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Geopolitical Effects and Policy Implications of Structural Changes in the Global Crude Oil Trade

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Geopolitical Effects and Policy Implications of Structural Changes in the Global Crude Oil Trade Basic Research Report 18-20 Geopolitical Effects and Policy Implications of Structural Changes in the Global Crude Oil Trade Dalseok Lee Research Participants Head Researcher: Dalseok Lee, Senior Research Fellow, KEEI Research Associates: Sangyun Shin, Research Fellow, KEEI Donguk Park, Postdoctoral Researcher Jaeseung Lee, Professor, Korea University ABSTRACT 1. Research purpose The United States, which was the world’s largest crude oil importer, showed a significant decline in its crude oil imports, resulting from the increase in its domestic shale oil production, and this trend is expected to continue in the future. Meanwhile, since China became a net importer of crude oil in 1996, its dependence on imported crude oil has been increasing steadily with its growing domestic oil demand and stagnant domestic crude oil production. The world’s two biggest crude oil importers are bringing about a huge change in the global crude oil trading structure. With the decrease in the United States’ crude oil imports from major oil producers in the Middle East, Africa, South America, and Europe, a new crude oil trading structure centered around China, and Asia in general, has emerged, and competition among oil producers to secure market share is intensifying. The change in the trading structure for crude oil, which is widely known as a “strategic product,” is expected to have geopolitical impacts, including changes in international relations. This raises several questions: While the decrease in the United States’ crude oil imports from Saudi Arabia and other Middle Eastern oil producers, will the United States radically change its diplomatic strategy for the Middle East? While the United States’ crude imports from the Middle East decrease, what impact will China’s increasing crude oil imports from the Middle East would have on its relationship with Middle Eastern oil producers? How will China’s growing dependence on foreign crude oil and the United States’ declining reliance on foreign crude oil change the relationship between the two countries? Meanwhile, Russia is already strengthening its ties with China to expand its oil sales in response to the intensifying competition in the European market, which has long been traditional oil market. These rapid changes in the crude oil trading structure and resulting geopolitical impacts will change the environment surrounding Korea’s international cooperation to energy and oil and further changes in Korea’s energy security. It is thus necessary to conduct interdisciplinary research to analyze the economic and international political aspects of these changes with the aim of devising countermeasures. The purpose of this study is to analyze the global crude oil trading structure and related geopolitical impacts and draw policy implications for enhancing Korea’s international energy cooperation efforts. To this end, we first examined the rapid changes occurred in the global crude oil trading structure as a result of the issues surrounding crude oil imports in the two largest crude oil importers: the United States and China. In particular, we applied social network analysis (SNA) to quantitatively analyze the changes in the centrality of major countries in the crude oil trading network. Secondly, we analyzed the effects of the structural changes in crude oil trading on geopolitics and relations between nations as well as between nations and nation groups, focusing on the main oil- producing regions. Based on the results of the analysis, we identified the changes that have occurred in the international energy cooperation environment and drew policy implications for Korea’s efforts to address such changes. 2. Major research results To analyze the structural changes in the global crude oil trade, this study used social network analysis (SNA) to quantitatively measure the changes in import centrality, export centrality, and trade centrality by country in 2006, 2011, and 2016. In terms of export centrality, Saudi Arabia and Russia consistently positioned themselves at the center and exercised influence in the global crude oil market throughout the analysis period. Major oil producers in the Middle East, as well as in Nigeria and Angola in Africa, appeared to be the countries that are most strongly connected to crude oil importers through trade. The most significant geopolitical change was the change in the United States’ export centrality in 2016, which came to be comparable to that of Algeria, a traditional oil producer, after the United States’ crude oil imports started expanding in 2011. In terms of import centrality, imports were centered on the United States in 2006, showing a significant gap with China in the network. However, China narrowed that gap in 2011 and eventually took a central position in 2016. In addition, India was ranked seventh in terms of import centrality in 2006 but rose to third alongside the United States and China in 2011 and further