand of other Asian countries, and the equally sharp spike in global crude oil prices, should set off alarm bells over the future of geopolitics in South and Southeast Asia.
Niharika Tagotra is a Ph.D. researcher in international politics at Jawaharlal Nehru University, New Delhi.