An Asian Dialogue on Energy Security: A Model for Interdependence

Introduction

Since its discovery in late 19th century, oil has been a strategic commodity. In earlier times, the role of energy was important only in order to provide the fuel needed to fight wars. Later, during the Cold War, oil was considered vital for the growth of industrialized countries. In the post-Cold War period, oil gained even more importance because of its impact on the growth of the global economy and on the globalization process.  Nowadays, the significance of oil production has reached such a milestone that the issue of global energy security and concerns about it were placed at the top of the agenda in the recent summit of the G-8.  Given the world’s growing need for energy, if there is no interaction and understanding between energy producers and consumers in the future, these concerns will increase.

The increase in energy consumption in Asia during the last decade and the likelihood that this trend will continue has highlighted the importance of energy-related issues on the continent. There is a great opportunity in Asia when it comes to energy:  Its western region is an energy supplier, and its eastern region (plus India) is an energy consumer. This opportunity can be realized if different sides can work out a framework for cooperation on this axis of energy.  The field of energy can create the grounds for beginning a constructive dialogue that could lead to the creation of an “East-West interdependent axis,” which would eventually pave the way for the establishment of an Asian model for energy security.

The Evolution of the Concept of Energy Security

The concept of energy security has changed over the years.  During the 1950s, energy security meant the need for the protection of the supply of energy to ensure its availability for consumers.  This was especially true for the great powers in times of war. During the Cold War, energy policy went beyond the military sphere, and energy trade and transactions found a pivotal role in driving the economies and development of numerous industrialized countries.  Because of this need for energy, any inflation shocks or disruptions of the energy supply had negative impacts on the economies of major oil and gas importers and led to global economic crises, which in turn affected energy producers.

Oil crises in the 1970s reduced the GDP growth rates of most Western states, increased their inflation rates, and in some cases led to economic stagnation. The importance of oil in the development of industrialized states turned energy security into a transnational and global issue. This issue has attracted even more attention in the post-Cold War period. The increasing gap between energy production and consumption at the international level has become an important issue in discussions about international security. In fact, in the 1990s greater global openness linked the issue of energy to the world economy.  Some experts regard security as protecting countries’ domestic economies against price fluctuation and inflation, as well as safeguarding economic growth rates, welfare transfers, and international economic and financial systems. [1]  Thus, today the issue of energy security has gone beyond the simple framework of providing military security for oil rich regions, mere energy consumption, and the search for reducing dependency on energy imports.  Indeed, it has become a complex issue. One of the reasons that makes this subject very crucial for both great powers and consumers (this implies that great powers are not consumers) is the rise in the world’s dependency on oil and gas resources.  At least for the foreseeable future, this dependency will have a great impact on the economies of both producer and consumer states. 

In global energy markets, no consumers or producers, regardless of their level of self-sufficiency, can isolate themselves from energy-related constraints, shocks, and fluctuations.  Because energy markets are very complicated and their various actors have divergent goals and motivations, any changes in these markets will lead to alterations in countries’ political, economic and security realms. These developments have compelled oil producers and consumers to interact because neither of them can guarantee energy security on their own. The eruption of any crisis in world energy markets will harm the world economy and affect both sides. In other words, mutual vulnerabilities and common interests at the same time. This outlook could pave the way for creating a model for interdependence among energy producers and consumers.

Energy Demand and Supply in the World

In the past, market forces were able to manage energy crises in relatively quickly.  For instance, the 1970s’ oil crisis, which caused worldwide economic stagnation, resulted in reduced global demand for oil.  Technological advances, a reduction in costs, and increases in productivity on both the demand and supply sides helped resolve this economic stagnation. The myth of vast energy reserves resulted in an over-reliance on market forces and the elimination of arrangements, regulations and controls.

In 1985, when oil prices were low, OPEC had a daily production capacity surplus of 15 million barrels, or50 percent of the total production of its member states and 25 percent of world demand.  In 1990, when Iraq invaded Kuwait; the world production capacity surplus was about 5 to 5.5 million barrels a day, amounting to 20 percent of OPEC’s production capacity and 8 percent of world’s oil demand.  This production surplus did control fluctuations in the oil supply and managed possible crises.

The surplus of oil during the 1980s and 1990s created the feeling that we were all living in a world that enjoyed abundant energy sources.  The Iraqi invasion of Kuwait and the proper management of the subsequent oil crisis amplified this feeling.  This trend was strengthened in the 1990s with the collapse of the Soviet Union, the expansion of globalization and the popularity of the free-market economy system. Even the United States integrated the issue of energy into its political disputes with some countries and created some limitations for the increase of production.  This was because of its overconfidence in oil market stability and the absence of an integrated national energy policy.

