Asia-and in particular, Japan and China-is pivotal to global oil demand, and Asia's economy was weak before the Sept. 11 terrorist attacks on the US rocked the overall world economy, said Fereidun Fesharaki, a senior fellow at the Honolulu-based East-West Center and president and founder of FACTS Inc. Fesharaki spoke in Houston early last week to a joint gathering of the Asia Society and the International Association for Energy Economics.
He warned, "We are in for a period of [economic] difficulty worldwide.... As far as the energy sector is concerned, the impacts are going to be quite severe."
Asia is experiencing economic weakness because of recent high oil prices and a strong US dollar, he said, adding that he is particularly concerned about a declining Japanese economy. He also expressed concern for Asia's growing dependence on Middle East oil supplies.
Japan
Although many economic observers assumed Asia had recovered from the economic crash of 1998, Fesharaki said the region is experiencing a "hiccup" that started last year.
"There is a time bomb in Japan," Fesharaki said. "Japan has a curve called the L-curve. It came down and stayed down. The L-curve we can live with, but what we can't live with is if the bottom of the 'L' falls down."
He expects third quarter data could show a 3-5% drop in Japan's gross domestic product vs. the third quarter last year.
"For the past 20 years, Asia has accounted for 50-100% of the global incremental oil demand," Fesharaki said. "If you don't have growth in Asia, you won't have growth in the world oil market. Asia is the linchpin of the global oil market, and to a lesser extent, the gas market."
China
Meanwhile, Fesharaki also foresees an economic slowdown in China.
"A sudden slowdown in China's economy as a result of the World Trade Organization entry or restructuring is a source of grave concern, although such a slowdown might be short lived," he said.
The consequences could be large, Fesharaki said, adding that China already has a huge domestic debt with "tens of thousands of companies bankrupt."
He said that long before Sept. 11, it already was clear that the Organization of Petroleum Exporting Countries was overshooting the market and that the recent high oil prices could not be sustained.
The terrorist attacks and subsequent economic slump merely accelerated by 2-3 months an inevitable drop in oil prices, he said. "Demand is not there. If you don't have the demand, then you have to reduce the prices; $25/bbl was unsustainable. What is sustainable is probably $15-20/bbl."
Asia-Middle East link
Meanwhile, the Asia-Pacific market is growing increasingly dependent upon Middle Eastern oil exports, he said.
"[Asian] imports will always be very high," given the region's high oil demand coupled with low reserves. "This year, 11 million b/d of oil was exported from the Middle East to Asia. In the future, the dependence becomes higher and higher," he said.
Fesharaki said the strong relationship between Asia and the Middle East is likely to continue, presenting future challenges to US foreign policy.
"China and India frankly care more about their own national interests than what anybody else thinks," he said, adding that US foreign policy should resist trying to impose US values on the Chinese.
"The foreign policy apparatus should be implemented in a constructive manner," he said.
We are in for a period of [economic] difficulty worldwide.... As far as the energy sector is concerned, the impacts are going to be quite severe.
