The Asian Energy Predicament 73

The Asian Energy Predicament
Robert A. Manning
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By 2010, Asia will be the world’s largest consumer of primary energy. By 2020, China and India – both of which have burgeoning middle classes – will produce more carbon emissions than the United States and Europe combined. Asia already imports some 60% of its oil from the Middle East, and Asian dependence on this volatile region is increasing. This dependency is a growing concern for Asian governments that have viewed energy largely in strategic terms, as one of the ‘commanding heights’ of the economy and a matter of fundamental national security. If this geostrategic mindset persists, Asia’s thirst for oil could increase the likelihood of conflict over territory. Myriad territorial disputes could be shaped by the perception of progressively scarcer hydrocarbon resources in an area where distrust and rivalry constitute regional pathology. Yet such prophecies, though perhaps self-fulfilling, are hardly certain. For market forces have increasingly proved to be essential to resolving energy questions by spurring conservation, energy efficiency and the development of new oil and alternative fuel sources. As Daniel Yergin has argued, ‘stresses can be resolved not through massive armies and blue-water navies, but through markets and investment within the ever-denser web of international commerce.’1 In this view, mobilising the massive financial resources needed for energy infrastructures (estimated at over $1 trillion over the next decade) and commercialising new sources of energy (for example, fuel cells and gas-to-liquids) are greater priorities than asserting military claims over islands with unproven oil or gas reserves. From this geoeconomic perspective, commerce and market forces shape inter-state relations, and not vice-versa. ‘Globalisation’ becomes a force for stability and prosperity, making available sufficient quantities of resources at lower prices and pressuring domestic industries to produce, refine and market energy more competitively. Geoeconomic and geostrategic perspectives – and the policies they drive – compete in Asia. How an Asian government defines energy security will, however, help determine which approach it follows. Will Japan continue to pour resources into its plutonium-reprocessing programme, even though it

Robert A. Manning, former US State Department Advisor for Policy (1989–93), is Senior Fellow and Director of Asian Studies at the Council on Foreign Relations, Washington DC. This article is adapted from his book The Asian Energy Factor: Myths and Dilemmas of Energy, Security and the Pacific Future (New York: St. Martins Press, 2000).

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74 Robert A. Manning lacks a coherent economic rationale? Will India insist on continuing its risky, expensive nuclear-power programme, though natural gas is far more economical? Will Beijing sink billions into a Kazakstan oil pipeline, hoping to reduce its dependence on Middle East oil? And will fears of sea-lane disruption inspire a naval arms race – reminiscent of the Dreadnought era – between China, Japan and India? Deeply ingrained Asian statist tendencies and wrong-headed perceptions of ‘scarcity’ suggest it might be a decade or more before a calming confidence in market mechanisms becomes evident – if it happens at all. At present, geostrategic and geoeconomic tendencies seem to be coexisting as the region comes to terms with its energy predicament.

Energy Complacency
Asia’s phenomenal economic trajectory up to July 1997, its steadily rising energy needs (the region contains 53% of the world’s population), and its resulting impact on world energy markets lent urgency to the question of how Asia would meet its considerable energy challenges.2 Yet, as Asian energy imports snowballed from the 1980s to the mid-1990s, energy ceased to be a frontline strategic concern due to low oil prices. For a quarter of a century, East Asian economies experienced roughly 6% annual growth in gross domestic product (GDP), a boom unprecedented in the modern era; accounting for just 4% of world GDP in 1960, their share had risen to roughly 25% by 1995. As Asian economies rocketed, their energy consumption grew by similar proportions. By 1994, Asia-Pacific oil consumption rivalled that of the United States.3 From 1971 to 1994, primary commercial-energy demand in East Asia (excluding China and Japan) grew by an average annual rate of 6.8%, quadrupling in absolute terms. In China, Korea, Thailand and Indonesia, electricity demand grew even faster than GDP, averaging 11–12% in this period. In the decade from 1983–93, four Asian economies – Japan, China, Taiwan and South Korea – accounted for 36% of world growth in primary energy demand.4 An economic and strategic watershed was reached in 1993, when China, then the world’s sixth-largest oil producer, became a net oil importer, leading many analysts to ponder the implications of another quarter of a century of the Asian miracle. Where would some 26 to 31 million barrels of oil (40% of total 1998 world production) that the Asia-Pacific was projected to need annually by 2020 come from, and how would such demand affect world markets, energy security, and, not least, the environment? How would the various Asian actors handle their respective dependencies on energy imports? But with the possible exception of Japan, energy was rarely central to national debates over economics or security. Instead, such discussions tended to focus on the marvels of export-oriented growth strategies and the virtues of the ‘Asian model’. The Asian juggernaut appeared unstoppable, even through the oil shocks of 1979–80. Similarly, until the mid-1990s, energy security did not figure prominently in the seemingly endless conferences and symposia on ‘the future of Asian Security’. Instead, these focused on military modernisation, flashpoints such as

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the Korean Peninsula, the Taiwan Strait and Kashmir, myriad territorial disputes, and by the mid-1990s, concern over the strategic implications of an emerging China. Apart from tensions over the disputed Spratly Islands in the South China Sea (with alleged, but unproven, oil and gas riches), energy was not often on the Asian security radar screen at all, despite the region’s negative energy balance.5 Only gradually did the sheer volume of East Asia’s real and projected energy needs, and their intersection with security issues, start to feature prominently in dialogue about the future of the Pacific. Many regional specialists have started to echo Kent Calder’s suggestion that energy is the ‘dark side to the explosive economic growth of East Asia, rooted in the region’s profound energy insecurities’.6 On the other hand, the instructive Western experience of coping with the 1970s oil shocks should provide some reassurance that markets can effectively ration access to adequate resources.

