Commodity Store with Sri Jegarajah

Oil -- A Decade Past

A decade on from Asia's financial crisis, the oil market has witnessed an unprecedented bull run. The surge in prices has seemed unsustainable with some commentators likening the jump to the dot com tech bubble. However, this particular bubble in the commodities market shows no signs of bursting as long as the twin powerhouses in the region -- China and India  -- continue to grow.

We've seen U.S. oil futures close in on $80 a barrel oil because of a 'perfect storm' of bullish news -- strong demand, a devastating hurricane season in the U.S., refining bottlenecks and concerns over supply disruptions prompted by turmoil in the Middle East and unrest in OPEC producers such as Nigeria and Venezuela.

As delegates at the World Economic Forum East Asia heard last week, ten years on from the financial crisis, Asian nations have learned crucial lessons from the meltdown. They now have larger foreign exchange reserves and banks have cleaned out their non-performing loans. Asian economies at this time, are far more resilient to another financial emergency, should it happen. On that score, the consensus is that there's a minimal chance of that scenario unfolding. Of course, all this bodes well for future oil demand.

Looking back a decade ago, it would have taken a brave soul to predict how radically the fundamental picture would changed. Post-crisis, Cambridge Energy Research Associates predicted "recovery and rapid growth of Asia by 2000" and it would be the oil industry which would be one of the first beneficiaries of the turnaround story. "The oil industry was the first major industry outside Asia to suffer the effects of the Asian crisis, as reflected in the 40% collapse in oil prices between 1997 and 1998 ... and the global oil industry would be among the first to respond to firm proof of recovery in Asia," said CERA chairman Daniel Yergin in 1999.

But the view from the boardroom (about a year after the crisis rocked the region) was not as positive. Malaysia's state oil company, Petronas, in July 1998 said sales in the prior year fell $2 billion and officials predicted a "difficult and challenging year ahead" as crude oil prices fell below $13 a barrel. Writing at the time in the International Herald Tribune, Thomas Fuller remarked, "Malaysia's cash cow is a lot thinner these days."

It's also worth reviewing how the crisis affected Asia's only OPEC member, Indonesia. The oil producer and exporter witnessed a considerable drop in investment in the exploration and production sector after the crisis. And investment in this sector has never fully recovered.

Then there was the burying of the 'ghost of Jakarta'. Rewind to late 1997 when OPEC met in Asia to decide on production policy and agreed to raise its oil output ceiling by 10%, an "ill-timed move," wrote veteran Dow Jones OPEC reporter David Bird in 2002 when the group met in Osaka, Japan. OPEC's Jakarta agreement "crashed prices as it coincided with the start of the Asian financial crisis and the arrival of El Nino, the warm weather phenomenon which sucked winter oil demand from the market," Bird wrote.

OPEC officials have been mindful to tread cautiously ever since. OPEC raised the ceiling much higher than they should have done at the time when the global economy was in decline, recalled former OPEC Preident Rilwanu Lukman of Nigeria. "We don't want a repeat of Jakarta."

Now the scenario is one of oil prices spiraling upwards not down and OPEC's critics say the group is irrelevant, unable to control mounting oil prices because it doesn't have as wide a margin of spare production capacity than previous years.

The ghost of Jakarta may be laid to rest but oil markets are facing a markedly different set of challenges to the ones a decade ago. Will China's seemingly insatiable demand start to slow as the authorities try to cool the red-hot economy and tame the surging stock market? Will the threat of supply disruptions from OPEC producers in the Middle East, Nigeria and Venezuela grow and, where will Asian consumer nations turn to for alternatives? Will the battle for energy security continue to pit China, Japan and India against one another and, of course, will greener environmentally friendly fuels replace traditional sources of energy? Watch this space.