However, the optimistic predictions of investments made in the field of energy, which were based on market forces, did not materialize.  Subsequently, production capacity surplus began to decline.  Thus, because of the unfulfilled investments in oil exploration and production in 2001, OPEC’s production capacity surplus was reduced to 2 percent of world demand, and this decline is still continuing. [2]  The most influential factor in setting the price in present oil markets is the acute shortage of production capacity surplus.

According to various studies, global oil consumption will increase by 50 percent within the next two decades. [3]  That means oil consumption will rise from 85 mbd in 2005 to 118 mbd in 2025.[4]  Even a large increase in world gas consumption is expected.  Studies predict that it will increase from 22 trillion cubic feet today to 156 trillion cubic feet  within the next three decades – a boost of more than 70 percent. Furthermore, the demand for natural gas will increase from 23 percent of the world’s energy demand today to 28 percent in 2030, [5]  and energy consumption in developing countries is expected to double by 2025.

 The world is therefore experiencing a mushrooming increase in energy demand and consumption.  Specifically, world markets face a shortage of energy because of the sharp reduction of production capacity surplus and because of the increase in energy demand and consumption. According to a simulation conducted by the U.S. National Commission of Energy Policy in 2005, a 4 percent shortage in daily oil supply would lead to a 177 percent increase in oil prices. These compressed markets have gradually emerged during the last two decades by relying too much upon the self-regulating mechanisms of the energy markets.

Energy Demand and Supply in Asia

The high rate of energy consumption in Asia as well as the continent’s rapid development in the last decade have made providing energy and its security an important challenge for the area.  According to the International Energy Organization, developing Asia (Asia minus Japan and South Korea) will increase its demand for energy by more than 42 percent in 2030, compared to a 26 percent increase in the demand of the United States and Canada. [6]

Figures show that worldwide, 1118 billion barrels of proven oil reserves currently exist --  735 billion barrels of which (62 percent) are in the Persian Gulf region.[7]   40 percent of world’s gas reserves are also situated in this region.  According to predictions, the daily production of crude oil by the Persian Gulf states will increase. Thus, this region’s share of the world’s crude oil production will grow from about 27 percent today to 33 percent in 2020.[8]   At the same time, it is predicted that energy consumption in the developing world will double by 2025.  Based on this prediction, Asia will account for 69 percent of the increase in energy consumption of the world’s developing countries. [9]

The impressive growth of energy consumption in Asia accounts for its large share in the increase of global energy consumption. In Asia's industrializing countries, the average annual energy consumption growth is 3 percent while this rate is 1.7 percent worldwide.  According to the predictions made by the International Energy Agency, Asia's consumption growth accounts for 40 percent of the world's energy consumption. The region's oil consumption will reach 25 to 30 mbd by 2010 --  most of which will be imported from the Persian Gulf region.[10] China alone will import 3 to 5 million barrels of oil by 2010, while it imported 104 million barrels of oil in 1999. [11]

An Asian Model for Energy Security

The increasing need of Asian countries for energy and the necessity of providing it from foreign resources have made energy security a vital issue for these countries.  For this reason, this matter has become a priority on the foreign policy agenda of these countries.

One of Asia’s most important characteristics is its self-sufficiency. In other words, the continent has great potential in terms of resources, technology and manpower, which constitute the main pillars of development and progress.  The world’s main centers of energy supply are in Asia.  At the same time, part of this continent, which is on the path of development, has practically become the most dynamic economic region in the world.  This has dramatically increased the area’s need for energy.

We must adequately tap into Asia’s self-sufficiency.  By expanding interactions among energy supplying countries, which are mostly situated in western and central Asia, and major Asian consumers, which are in the east and south of the continent, exploiting we can make use of Asia’s potential for self-sufficiency while at the same time consolidate interdependence.  These steps will make “Asian solidarity” possible.

The world’s most important energy producers are in West Asia, and the fastest growing energy consumers in the world are East Asia (plus India).  Given the general decline in energy production, particularly oil production, in other parts of the world, West Asia, especially the Persian Gulf, is the only region that can provide reliable energy to world consumers during the next 50 years.  As figures related to world energy consumption suggest, newly industrialized countries along with India have the fastest energy consumption rate in the world.[12] 

The impressive economic growth of East Asia plus India, high rates of urbanization, the unprecedented expansion of transportation, and extensive electricity consumption are contributing to the region’s growing dependency on energy imports.[13]  Hence, providing energy security, especially for major energy consumers, is a significant challenge that requires them to be linked to them to the Persian Gulf region.