Whither the ‘Miracle’?
The Asian economic crisis further delayed decision-making about energy security in the region. The negative synergy of excessive and misallocated capital flows; fixed exchange rates; and over-guaranteed, under-regulated and opaque domestic financial markets appears to have been the key factor that precipitated the crisis. These elements sparked contagion in international financial markets, thereby accelerating and deepening the crisis.7 Initially, devalued currencies propelled the price of oil imports (purchased in dollars) to two or three times the pre-crisis level. The region’s oil consumption fell by some 500,000 barrels per day (b/pd) or 2.7% in 1998, after averaging over 5.5% annual growth for the past two decades.8 This development led to a rare state of near-zero (+0.5%) growth in world oil consumption, as prices fell to pre-1973 levels, hitting $8 per barrel at one point and leaving producers with a surplus of more than a million barrels. Do such economic difficulties signal an end to Asian dynamism? Or was the contraction of 1997–98 a severe, protracted correction, merely signalling a new, more complex phase in the region’s progress? The optimistic scenario seems the most likely. To be sure, as the new century began, the Asian recovery was fragile and tentative. Sustainable growth across the region will remain vulnerable until bad debts are restructured, banks are recapitalised, and financial systems are modernised. Economic growth in much of the AsiaPacific region may remain erratic until 2002–03. Japan’s growth is likely to stay at around 1% or lower. China’s GDP is unlikely to grow by more than 6% before 2002, and internal turmoil and growing debt arising from government measures to try to stimulate growth could scale back its economy further in the 2000–03 period.9 But by late 1999, oil demand had picked up from the previous year: by 4.8% in Japan, 11.1% in South Korea, and 3% in China.10 All Asian economies, save Indonesia, showed growth inching into the positive column. Most of the private capital that fled amid the contagion has trickled back in.11 Further, Asian oil demand shot back up by more than the 500,000 b/pd drop witnessed in the previous year.

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76 Robert A. Manning The crisis may have deflated a regional conceit about East Asia’s economic prowess, but the surprisingly resilient recovery in much of the region tempers such contrition. Full recovery will not be easy or instantaneous; Korea’s debt work-out will be protracted and Japan’s economy remains sluggish. Yet measured against numerous 1998 predictions of a three- to five-year crisis, the region appears to have stabilised and achieved a relatively swift, albeit uneven, return to sustained growth. The fundamentals that led to the phenomenal Asian dynamism of the quarter-century preceding the crisis remain in place. High savings rates, a strong emphasis on education, hard work, good macroeconomic management, the ability to absorb technology and relatively open capital markets all remain important and intact assets. After the International Monetary Fund (IMF) relaxed initially stringent fiscal conditionality, its large commitment of bailout funds and prescription of de-linking currencies from the dollar and devaluing them have helped to consolidate the turnaround. For the region as a whole, the most prudent forecast is for a moderate nearterm recovery, with GDP growth in the range of 4.5%–5.2% reflected in the ‘moderate’ recovery scenario of the International Energy Agency (IEA), albeit somewhat more modestly. In the 2004–2010 period, the higher end of that range is projected while, from 2011–2020, the lower end is more likely.12 Energy demand lags, but generally tracks, economic growth. The Asian economic crisis, then, only marginally alters the region’s energy picture. Asia’s demand for oil will increase, and its need for a coherent approach to energy security persists.

Asian Energy Patterns
All economic projections are clouded by such unpredictable developments as renewed recession, war, political turmoil in China and technological change. Yet, even at what are likely to be far more modest economic growth rates than seen during the 1980s and early 1990s, oil demand is still likely to grow more rapidly in Asia than in the rest of the world. By 2020, according to the Energy Information Agency (EIA) of the US Department of Energy, Asian oil demand will still grow two to three times more rapidly than that of the industrialised West assuming oil prices will average $15–20 per barrel (a likely scenario, since recent high prices have led to renewed investment, which should increase capacity from roughly the spring of 2001).13 Demand-growth of this order is comparable to the pattern of the previous quarter-century. Asian energy demand grew by 274% in 1970–94, compared to 63% in the rest of the world.14 Yet the aggregate numbers conceal as much as they reveal about the region’s energy patterns, given the distorting effect of the volume and diversity of China’s energy consumption. Despite the country’s pace-setting growth in oil demand, oil still accounts for only 23% of its energy consumption, while coal fills 67% of its needs after a remarkable drop in coal consumption since 1997.15 Some 60% of India’s requirements are also met by coal, which thus accounts for 46% of the region’s total energy use. Over the region as a whole, the proportion of energy requirements accounted for by oil is 38%, which is

