Asians fighting the next Asian energy
crisis By Richard Hanson
TOKYO - One of the enduring images of Japan's
oil crises of the 1970s - a cool sartorial safari-wear
statement - occurred during the sweltering summer of
1979 as the price of OPEC-controlled petroleum soared,
threatening the economy in the nation's second oil
crisis; the first oil upheaval had been in 1973.
To champion the cause of energy conservation at
the time, bulldog-faced prime minister Masayoshi Ohira -
anything but a fashion plate - was persuaded by his
advisers to become the poster guy to model an
"energy-saving" suit, as government offices cut back on
air conditioning.
With cameras flashing, Ohira
appeared on stage with a nifty beige safari-type,
short-sleeved jacket, which he wore over a stiff,
buttoned-up white shirt and dark tie. The fashion mavens
mourned.
Two and half decades later, Japan and
other Asian countries are still dependent on oil from
the Organization of Petroleum Exporting Countries
(OPEC). The Japanese government is stepping up its
efforts to bring some order in Asia to the perilously
chaotic state of energy supplies, dysfunctional local
energy markets and, most threatening, a massive
escalation in demand for oil and other energy resources.
At the heart of the message, however, is Japan's
own very real sense of vulnerability, in large part the
result of its own gross failure to provide for a sound
energy policy despite the experiences of the first two
oil shocks of the 1970s. Japan made some emergency
progress at the time. But the fact that Japan is hardly
much more secure now than it was three decades ago is
not comforting.
Before the first oil crisis in
1973 when OPEC quadrupled prices, oil represented 75
percent of all energy consumed in Japan. Oil fell to 50
percent of all energy after the crises hit, but the
government has failed to lower the ratio of oil
dependence any further. The biggest weak point is that
87 percent of that oil still comes from the unstable
Middle East (domestic oil production is tiny). Other
countries in Asia, notably South Korea, have also stuck
with Middle Eastern suppliers. The incentives for doing
so are high: Saudi Arabia, for example, "imports"
construction projects and manufactured goods from South
Korea.
China's booming economy demands oil
imports Other oil-producing countries in the
region are only marginally more secure. Oil-guzzling
China, which used to be an oil exporter, began importing
in 1992. Some projections see oil-producing states such
as Malaysia and Indonesia turning to more imported
energy within the next decade.
Saudi Oil
Minister Ali Naimi recently pledged "stable" oil
supplies to its customers - including South Korea and
Japan - in return for cooperation in building power
plants, petrochemical plants and other large, long-term
infrastructure projects. The Saudis, according to news
reports, are having trouble attracting US and other oil
companies because of the risks and and instability in
the region. Japan, however, recently signed a major
oil-project agreement with Iran in which it it will
develop and secure supplies from a new oilfield not far
from the Iraqi border.
That is a good reason to
pay attention to Japan's efforts to rally the energy
troops among the members of ASEAN-Plus-3, the
Association of Southeast Asian Nations plus Japan, China
and South Korea. Japan's motives include a high priority
on straightening out its own domestic energy dilemma,
which includes the absence of any credible futures
market in energy and bureaucratic rivalries within in
the government.
Here's what the government is up
to:
On Monday, the Ministry of Economy, Trade
and Industry (METI) released a draft document proposing
an "Asian Energy Partnership". This would be a major
pillar of Japan's own "international energy strategy
toward the year 2030", which was presented to METI
Minister Shoichi Nakagawa and his advisory committee for
natural resources and energy.
This report in
turn is a follow-up to a key gathering of regional
energy ministers in December 2002, which was convened at
Japan's behest in Osaka, in western Japan. At the time,
all energy-consuming countries were sharply focused on
the repercussions of a pending war by the United States
and its allies in Iraq. After the proven reserves of
Saudi Arabia, Iraq holds the world's second-largest
cache of oil.
Asia's common energy
problems At Japan's initiative, the emphasis then
(and now) is on what is called the "common problem" in
Asia - a chronic lack of oil stockpiles, uncertain oil
and other energy supplies and volatile prices, which are
made all the worse by the absence of any regional energy
commodities markets.
