Nick Butler is a visiting professor at King's College London and a former senior executive at energy company BP.
The time has come for the nations of Asia dependent on oil imports to establish for themselves a degree of protection and stability in a volatile market. What they need to do is overcome mutual suspicion and start a pan-Asian oil stockpile.
This might seem an unnecessary step when oil prices have touched 30-year lows, with stocks and supplies plentiful. But oil markets can never be taken for granted. Over the last 50 years, markets have swung by 200% or 300% in a matter of weeks on four different occasions.
This volatility, resulting from the political instability of many oil-producing regions and compounded by intensive speculation in the trading market, matters for Asia because imports have become essential to match growing consumption. In the last decade, oil demand across the region has risen by almost 40% with imports rising by over 60% in economies as diverse as India and Vietnam.
More than half the oil traded internationally each day is now consumed in Asia, according to data just published in BP's annual statistical review of the world's energy market. Most of the world's oil exports come from the Middle East where the risks of conflict remain high. The bulk of Asia's oil needs pass through the Straits of Hormuz.
The closure by military conflict or terrorist action of the 21-mile wide channel at the southern end of the Persian Gulf used to be the fear which spooked energy consumers in Europe and North America. In 2018 an estimated three-quarters of the 21 million barrels passing through Hormuz each day turned east.
The current age of plenty may not last. The major oil companies have taken billions out of their investment plans, and the major state companies are following suit as revenue is diverted to more immediate priorities. Oil fields are wasting assets -- as oil is produced and burnt, output plateaus and declines. New developments are always necessary.
Over time, reduced levels of investment in production in other regions of the world can only increase the market share of producers such as Saudi Arabia, Iraq and one day perhaps Iran. For importing regions such as Asia, the growing use of what are currently cheap supplies could easily turn into dependence with all the risks that involves. Energy security should be an issue of concern for every country in Asia.
A collective energy security agreement could establish substantial stocks held by both governments and private companies and a mechanism for their use which would provide a cushion against sudden physical shortages.
The precedent for such an initiative is the agreement reached almost 50 years ago in the wake of the embargo imposed by the Gulf producers on countries considered to have supported Israel in the Yom Kippur War of 1973. The agreement -- the Energy Security Programme managed by the International Energy Agency -- committed the signatories to hold stocks and to pool their resources in the event of a severe supply shortage.
The agreement has been invoked three times -- in the run up to the Gulf War in 1991, in the face of Hurricanes Katrina and Rita in 2005 and most recently during the Libyan civil war in 2011. In each case the release of supplies helped to stabilise the market and prevented panic buying. Japan, South Korea, Australia and New Zealand are party to that agreement. The rest of Asia is not.
Every country in Asia which imports oil has an interest in such a stabilisation mechanism but some, particularly China, may think that the risk can be managed by bilateral agreements with producers. The proposed deal between China and Iran, where China would receive discounted Iranian oil for 25 years in return for investment, is just one example of what could be done.
Chinese imports have risen from 5 million barrels per day in 2009 to almost 12 million barrels per day last year. COVID-19 has not broken the trend. After a fall in the first quarter Chinese imports were back up to over 11 million barrels per day in May.
One obstacle to this agreement is that China does not seem likely to share details of its strategic stockpiles or its bilateral relationships with countries such as Venezuela and Angola, which could provide trade in return for much-needed loans and investment.
The trend of growing imports is not limited to China. The rest of Asia accounts for another 15 million barrels per day of imports, with oil demand rising everywhere except Japan. For most Asian importers, Chinese-style mercantilism is not an option. A pan-Asian management of the risks would make much more sense for all the smaller Asian economies and for those such as India whose growth ambitions are predicated on a doubling of energy consumption over the next 20 years.
Pan-Asian agreement is never simple, and a good deal of historic distrust will have to be overcome for any stabilisation mechanism to be agreed. It may well be that it will take a crisis to focus minds, especially if China succeeds in pre-empting a large proportion of any resources which are available to meet its own needs. That would be the hardest way for Asia to learn just how much energy security matters.