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slightly below the average for the world; the proportion accounted for by natural gas (8%) is substantially less than the world average, while hydropower accounts for a mere 1.4.16 This energy mix, with 84% of Asia’s energy composed of coal and oil, explains why the region is a leading source of carbon emissions. More remarkable still, Asian per capita energy consumption is barely half the world average. The US consumes eleven times more energy per capita than China, and nearly twenty times more per capita than India.17 But the more developed economies of the region – Japan and the ‘Four Tigers’ – have per capita energy-consumption levels closer to those of Europe and the US. At the same time, the level of energy efficiency, measured in energy use as a percentage of GDP is the inverse. China, for example, requires roughly four times the oil equivalent in energy consumption per $1,000 of GDP than the US, and nearly ten times more than Japan, an unusually energy-efficient economy.18 Yet China’s per capita oil consumption is nearly twice that of India. The differences are of similar proportions with respect to electricity consumption, with China’s per capita usage about 8% of the OECD average, and India’s just over 3%.19 By this evidence, advanced industrial economies with higher living standards tend to have much greater energy use per capita than developing nations, but their consumption levels tend to be relatively static, or may even decline slightly. Energy intensity – the amount of energy needed per unit of GDP – tends to diminish in post-industrial societies that have moved to more service- and knowledge-based economies. By contrast, predominantly agriculture-based economies (e.g. in China, India, and Thailand) tend to use large amounts of non-commercial energy (e.g., biomass), but, as they modernise, move towards higher energy intensity and greater use of oil products. Much of this demand growth comes from transport and domestic use, as the economy in question blossoms and a large urban middle class materialises. Asian oil demand has thus expanded rapidly, while even greater increases in electricity demand have led to frequent fears of ‘brownouts’ disrupting industry and private life. The striking example of Korea, where energy demand tripled in 1975–92 and oil demand quadrupled in 1985–95, may not be replicated in nations such as India and China, which are much larger, more rural and more segmented in terms of development. Yet the minuscule per capita energy consumption figures of both India and China – even compared to other Asian economies – foreshadow qualitative leaps in energy consumption over the coming generation. The recent experience of several South-east Asian states may be instructive. In dynamic Association of South-East Asian Nations (ASEAN) economies such as Thailand, Malaysia, and Indonesia, which are less developed and less economically complex than South Korea, fledgling middle classes clustered in major metropolitan areas and quickly obtained motorised transport. In Thailand, for example, personal automobile purchases increased by nearly 18% annually during 1985–92. Prior to the 1997 crisis, automobile purchases in Thailand and other South-east Asian economies were increasing

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78 Robert A. Manning by nearly 30% annually. Even so, each of these economies still has significantly less than half Japan’s automobiles per capita.20 Such consumption trends suggest immense potential energy demand growth if, as projected, the Asian population increases by some 500m people in the first two decades of the twenty-first century. Consider China alone, which accounts for roughly half of Asia’s energy demand. Until the mid-1980s, few Chinese had household appliances. Now, most urban Chinese have televisions (280m in total), stereos (300m), and fans, and about half of them own refrigerators and washing machines. Since 1978, the number of air-conditioning units has grown more than fifty-fold.21 During the 1984–96 period, residential electricity-consumption more than quadrupled. Yet China’s per capita electricity consumption is only 8% of the OECD average.22 For many Chinese families, an automobile is next on the wish list. About half of the growth in world oil demand over the next two decades, according to the Energy Information Agency (EIA), will come from the transportation sector, and in the Asia-Pacific the transport sector may well account for an even larger portion of regional demand growth.23 All these factors raise the question of how much oil is likely to come from regional producers. Is Asian oil production approaching its peak, or is there more room for growth? Many forecasters appear to have been unduly pessimistic about the prospects of Asian oil production. They point to the fact that in 1998, AsiaPacific production was 7.65m b/pd., just over 10% of world production, yet the region included just under 5% of world reserves. Asian oil states have a modest 18-year average reserve-to-production ratio, that is, life of proven reserves at current rates of production, of less than half the world average of 43 years.24 China, producing 3.2m b/pd, accounts for about 40% of Asian oil production, with Indonesian production roughly half that of China, or 1.6m b/pd. India, Malaysia, Brunei, Vietnam and Papua New Guinea account for the rest of the region’s yield. Indonesia, Malaysia, Brunei and Vietnam are the only net oil exporters in the region, and some forecasts suggest that they may be net importers by 2010.25 Nevertheless, there is reason to believe that analyses forecasting declines in Asian production over the next decade may be overly pessimistic. To be sure, exploration efforts in the East and South China Seas, and in western China’s Tarim Basin, have left Western oil firms rather sceptical about prospects of any major new commercial discoveries.26 Yet, the pessimists may be underestimating the potential of existing oil fields. Among four prominent analyses, predictions of total Asian oil production range from a decline of 1.1m b/pd to essentially maintenance of current levels.27 However, extrapolating from the growth in North Sea oil reserves between 1975–95, which defied all predictions, Paul Hornswell makes a cogent case that it may be possible to raise Asian regional production to 9m b/pd or higher by 2010. The obstacles to enhancing production in existing Asian oil fields, he argues, are principally government policies, not geology. This view is shared by a number of Western oil company officials.28 Achieving higher production may be possible only if Asian

