[Choi Ji-woong's Energy War] The $100 Oil Era, Our Blues

Early 2000s Surge in Chinese Oil Prices
Prices Stabilized by US Shale Oil

Currently, Shale Production Difficult
Due to Maintenance and Eco-Friendly Policies
Mismatch with Rising Chinese Crude Consumption

Supply-Demand Imbalance Drives Oil Price Rise
Concerns Over Prolonged South Korea Trade Deficit
Time to Reconsider Excessive Consumption Patterns

Editor's NoteAsia Economy publishes a monthly series titled "Choi Ji-woong's Energy War" every Thursday, diagnosing the energy industry undergoing a great transformation and examining the related changes in the international order. The author is an expert in the energy field who joined Korea National Oil Corporation in 2008, worked in the Europe & Africa Business Division and the Stockpile Business Division, and completed an MBA in Oil & Gas at Coventry University in London in 2015. He is the author of the bestseller "The Future of the Energy Empire 2050," which covers the present and future of energy.

[Image source=Getty Images Bank]

When international oil prices surpassed $100 per barrel in February this year, the media and the public were quite shocked. However, $100 oil is not unfamiliar. For a very long time, the market has recognized oil prices above $100 as a normal price level. Oil prices first crossed $100 in 2008, and from 2011 to 2014, they consistently hovered around $110. Specifically, the annual average Brent prices in 2011, 2012, and 2013 were $110.9, $111.7, and $108.7 respectively. The average price for the first to third quarters of 2014 was also $107. For nearly four years, oil prices remained near $110.

The two biggest factors that influenced oil prices since 2000 were, on the demand side, the emergence of China, and on the supply side, the advent of shale oil. Summarizing the changes in oil prices over the past 20 years in one sentence: "The rise of China opened the era of $100 oil, and the emergence of shale ended it."

After China joined the World Trade Organization (WTO) in 2001, its oil consumption doubled over ten years. Naturally, global crude oil consumption also steadily increased. This led to international oil prices surpassing $100 for the first time in history in January 2008. Prices above $100 were maintained for a long period. Then, from the fourth quarter of 2014, international oil prices experienced an unprecedented plunge as shale oil began to enter the market in earnest. Since then, international oil prices have fluctuated between $50 and $70. Following the emergence of shale oil, oil-producing countries formed a new group called "OPEC+," which includes OPEC members and major non-OPEC producers such as Russia. From 2016 until just before the COVID-19 outbreak in 2020, the market relied on OPEC+'s production cut agreements to support the floor of oil prices.

The biggest change in the oil market in 2022 is that the supply surplus situation that lasted for seven years since 2015 no longer exists. The main reason the oil market could be oversupplied for the past seven years was shale oil. Shale oil production increased at a rate higher than the global oil demand growth of 1.3% per year. True to the term "shale revolution," the United States doubled its oil production in just ten years thanks to shale oil and became the world's largest oil producer in 2018. However, shale oil production is no longer increasing annually as it did in the past. Production actually declined in 2020, and there will be no significant increase in 2021 and this year. Shale companies no longer pursue growth as before. Over the past decade, the shale industry has expanded production facilities through continuous growth, and currently, maintaining that level alone strains manpower and infrastructure. To pursue further production increases now requires more capital investment, which conflicts with the Biden administration's green policies. There is also still a lot of debt to repay.

On the other hand, oil demand is expected to continue a solid upward trend worldwide. Although renewable energy is expanding, the energy consumption environment using oil and gas is unlikely to change significantly within at least the next ten years. Major institutions such as IHS Markit expect the peak of oil demand to occur after 2030. The International Energy Agency (IEA) projected in its June report this year that oil consumption will increase by 1.8 million barrels per day compared to last year and by 2.2 million barrels per day next year compared to this year. This means oil consumption is expected to grow at 1.8?2.2%, higher than the 1.3% average growth rate over the past 20 years for at least this year and next. The increase in China's crude oil consumption, which opened the era of $100 oil, will continue. According to the IEA, China's crude oil demand will increase by about 10% compared to the current level by 2030. In the past, the increase in U.S. shale oil production exceeded China's demand growth, enabling a structurally oversupplied market. However, the shale industry no longer pursues production increases. This imbalance between demand growth and supply growth is the core reason for the current high oil price trend.

From a big-picture perspective, the oil market has returned to the pre-2014 period when it was balanced around $110 per barrel. The current supply-demand situation is similar to the period when oil prices above $100 were maintained for four years. While China's oil demand growth that opened the $100 oil era remains, shale oil production growth has stopped. Not only the U.S. but other oil-producing countries are also suffering from investment stagnation.

Jiwung Choi, Researcher at Korea National Oil Corporation Smart Data Center

So, an important question arises here: What should be done if high oil prices above $100 per barrel continue for several years as in the past? Oil prices are a key factor determining inflation levels and, in Korea's case, the largest factor determining the trade balance. This is because crude oil accounts for the largest share of Korea's imports. Therefore, if high oil prices persist long-term, there is a risk that Korea's trade deficit will continue for an extended period. In fact, comparing the annual trade balance surplus from 2010 to 2021 with the annual average oil price shows a very clear inverse relationship. As of early June this year, the trade balance is also recording a deficit exceeding $10 billion due to high oil prices. High oil prices affect domestic inflation levels, but the prolonged deterioration of the trade balance is also serious. Therefore, it is time to borrow a familiar old slogan and launch a campaign once again: "Let's save energy in a country that produces not a single drop of oil." Regardless of the trade balance, it is necessary to conserve oil to reduce carbon emissions.

In conclusion, we have not thought wisely about oil consumption while passing through the low oil price period of the past seven years. We need to reflect on Korea's current oil consumption reality and reconsider. Korea is the world's fourth-largest crude oil importer. It is necessary to examine whether Korea is using too much oil relative to its economic size and carbon reduction goals. At the same time, we should also consider what efforts are being made to ensure stable oil supply.

Choi Ji-woong, Researcher, Smart Data Center, Korea National Oil Corporation