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There has been a fundamental shift in the oil market.
The price of oil has collapsed from over $100 a barrel to less than $30 earlier this year. This has led to a redistribution of wealth from oil exporting to oil importing countries. There has been a shift in the direction of trade with India and China now the main markets.
Saudi Arabia has passed on the baton of “swing producer” to US shale producers in a rational effort to protect their market share. And through the medium of low prices to drive out high cost producers.
The drivers of demand have undergone a structural change. Whereas China accounted for 60% of incremental global energy consumption between 2003 and 2013, it accounted for only 8% of incremental demand for the past three years.
Technology has altered the trajectory of supply. Hydraulic fracturing has led to the shale gas / tight oil revolution, resulting in the United States becoming the largest liquid producer in the world.
Middle East geopolitics is driven by uncertainties. The generational change in the leadership of the Middle East and particularly in Saudi Arabia; the ongoing conflict between Sunni Saudi Arabia and Shia and financial stress are just some of the ongoing dynamics with political, social and strategic implications. The financial situation of the oil producer countries is particularly acute, whereas until three years ago the five Gulf producers enjoyed a surplus of almost $600 billion, today they are running a deficit of near $400 billion.
Underlying these market and regional shifts is a broader change in public and regulatory sentiment towards oil. The Paris agreement is a formal acknowledgement by almost all countries of the import of moving economic growth onto a low carbon trajectory. Governments are imposing regulatory constraints on the monetisation of oil reserves assets shifting the conversation from the subject of “peak supply” to “peak demand”. In parallel, governments are subsiding clean energy. Public sentiment has also shifted against fossil fuels.
India is emerging as a “swing demander”. It should leverage this bargaining power to secure better commercial terms. Question is how. Energy diplomacy needs to ratcheted up the policy agenda. A further question flows from India’s growing import dependence on a volatile region: is it investing enough to secure its supply lines? Or to create strategic reserves?
Like other products of the Brookings Institution India Center, this report is intended to contribute to discussion and stimulate debate on important issues. Brookings India does not hold any institutional views.