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producers remove the impediments to investment in better exploration technologies (for example, 3-D and 4-D seismic and directional drilling) that can improve and prolong output. The principal culprits appear to be complex price-setting and taxation regimes, particularly in Indonesia, the most stagnant producer, and Vietnam, as well as inefficient industrial structures that could be liberalised to offer more investment incentives. Natural gas, despite steady growth of almost 18% annually, still only accounts for less than 10% of Asia-Pacific primary energy consumption, far below OECD levels of about 26%. There is great potential for the expansion of Asian gas production: Indonesia, Malaysia and Brunei are already major exporters. Natural gas resources in China are under-explored, and are likely to prove substantially larger than the current 48 trillion cubic feet of proven reserves (more than half those of Indonesia).29 Moreover, there are massive natural gas resources in the Russian Far East, whose proportion of world gas reserves is roughly the same as the proportion of world oil resources accounted for by Saudi Arabia. Several pipeline schemes for the region are under consideration. Although infrastructure and delivery capacity will develop gradually over the next two decades, gas from these sources will eventually substitute for coal and oil in power generation. Thus, gas will be increasingly important in avoiding one of the key strategic bottlenecks in economic growth – critical electricity demand in the region.30 Meanwhile, large reserves of lowsulphur coal in Indonesia and Australia will seek export markets. In light of the growing environmental factor in energy choices, this relatively clean energy source, available within the region, will almost certainly take off as an increasingly popular Asian fuel over the next two decades. Indeed, concerns about industrial pollution and global warming constitute a further complicating factor for Asian energy futures. For example, on top of horrendous pollution in major Chinese cities, acid rain from the use of coal – especially in the Manchurian ‘rust belt’ – has become a problem for North-east Asia generally. Yet large coal reserves in China and India make it unlikely that either country will shift quickly to less polluting fuels. Likewise, public anxieties about nuclear safety as well as the problem of managing nuclear waste are likely to limit the growth of nuclear energy in Japan, South Korea, and Taiwan. For China, the larger impediment is cost, but the effect is the same: a major scaling-back of nuclear energy plans.31 And even the most optimistic projections of China’s expansion of natural gas, hydropower, and/or nuclear energy resources do not envisage a reduction of its reliance on coal below 60% of energy requirements by 2020.32

The Asian–Middle East Energy Nexus
Prudently assuming no major new finds and no advances in efficient extraction, any increase in Asian production will affect the Asia-Pacific regional oil deficit only at the margins. Thus, in November 1999, President Jiang Zemin made the first-ever visit by a Chinese head of state to Saudi Arabia, heading to Damman, the heart of Saudi oil country, after a stop in Riyadh. That China, one

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80 Robert A. Manning of the world’s largest oil producers, is diligently cultivating energy ties to the Saudis and other major Gulf producers indicates Beijing’s concerns about the limits of Asian production. The dominant trend is one of growing Asian oil dependence on the Middle East. Already, over 60% of Middle East oil exports go to Asia, and some 70% of Asian oil imports come from Middle East producers. Moreover, the oil throughput for the three major Asian refining centres – Singapore, Japan and South Korea – is overwhelmingly from the Middle East.33 As oil commerce in increasingly global and transparent markets has come to be shaped more by transport costs than political relationships, a largely bifurcated global market has arisen: oil flows from the Middle East gravitating to Asia; oil supplies from the Western Hemisphere (Mexico, Venezuela, Colombia and Canada), and the Atlantic Basin (the North Sea and West Africa) to a large degree displacing Gulf oil in the US market. According to oil economist Fadhil Chalabi, a former senior official of the Organisation of Petroleum-Exporting Countries (OPEC), by 2010 ‘the share of the Middle East’s oil exports going to the Asia-Pacific region as a whole is expected to rise … to 66% … Interdependence between the Asia-Pacific and Gulf regions in the oil sector is firmly entrenched’.34 Indeed, the Asia-Pacific is likely to take some 95% of its total oil imports from the Middle East by 2010, totalling 20-24 m b/ pd by 2020.35 The strategic significance of new energy linkages between two potentially turbulent regions has not been delineated. Is it principally a benign commercial relationship, or could it ‘fundamentally challenge the prevailing Westerndominated political order,’ as one prominent analyst has suggested?36 This latter scenario conjures up an Islamic–Confucian civilisational alliance, one of the West’s worst nightmares. Even if one views the connection less apocalyptically, what are its geopolitical implications for Persian Gulf security, for Asian security, and for the US role in the both South-west and East Asia?