narrowed the gap with the United States in 2016, even though both remained at the same rank. Among the countries that occupied central positions in the import network during the period of analysis, the centrality of France and Germany fell sharply, while the centrality of Japan, Italy, and Korea remained stable. In terms of trade centrality, which involves both exports and imports, China became the most central nation in 2011 and widened the gap with other countries in 2016. In 2006, Saudi Arabia occupied the most central position, followed by the United States, China, and Russia. In 2011, however, China rose to the top, followed by the United States, Saudi Arabia, and Russia. In 2016, the trade centrality rankings of the top three countries remained the same as in 2011, with China at the top, followed by the United Sates and Saudi Arabia, but India pushed Russia out of fourth place. Other major importers (Japan, Italy, and Korea) as well as exporters (Iraq, Kuwait, and the United Arab Emirates) continued to show high trade centrality. In this way, the crude oil trade network is changing, with China, instead of the United States, reinforcing its import centrality, while Saudi Arabia and other Middle Eastern oil producers, as well as Russia, maintain a central position in exports. This means that the center of the global oil market is shifting from the United States and Europe to East Asia, indicating that competition among oil producers in the Northeast Asian oil market is intensifying. Next, we analyzed the impact of structural changes in crude oil trade on the relationships between the United States and Middle Eastern countries, between China and Middle Eastern countries, between the United States and China, and between Russia and China. The Trump administration’s diplomatic policy is based on putting “America First” while it maintains a protectionist policy in relation to the economy and trade. In the energy sector, the Trump administration is pursuing the reduction of the country’s dependence on foreign oil through the expansion of domestic energy resource development. This change in policy trends is reducing the traditional roles and influence of the Middle Eastern oil producers as oil suppliers to the United States. Saudi Arabia, the largest oil producer and the country that controls oil production in the global oil market, is considered to be the Trump administration’s most favored nation in the Middle East and a key consumer in the global defense market. The Trump administration is withdrawing from active intervention in the oil-producing countries of the Middle East that are less attractive than Saudi Arabia as defense markets; nevertheless, the Middle East still holds strategic value for the United States. Stable international energy prices based on stability in the Middle East is important for the economy of the United States in the future, and the United States also has the strategic goal of checking the influence of China and Russia in the Middle East. China is working to strengthen its ties with major oil producers in the Middle East to ensure a stable supply of the crude oil it needs to satisfy its growing domestic demand. However, China still lacks the will and capacity to become the single most important power in the Middle East. However, China still lacks the will and capacity to become the single most ultimate power in the Middle East. However, as it observes the United States’ gradual withdrawal from the Middle East, China is strengthening its ties with Middle Eastern oil producers, hoping them to function as a stable energy supplier. As Saudi Arabia, the largest oil producer in the Middle East, also hopes that China will serve as a stable crude oil consumer, the two countries are actively strengthening their cooperation. The shale oil production boom and following decrease of crude oil imports in the United States are changing U.S.-China relations as well. Traditionally, the main strategic goal of the United States was to secure a stable supply of energy from the Middle East, but that goal is now shifting toward countering China’s expansion. As a result, the United States’ interest is shifting to maritime transportation routes in Asia, where China is located. In terms of energy security, China is focusing on securing a stable energy supply and maintaining the security of its energy transportation routes. Considering these circumstances, future conflicts and frictions between the United States and China are likely to arise in relation to maritime transportation routes for the transport of crude oil rather than the two countries’ relationships with crude oil-producing regions. The series of recent incidents that have taken place in the South China Sea seems to indicate that the friction between the two countries regarding maritime transportation routes is growing. In terms of China-Russia relations, stable energy imports and exports are not the only decisive factors. Instead, the significance of the relationship between the two countries lies in the fact that the second-largest military power and second-largest economic power are strengthening their relationship against the hegemonic power of the United States.
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