The emergence of the novel coronavirus infection (COVID-19) ‘Omicron’ mutation put a break in the price of the international oil market, which had been marching high. The aftermath comes after reports that a new mutant virus discovered in South Africa is more infective and deadly than the delta mutant.
As soon as it was announced that the international oil price, which had risen above $80 a barrel last weekend, is expected to hit recovering oil demand due to travel restrictions and the possibility of border closures, the West Texas Intermediate (WTI) in the New York market in the United States sold at $60 a barrel. As a result, European Brent crude plummeted to the low-$70 level all at once. However, the current international oil price is still high.”
The international oil price, which was less than $12 per barrel in early 1999, began to rise as soon as 2000, and peaked at $140 in the summer of 2008. Repeated ups and downs. It has risen sharply this year and has been soaring past the $70 level through the summer.
The biggest factor determining international oil prices is oil demand. Prices plummeted at the beginning of last year due to a decrease in demand due to COVID-19, but this year, the demand recovery sentiment has revived and the oil price has been pushed up. Last weekend’s crash was mainly due to the expected decline in demand due to the emergence of micron mutations. Crude oil consumption in 2020 was approximately 90 million barrels per day, and international organizations predict that it will increase to 98 million barrels a day in 2022. Such demand growth forecasts are driving up international oil prices. However, these fluctuations in demand alone cannot fully explain the current high international oil prices. There is also a problem on the supply side, and this is mainly due to the change in the international order among the traditional oil-supplying countries since the 20th century.
Currently, the world’s crude oil suppliers can be broadly divided into the following three categories. First, there are member states of the Organization of Petroleum Exporting Countries (OPEC) and Russia, which can be mass-produced at a cost of less than $10-20 per barrel. They account for about 40% of the world’s supply. Second, crude oil produced by advanced western countries such as North Sea oil fields, Mexico oil fields, Texas, and the Gulf plays an important role in the production cost of 30-40 dollars per barrel. Finally, there is US shale oil, which has a production cost of $50-60 per barrel.
Even in the 1960s, when OPEC was formed, the world’s oil supply and demand was dominated by consumers, that is, developed countries in the West. There was no international market, and it was a time when advanced countries went to resource-rich countries and took crude oil unilaterally at low prices. However, in the 1970s, the first and second oil crises were when the OPEC united and exercised their power due to the war between the Middle Eastern countries and Israel. Developed countries suffered a major blow to the economy, and to defend against this, they built their own oil fields, such as Mexico and North Sea oil fields. In addition, an international crude oil market was created so that crude oil could be traded in the market, and the Strategic Petroleum Reserve (SPR) was started. As these policies took effect, the OPEC cartel, which had been maintained for more than 12 years, collapsed at the end of 1986, and the Soviet Union collapsed after that.
High oil prices in the 21st century are greatly affected by the surge in demand from China and the climate change agreement and carbon neutrality declaration. When China’s demand in 2004 greatly exceeded expectations, the international oil price immediately surged and broke the $100 mark in early 2008. OPEC, which had been eyeing an opportunity since the beginning of the 21st century, immediately cut production and formed OPEC+ with Russia to control nearly half of the world’s oil supply.
However, as soon as the United States began to mass-produce shale gas and shale oil, and then, Western speculative capital flowed into the international energy market, the international crude oil market price on average reached a price level close to the so-called marginal production cost. has been maintained At the same time, it fluctuated between the $40 range and the $120 range due to speculative capital.
Western countries such as the United States increased the use of shale oil, increased renewable energy under the climate change agreement, and initiated the phase-out of petroleum and OPEC by leading to the Paris climate agreement at the end of 2015. Perhaps thanks to that, the international oil price has been formed at the level of $50, which is the level of shale oil production, from 2016. Gaining confidence, the United States began considering a strategy to withdraw from the Middle East, professing to be an energy exporter.
However, the unity between OPEC+ countries has been further strengthened due to the declaration of carbon neutrality by Western countries since 2019, and this has been expressed through actions such as reducing production of OPEC+. OPEC+ countries have a sense of crisis that this may be their last chance to gain wealth from oil, which is continuing the cartel.
In the midst of this, as shale gas production in the US is limited due to environmental problems, major oil demanding countries, including the US, have lost their defense against OPEC and OPEC+. In response, the United States was forced to take out the strategic oil reserve card, a tool it had used in the past, and was forced into a situation in which South Korea, China, Japan, Britain, India, etc. demanded it.
OPEC+ will discuss oil supply at the beginning of the new year in 2022 at a ministerial meeting on the 2nd. The decision is likely to be influenced by the US strategic stockpile release card and the expected reduction in demand due to the new omicron mutation. The prevailing view is that OPEC+ countries will further tighten production as they stop increasing production. Western developed countries and consuming countries, which had a dominant position in shale oil production, now have to wait for the decision of the oil supplier again. Carbon neutrality is still a distant future, and we have to worry about industrial competitiveness and domestic prices right away.
In Korea, plans to improve energy self-sufficiency, such as overseas resource development projects and expansion of new and renewable energy, that have been promoted since the Kim Dae-jung administration have not been successful. The oil development-linked projects promoted by the shipbuilding industry are also at an insignificant level, leaving them vulnerable to fluctuations in international oil prices. In this situation, the global economy is increasingly facing protectionism, such as Brexit and the US-China trade conflict. The need to construct a new energy supply chain rather than the existing energy import method is growing.
Efforts to actively diversify the source of oil imports, which depend entirely on imports, and to switch some of them to other energy sources are now essential. New proposals, such as expanding the value chain to Northeast Asia such as Russia and Mongolia, and Southeast Asia such as Indonesia and Cambodia, are being considered in earnest.
Eunnyeong Huh, Professor, Department of Energy Systems Engineering, Seoul National University
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