Geoeconomics or Geopolitics?
The implications of the Middle East–Asian oil nexus may be divided into three categories: the near-term (to 2010) and tangible; the long-term and intangible; and potential nightmare scenarios. Both sides are keenly aware of their respective imperatives: the need to ensure customers on the part of Gulf/Middle East exporters; and the need to ensure oil supplies on the Asian side. ‘For the first time we are focusing on Asia,’ declared former Saudi Oil Minister and senior OPEC official Ahmed Zaki Yamani in 1998, reflecting fears at the time of the impact the Asian crisis would have on OPEC. ‘Asia can play a crucial role in helping to improve OPEC’s prospects.’37 Asians are investing in upstream oil and gas sectors in the Middle East, while OPEC Middle East exporters are investing in downstream Asian activities. In 1995, Beijing decided to import 3.5m tons of crude oil from Saudi Arabia annually (less than 1% of Saudi production). Chinese President Jiang Zemin
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brought in an entourage of Chinese business officials, signed oil cooperation agreements, and discussed a $1.5bn refinery and petrochemical complex in southern China that would use Saudi oil.38 He has characterised China’s evolving relationship with Saudi Arabia as a ‘strategic oil partnership’. China has also invested in oil fields in Iraq and Iran since the mid-1990s. Similarly, Malaysia’s state-run Petronas is in a joint venture with European companies to develop the South Pars gas fields in Iran as well as oil fields in Iran and Yemen. Both India and Indonesia have explored investing in the Tuba oil field in Iraq, pending lifting of sanctions. Japan too has steadily cultivated Gulf producers, investing in Saudi Arabia, Abu Dhabi, and Oman, and taking, along with South Korea, a stake in an operation in Qatar to produce liquid natural gas (LNG). Further, Japan has helped to develop the Khafji oil field in the Neutral Zone between Saudi Arabia and Kuwait. Japan has also started to pursue major investments in Iranian oilfields. In the other direction, OPEC Middle East producers have been seeking to deepen their economic ties with Asia, with an emphasis on downstream activities such as refining. The Saudis have been perhaps the most active in this area over the past decade. In 1991, Saudi Aramco bought for $470m a 35% stake in Ssangyong Oil Refining Co, the third largest refiner in South Korea, and may increase this stake. Saudi Aramco also purchased a 40% stake in Petron, a major Philippines refiner in 1995, and, in 1997, an Exxon joint venture to expand a refinery in China’s Fujian province from 80,000 b/pd to 240,000 b/pd capacity. In addition, the state firm simultaneously formed a partnership with Royal/Dutch Shell to invest in Asian downstream ventures. Kuwait has also cultivated Asian importers, and Qatar has tried to lock in long-term gas contracts with India, China, and Japan. Iran has agreed to increase oil imports to China and to build a joint refinery in China.39 These energy investments in both directions are in an early, and to some extent, exploratory phase. But clearly, as the oil and gas relationship with Asia expands over the coming decade, there will be an enormous volume of capital flows into the OPEC Middle East producers. According to one estimate, by 2010, if Asia is importing 17m b/pd from the Middle East at $20 a barrel, the result would be capital transfers to the Middle East of $124bn annually.40 Even in today’s global financial markets, where nearly $2 trillion a day floats through cyberspace, that is serious money. Such revenues could, in part, be recycled into downstream investment in dynamic Asian economies. Expanding capital flows to the Middle East would also go some distance towards ameliorating a growing list of problems in major oil-exporting countries such as Saudi Arabia, Kuwait, Iran and Iraq. Riyadh, for example has seen a significant decline in living standards over the past 15 years, has a large demographic bulge of young adults to absorb into its economy, and has accumulated foreign debt of $130bn. By the same token, in the slightly more distant future, such capital flows could also accelerate efforts to obtain a new cycle of modern weapons, including weapons of mass destruction. If at least the rough outlines of the anticipated economic and financial consequences of the Middle East–Asian
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82 Robert A. Manning energy relationship for the global economy are discernible, the political and security implications enter the realm of the intangible and the speculative. In the 1930s, it was energy security that led Japan to occupy Indonesia (then the Dutch East Indies) and take control of its oil fields. Indeed, the US oil embargo was an important factor leading Tokyo to attack Pearl Harbor, bringing the US into the Second World War. Some analysts see in China, a rising power with a new-found energy dependence, the potential for twenty-first century repetition of these experiences. ‘The problem for Asian stability, growing with each barrel of Chinese oil imports, is now clear,’ writes Kent Calder in an influential book on energy and security in Asia. ‘It is the danger that China’s attempts to safeguard its oil supply lanes and defend its historical sovereignty in adjacent seas poses for other nations, especially Japan. China claims 80% of the South China Sea as territorial water, 70 per cent of Japan’s oil supplies pass that way.’ Thus, this logic runs, ‘as Chinese imports steadily rise, defending the fragile sea-lanes to the far-off Persian Gulf becomes a new security imperative for the PLA Navy.’41 Such speculation begins to move from the merely intangible into the category of nightmare scenarios, in which China deploys destroyers and aircraft carriers to interdict tanker traffic in a confrontation over the disputed Spratly Islands in the South China Sea, goes to war with Japan over the virtually uninhabited Senkaku islands, or, worse still, allies with Iraq or Iran in a future Gulf war. It is easy to conjure up such scare stories. The number of oil tankers navigating the waters of the Indian Ocean, through the straits of Malacca and the South China Sea for ports in Pusan, Yokohama and Shanghai, in the two decades ahead are likely to increase three-fold. But whether this prospect poses a security threat depends to a considerable degree on whether China elects to view energy security geostrategically or geoeconomically. The ‘looming conflict’ model seems to be based on some neo-mercantilist assumptions, reminiscent of nineteenth-century and pre-Second World War interstate relations in Europe. Certainly the Asia-Pacific has more than its share of nationalism, historical grievance and ethnic antagonism. Yet thus far these problems have not tended to manifest themselves in the same way as in European nations before the First World War. In any event, there does not appear to be any imminent shortage of oil, nor is a shortage likely over the next quarter-century even if high-end demand projections are realised. A study by the Baker Institute at Rice University, based on median assumptions of a crosssection of prominent industry consultant groups, concluded that, even liberally assuming Chinese demand of 7.1m b/pd by 2010, if non-OPEC production grew at 1% (a conservative forecast), the result would be a modest oil surplus and prices under $20 per barrel.42 Indeed, the Saudis and other Gulf states could fill most of the increased import needs of Asia-Pacific nations. And, in contrast to the situation prevailing during the 1930s, the oil market today is globalised, transparent and computerised, much like modern financial markets. Foreign investment, long-term futures contracts, and the build-up of strategic petroleum reserves are more efficient ways to safeguard supply than territorial aggrandisement.