The Osaka meeting was
conceived as the US president, George W Bush, in
September 2002 made it clear that Iraq was to be on his
agenda of wars against the "axis of evil". Under such
trying circumstances, the participants agreed on five
priorities:
Establishing an emergency network among themselves.
Building up oil stockpiles.
Strengthening Asian crude-oil markets to make them
more transparent and market-like.
Developing natural-gas resources.
Building renewable energy sources (like standing
things in the sun) and conserving energy.
That
list speaks barrels about how little progress has been
made since the first oil crises struck in the 1970s. The
question is whether Japanese energy officials can get up
the momentum to push a sensible agenda for Japan's own
markets and energy behavior in setting an example for
the rest of Asia.
Unfortunately, the rest of
Asia is behaving much as Japan did in the 1960s when it
set itself up for the first oil crisis of 1973. History
may teach lessons, but they tend to be very fluid when
oil is involved.
First there is the fast
economic growth in a neo-capitalist China, and other
booming countries, which has made matters all the more
urgent in a region that has long paid the price of
disorganized energy markets and fragmented political
interests. That lack of any central or regional clout
has left the region as a whole subject to higher energy
costs.
Asia pays extra for Middle East
oil Most glaring is the long-standing penalty
paid in the market for crude oil, overwhelmingly
dependent on the Middle East, known as the "Asian
Premium" on the crude it buys, usually adding about US$1
for the consumer on a barrel of Arabian light.
By far, the soaring economic growth in China and
a resulting recovery in Japan and other countries pose
the biggest threat if there is a major oil-supply
problem.
METI's "Asian Energy Partnership?seeks
cooperation among Asian countries on common energy
challenges covering:
Energy security through a strengthened oil-stockpile
program in Asia, seeking a future cooperative emergency
response scheme to supplement the International Energy
Agency (IEA). The idea is a regional version of the IEA
stockpiles, which are mainly set up for Western nations.
Some in Asia don't qualify to join the IEA because they
are not members of the Organization for Economic
Cooperation (OECD), with its roots as a clubby group of
industrialized countries.
Market reform, in particular, for oil and natural
gas, through nurturing spot and future markets of oil
and liquefied natural gas (LNG), trade and investment
liberalization through free-trade agreements, and
abolition of destination clauses in oil and LNG sales
and purchase contracts. Japan is a laggard partly
because of rivalries over which ministries have
authority over futures trading (a stunted activity in
industrial Japan, where futures trading was invented for
rice trading in the 17th century). The Ministry of
Agriculture vies with METI for control. Officials say
they will now cooperate on legislation to promote energy
future trading in Japan. A solid Japanese oil futures
market could provide a "bench" for Asian oil prices.
Environment and energy-efficiency policymaking and
regulation, in domestic, regional and global contexts,
through various policy dialogues and peer pressure.
Energy-supply security through resource development
and transportation (pipeline and sea lane) through
cooperation among relevant authorities. In Japan, the
plan will be adopted as an official policy
recommendation in June. METI is also planning to provide
"input" for the plan to spark the discussions at the
Energy Ministers Meeting of ASEAN, China, Japan and
South Korea and the Asia-Pacific Economic Cooperation
group, APEC. These meetings are scheduled for June 9 and
10, respectively, in Manila.
METI in its press
release said: "It is widely viewed that energy security
will be the key challenge for future Asian economic
growth." METI estimates that Asia, including Japan and
South Korea, will become the largest energy-demand
region in 2030. Asia is expected to rely on about 40
percent of primary energy on oil, of which more than 80
percent will be imported mainly from the Middle East.
Also, Asian consuming countries are paying the so-called
"Asian Premium" on procurement of crude oil, liquefied
petroleum gas and LNG. Some point out that this stems
from the limited function of market mechanisms in Asia
compared with the US.
Unlike prime minister
Ohira's token 1979 gesture with energy-saving safari
wear, the latest initiative will require tough decisions
rather than loosening ties to assure Asia's energy
security in years to come.
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