On October 14, 2015, the Asan Institute for Policy Studies hosted a roundtable with David Gordon, Former Director of Policy Planning with the U.S. Department of State and Senior Adviser at Eurasia Group, for a discussion on the geopolitics of the global energy market and how it will impact trends in the East Asian region. Dr. Gordon explored how dramatically changing energy market dynamics might lead to a lowering of geopolitical tensions in East Asia. He considers how growing energy efficiency in China, the shale revolution in the United States, and increasing competition for market share in Asia among Middle Eastern producers are likely to lead to increasing energy security in the region. He then addressed what this might mean for China’s “new silk road” initiative, burden sharing on the sea lanes linking East Asia and the Persian Gulf, and American participation in the Asian Infrastructure Investment Bank (AIIB).
Gordon began by commenting that the global energy market is likely entering a prolonged period of “robust and resilient supply,” in contrast to recent trends with “demand shocks from China, instability from the Middle East, and the widespread notion that peak oil was on its way.” As Gordon points out, these trends culminated 14-15 months ago, with energy prices reaching extraordinary peaks. He highlights that three countries are presently driving energy markets in other direction: China on the demand side, U.S. on the supply side, and Saudi Arabia in its policy response. For each of these countries, the overall trend will be towards greater supply and lower prices.
In China, Gordon predicts that there will be an “extended period of low demand.” Over the last decade, there had been a substantial positive demand shock when energy demand began to increase much faster than expectations. However, there is now a negative demand shock in China, partially as result in shift to lower aggregate level of growth. Gordon points out that this is not simply evidence of a cyclical growth pattern, as it is important to note that “as China’s economy evolves, it becomes less energy intensive” where the “energy intensity of production is changing dramatically.”
On the U.S. supply story, Gordon anticipates that it will “likely remain very bullish in terms of increasing demand [and] relative oversupply in energy markets as a result of overbuilding,” stating that the growth in U.S. production has been a “big surprise.” The US supply revolution has created a buffer for oil prices when geopolitical and political tensions in the Middle East began to escalate, lessoning the impact of a recession by suppressing energy price hikes. According to Dr. Gordon, this unconventional energy revolution has “broken a pattern whereby non-OPEC production has historically not been price sensitive.” Recent price decreases have made US producers much more efficient, where “production level and capability on the U.S. supply side continues to grow despite [fracking] rigs being taken offline.” As such, this consolidation of the US industry makes it “bullish for supply [and] bearish for prices.” More US production will be drawn online as it becomes more economically viable for a larger range of people to produce, and this additional supply will put a cap on price. Nonetheless, Dr. Gordon anticipates that there will not be supply growth on a similar scale for some time.
Regarding Saudi Arabia, Dr. Gordon comments that OPEC “decided not to undertake what cartels are supposed to do in moments of excess supply, which is the removal of supply from the market.” Instead, they have realized that taking production offline would only give further impetus to the U.S. and Russia to increase supply. However, it is unclear who is in a better position for a share of the energy market and supply management.
Dr. Gordon infers four key implications from these energy market dynamics:
1) When the market becomes more resilient and demand is low, risk shifts from the consumer side to producer side of the equation.
2) International oil companies on the one hand are taking huge financial hits, but on the other hand, they are positioned to get much better deals.
3) Market conditions create very powerful incentives for pro-cyclical behavior that reinforces disequilibrium.
4) For East Asia and Asia more generally, the impact of such dynamics sustained over time reduces resource anxiety for many countries. This will be most prominent for countries who have thought about resource anxiety in the most mercantilist of terms (e.g.: China and India).
With China’s global aspirations going West, and Islamic extremist aspirations going East, Dr. Gordon comments that we are beginning to see “a spread eastward of the kinds of instability previously only seen in the Middle East.” China, in particular, is “extremely vulnerable to extremism.” With the recent Obama-Xi Jinping summit, Dr. Gordon highlights that the discussion of AIIB is noteworthy. Dr. Gordon comments that the “possibility of the US coming into the Asia Infrastructure Investment Bank (AIIB) remains particularly high,” especially given a broader China-U.S. security arrangement in the context of China’s efforts to build westwards.
To conclude his presentation, Dr. Gordon remarked that the energy industry in the East Asia region can now move on from being a “vector of competition and potential conflict” to become “an era of potential collaboration and easing of tensions.”
Date/Time: Wednesday, October 14, 2015 / 10:00am – 11:30am
Place: Conference Room (2F), The Asan Institute for Policy Studies
Written by: Rachel Leng
⇨ Dr. David F. Gordon has been Senior Adviser at Eurasia Group, Ltd since July 31, 2015. Dr. Gordon also served as the Head of Research and Director of Global Macro Analysis at Eurasia Group, Ltd. since February 2009. Previously, Dr. Gordon served as the Director of Policy Planning at the U.S. State Department and Vice Chairman of the U.S. National Intelligence Council. From June 2007 to January 2009, he was the Director of Policy Planning under Secretary of State Condoleezza Rice. Prior to the State Department, Dr. Gordon served in a top management role at the National Intelligence Council (NIC) from 2004 to 2007 and he also served as the Director of CIA’s Office of Transnational Issues.