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To put Asia’s projected oil demand in perspective, it is worth recalling that US oil imports grew from 1.8m b/pd in 1960 to 8.8m b/pd in 1977 without creating crisis competition from other importers. In the same time frame, oil demand from Europe and Asia combined rose from 4.5m b/pd to 19m b/pd. Yet, by the mid-1980s, after the twin oil shocks of 1970s, oil prices were in a downward spiral. A rise in Asian oil imports from about 12m b/pd in 1999 to 25m b/pd by 2020 would be in a comparable range, and there is no reason to think it could not be similarly accommodated by world markets. Morever, such projections do not factor in such technological developments as the mass marketing of hybrid or fuel-cell autos likely to occur well before 2020, which would dramatically reduce oil demand. And there is always the possibility of entirely new technologies that might reduce demand even further. Furthermore, China has not had a blue-water navy for nearly six centuries, since the days of Admiral Zhang He in the Ming Dynasty. Neither, of course, has it been heavily dependent on foreign energy sources for the past six centuries. In any case, while Chinese military modernisation continues apace, it is unlikely that China will obtain the air and sea-force projection capabilities to challenge the United States in the Gulf or in the Pacific for at least the next two decades.43 Moreover, with respect to the Persian Gulf, China appears to be behaving more geoeconomically than geostrategically. The Persian Gulf is not an area where China historically has had ties or compelling strategic interests. Chinese exports to the entire Middle East are less than $5bn. Beginning with the Iran–Iraq war, it is true, China became a major arms supplier in the region, particularly of missiles and other weapons of mass destruction to Iran. But as its Middle-East oil dependency has grown, China’s arms sales to the region have tapered off – pointedly to its most troubling customer, Iran. Beijing’s ties to its other major arms client, Pakistan, bear no relation whatsoever to energy. In the late 1980s and early 1990s, Beijing had sold C-802 missiles and other sophisticated military equipment to Tehran, and planned to build in Iran two nuclear plants and a hexafluoride plant, which could have facilitated Iran’s efforts to join the nuclear club. Some analysts have suggested that China pulled back because economically troubled Iran was in arrears to it for some $900m.44 Another factor may have been Beijing’s desire to improve relations with the United States. But it also may be the case that China has reconsidered its military dealings with Gulf and other Middle East nations in light of its growing dependence on oil from the region. Beijing may see some common interests with the US in Middle East peace and stability. The possibility of a C802 missile hitting an oil tanker carrying crude to China may have occurred to Chinese policy-makers. While China’s behaviour remains somewhat ambiguous – selling technology and expertise, or, in some cases, all-but complete systems rather than whole weapons systems – the tilt of China’s policies on missile and nuclear proliferation has been steadily in the direction of international norms embodied in the Non-Proliferation Treaty, the Chemical Weapons Convention, the Comprehensive Test Ban Treaty, and the Missile Technology Control Regime standards.45 At the same time, Beijing’s relationship with Israel has flowered,
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84 Robert A. Manning and China has supported the Middle East peace process. During the 1990–91 Gulf War, Beijing acquiesced in US-led efforts to counter Iraq’s invasion of Kuwait and with subsequent sanctions. On balance, therefore, China’s top priority in the Middle East at the moment appears to be the enhancement of economic relationships bearing on energy security rather than geopolitical intrigue.46 Other Asian energy importers dependent on the Middle East are also likely to have a new appreciation for stability in the Persian Gulf. Insofar as oil is a globalised commodity, a disruption anywhere is a price spike everywhere. Thus, mere geopolitical access to the strategic resource will not yield the accessing party the best price. What matters, rather, is who gets what long-term contract. This is a point US officials have repeatedly made to China in an effort to persuade Beijing that missile sales to Iran, for example, may not be in China’s best interest. But even Asian nations’ geoeconomic pursuit of energy security vis-à-vis the Middle East may pose geopolitical problems. The United States will be the guarantor of stability in the Persian Gulf for the foreseeable future. China and other Asian oil-importing nations are essentially free-riders. Washington might want to encourage China’s freeriding for the sake of stability. On the other hand, at some point Chinese nationalism and sovereign pride could hold sway, so that Beijing is no longer comfortable remaining the benefactor of the American security guarantee. There may also be some future regional crisis during which China or India, for instance, must decide whether, directly or indirectly, to support US actions that may adversely affect their economic relationship to its Middle East oil or gas suppliers.47 In these circumstances, it is possible that the collective economic weight and shared interests of Asian and Middle Eastern states might unite them politically against the United States, if they perceive it behaving like a global bully or acting against their respective national interests. Conversely, the resources that the US is protecting in the Gulf increasingly go elsewhere – mainly to Asia, secondarily to Europe, but only marginally to the US itself. It can be argued that, since oil is fungible, the US does benefit from its role in the Gulf in any case. Yet there remains a burden-sharing problem. US allies in Europe lack the capacity, and to some degree the political will, to assume more political-military responsibility. Japan is constitutionally prohibited from assuming a proactive military role, and, certainly for the foreseeable future, is not likely to have a Japanese (let alone regional) mandate to project power a great distance from the home islands. As a consequence, there is some possibility that the Congress will at some point reduce or withdraw its support for an extensive American military role in the region, if those directly benefiting from the United States’ stabilising function do not assume their fair share of responsibility. Such issues cannot be completely resolved before they arise, of course. How they are eventually handled will depend in large measure on how Asia-Pacific nations conceive of energy security, how the political environments both in East Asia and the Middle East evolve, and what the energy picture looks like a

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generation hence. Perhaps the most worrisome problem concerns outmoded perceptions, the ‘scarcity’ view of energy security. The view is outmoded because it suggests illusory solutions. Even if China were to acquire 15 aircraft carriers, such military capability would offer little energy security if a revolution in Saudi Arabia halted much of Gulf production. As the experience of Western nations in the 1970s demonstrates, the most likely threat to energy security is one of short-term disruption. Energy cooperation, increased energy efficiency and 90-day strategic petroleum reserves were the Western response. Therein may be important lessons for Asia. For now, it suffices to note that the emerging economic relationship between the two most prominent non-Western civilisations on the Eurasian landmass has become a central reality in world-energy markets.

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Notes
1

See Daniel Yergin, ‘Asian Energy Needs and Security Implications’, paper for the International Institute for Strategic Studies, September 1997, p. 36; Daniel Yergin, Dennis Eklof, Jefferson Edwards, ‘Fueling Asia’s Recovery’, Foreign Affairs, vol. 77, no. 2, March/April 1998, pp. 34– 50. 2 For purposes of analysis, East Asia refers to Japan, China, the two Koreas, the nations of ASEAN, and Australia. References to Asia or Asia-Pacific encompass the three categories for the region used by the IEA – East Asia, China, and Pacific countries in the Organisation for Economic Cooperation and Development (OECD) plus India. 3 British Petroleum, Statistical Review of World Energy, 1999, p.10. 4 See Keun-Wook Paik, Gas and Oil in Northeast Asia (London: Royal Institute of International Affairs, 1995), pp. 3–5. 5 The most dynamic and rapidly growing economies – Japan and the socalled ‘four tigers’ of South Korea, Taiwan, Singapore and Hong Kong – possess virtually no hydrocarbon resources. 6 The logic of energy security is based on an interrelationship of resource scarcity and territorial dispute that leads to conflict. The most cogent and frequently cited articulation of this is given in Kent E. Calder, Asia’s Deadly Triangle: How Arms, Energy, and Growth Threaten to Destabilize Asia-Pacific (London: Nicolas Brealey Publishing, 1997), published in US as Pacific Defense (New York: William Morrow, 1996). See also Kent E. Calder, ‘Asia’s Empty Gas Tank’, Foreign Affairs, vol. 75, no. 2, March–April 1996; and Mamdouh G. Salameh, ’China Oil and the Risks of Regional Conflict’, Survival, vol 37 no. 4, Winter 1995–96. 7 For an analysis of the financial crisis see Robert A. Manning, ‘The Asian Financial Crisis: Security Risks and Opportunities’, paper presented to the

May 1998 Pacific Symposium, Institute of National Strategic Studies, National Defense University, Washington DC. 8 British Petroleum, Statistical Review of World Energy, 1999. 9 For a discussion of the contentious debate among economists, see International Energy Agency, World Energy Outlook, 1998 (Paris: International Energy Agency, 1999), pps. 276–278. There is great doubt about the accuracy of official Chinese growth statistics. See also Angus Maddison, Measuring Chinese Economic Growth and Levels of Performance (Paris: Organisation for Economic Cooperation and Development, 1997). It appears that official growth figures have been overstated by 2–3% since 1954. 10 Petroleum Intelligence Weekly, 24 October 1999, p.14. 11 Institute for International Finance, www.iif.com; also G. Pierre Goad, ‘Opening the Money Tap’, Far Eastern Economic Review, 7 October 1999, pp. 84– 85. 12 International Energy Agency, World Energy Outlook and the Impact of Economic Turmoil in Asia on Oil Prospects, (Paris: International Energy Agency, June 1999). Also International Monetary Fund, 1999, World Economic Outlook. 13 Energy Information Agency International Energy Outlook, 1999 (Washington DC: US Department of Energy), p. 141. 14 Northeast Asian Energy in a Global Context (London: The Royal Institute of International Affairs, 1996), p. 11. 15 See BP-Amaco Statistical Review of Energy 2000, p.33. 16 Author’s calculations derived from British Petroleum Statistical Review of World Energy, 1999; and Ichizo Aoyama and Richard Berard, The Asian Oil Imbalance 1996-2010, research paper for study of Persian Gulf energy, James A. Baker II Institute for Public Policy, Rice University, Houston, TX, 1997.

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The Asian Energy Predicament 87 Moreover, China’s per capita oil consumption is less than that of the US by a factor of almost 22 and that of South Korea by a factor of 13. 18 Author’s extrapolations based on calculations in Paul Hornswell, Oil in Asia (London: Oxford University Press, 1997), p. 22. 19 Northeast Asian Energy in a Global Context, p. 3. 20 World Automobile Association, 1999. 21 China Energy Databook, Jonathan Sinton (Berkeley, CA: Lawrence Berkeley Laboratory, 1996). Statistics produced by the Chinese State Statistical Bureau; Author’s calculations. 22 Author’s calculations based on IEA and Asian Development Bank energy statistics. 23 See EIA International Energy Outlook, 1999. 24 British Petroleum Statistical Review of World Energy, 1998. 25 ibid. 26 It is possible that Tarim will prove to contain 20bn barrels of commerciallyextractable oil, and that the South China Sea holds 100 trillion cu. ft of natural gas, but so far no major oil companies believe either to be the case. 27 See Paul Hornswell, Oil in Asia, Chapter 10, pps. 251–277. 28 ibid., Chapter 10, and interviews with executives from three major oil companies active in Asia, Beijing, September 1999. 29 This assertion is based on numerous interviews with Chinese energy officials and Western oil and gas multinationals, 1998–1999. 30 For ideas on an ASEAN energy grid, see, APEC Energy Working Group, www.apecenergy.org; for ideas on a North-east Asia gas grid, see KeunWook Paik, Gas and Oil in Northeast Asia. Both are still at an embryonic stage of development. 31 Interview with Chinese nuclear officials in Beijing and Guangzhou,
17

March 1999. Author’s calculations based on a presentation by Fereidun Fesharaki to the Council on Foreign Relations Energy Security Study, 29 July 1998, Washington DC; also interview with US Department of Energy official, June 1999. 33 This was the result of several factors including Middle East production cutbacks to maintain high prices in the early 1980s; reduced Asian (particularly Japanese) demand, in response to the two oil shocks; diversification from oil; increased efficiency of industrialised Asian consumers; and growth in Asian production. See Paul Hornswell, Oil in Asia, Chapter 11, for a detailed discussion of oil supply relationships, particularly pricing, in the Dubai forward market and the Saudi ‘Asian premium’. 34 Fadhil Chalabi, ‘Gulf-Asia Energy Interdependence’ in John Calabrese (ed.), (Washington DC: Middle East Institute, 1998), pp. 13–21. 35 EIA International Energy Outlook 1999; and Fereidun Fesheraki, Pacific Energy Outlook: Strategies and Policy Imperatives to 2010, (Honolulu, Hawaii: East-West Center, March 1995) (paper). 36 Kent E. Calder, ‘Asia’s Empty Gas Tank’. 37 Speech by Ahmed Zaki Yamani to the Eighth Annual Conference, Centre for Global Energy Studies, London, 27 April 1998. 38 South China Morning Post (internet edition), 4 November 1999, www.scmp.com; and China Daily 4 November 1999. 39 Middle East Digest, 9 June 1995, www.icej.org.il/. 40 Cited in Ichizo Aoyama and Richard Berard, ‘The Asian Oil Imbalance 1996– 2010’, working paper for Middle East and the Gulf study, James A. Baker II Institute for Public Policy, Rice University, Houston, TX, 1997. 41 Kent E. Calder, Asia’s Deadly Triangle:
32

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How Arms, Energy and Growth Threaten to Destabilize Asia-Pacific. 42 Ronald Soligo and Amy Jaffe, ‘China’s Growing Energy Dependence’, working paper for China and Long-Range Energy Security study, James A. Baker II Institute, Rice University, April 1999. 43 Financial Times, 6 November 1999, p.1, www.ft.com. 44 Interviews with Chinese officials, Beijing, July 1997, and with US officials Chengdu, September 1997 and Guangzhou, February 1998. 45 See Bates Gill, ‘Chinese Arms Exports to Iran’, Middle East Review of International Affairs (MERIA), Internet edition, vol. 2, no.2, May 1998, www.biu.ac.il/SOC/besa/meria/. See also Bates Gill, ‘Two Steps Forward, One Step Back: The Dynamics of Chinese Non-Proliferation and Arms Control Policy-making in an Era of Reform’, in David M. Lampton (ed.), Chinese Foreign and Security Policy Decision-making in an Era of Reform, 1985–2000 (forthcoming). 46 See Jonathan Rynhold, ‘China’s Cautious New Pragmatism in the Middle East’, Survival, vol. 38, no.3, Autumn 1996, pp. 102-16, for a discussion of how China balances strategic considerations with the demands of modernisation. 47 See Geoffrey Kemp, Energy Superbowl: Strategic Politics and the Persian Gulf and Caspian Basin (Washington DC: The Nixon Center, 1997) for a thoughtful discussion of the Gulf, Caspian and energy security.

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