Interdependence is emerging among the Persian Gulf, East Asia and South Asia regions.  According to interdependence theory, two actors are in a state of interdependence when they are able to provide for at least one of the strategic needs of the other . Persian Gulf states can manage strategic concerns about energy security, while East Asian countries can meet some of the strategic needs of Persian Gulf countries on issues related to development and security.

It seems that there are common grounds for starting a constructive dialogue aimed at providing a model for Asian interdependence based on energy security. According to this model, West Asia is considered an energy supplier, and East Asia is regarded as a supplier of technology and capital (MOVED HERE FROM BELOW) Energy consumers and producers in the two regions have reliable geographical links, meaning that there are no obstacles disrupting their geographical connection.  More importantly, there are no major political disputes or critical tensions between these regions. 

Iran’s Status in Providing Energy

Iran’s geographic situation gives it the ability to transfer its energy resources from the south, east and north of the country to Asian consumers through pipelines. This is especially true in the gas sector because Iran has the second largest natural gas  reserves in the world, and gas has become a priority in the energy security strategies of Asian consumers. Iran also has the second largest oil reserves in the world after Saudi Arabia, which amounts to 137 billion barrels, or 12 percent of the world’s proven oil reserves.   Iran produces 9 million barrels of oil per day, which is 4 percent of the world’s oil.

Moreover, Iran follows Russia in having the largest natural gas reserves which amount to 27 trillion cubic meters, or 12 percent of the world’s natural gas reserves.  The Islamic Republic of Iran produces 120 billion cubic meters of natural gas a year, which is 5 percent of the world’s gas.

Iran's independent policy in controlling its energy resources, its political stability and its special interest in cooperating with independent Asian countries to establish and consolidate Asian solidarity heighten its potential. In addition, Iran’s 4th Five–Year Development Plan lays out large projects in the country’s oil, gas and petrochemical industries, which are to be implemented with the participation of foreign companies. Working toward the realization of joining the Iran-Pakistan-India pipeline to China can be the first step toward reaching Asian interdependence.  The reason is that in this case, western Asia and Iran can play a major role in providing energy security for the eastern and southern parts of the continent, strengthening the interdependence of the two sides of Asia.  The potential gas pipeline, which has been called the “Peace Pipeline,” would also have a major impact on reducing one of the most important crises in Asia – i.e. the India–Pakistan conflict over Kashmir.  This would be an essential step toward the realization of “peace and development” in an important part of the continent.

In general, given its obvious advantages in terms of oil and gas reserves and its geographical location, Iran can play a positive role in addressing the common interests and reducing the mutual vulnerabilities of these two parts of Asia.  To this end, Iran is currently ready to first establish bilateral dialogues with Asian consumers and later to pave the way for a multilateral dialogue among parties.  This dialogue could be established by emphasizing the possibility of linking Iran's vast gas resources to Asian consumers via pipelines and liquefied natural gas (LNG).  Under these circumstances, Iran can play a pivotal role in Asian cooperation toward establishing a dialogue on energy.[14]

In recent years, relations between Iran and China have expanded and deepened in different fields. This is because of the great potential that relations between these two NATO us have. One of the most significant fields in the development of good relations between Iran and China has been energy.  However, the potential for bilateral cooperation between Iran and China goes beyond the field of energy, and if they are realized, they could have positive political and security consequences.  For example, we can mention Beijing’s potential for expanding its cooperation with the Islamic Republic of Iran, given China’s increasing demand for energy.

 China’s Role in Energy Security

1- Oil

China, which has the highest rate of energy consumption and the most rapid economic growth in the world, undoubtedly has serious concerns about the world’s energy supply because having secure access to energy resources is a necessity for the continuation of its modernization.

China’s swift economic growth compelled it to import oil in 1993, even though it was considered the fifth largest oil producer in the world at that time.  In 2003, China’s high rate of energy consumption turned the country into the second largest oil consumer in the world after Japan. According to statistics, from 1993 to 2003, China’s oil consumption has experienced a 90 percent increase, while during the same period domestic oil production increased by less than 15 percent.[15]   The growing gap between  domestic oil production and consumption will make China more dependent on imported oil than ever before.  China’s need for imported oil has increased from 20 million tons in 1996 to 70 million tons in 2002.  This figure rose to 100 million tons in 2005, and predictions suggest that it will reach 150 million tons by 2010 and 250 to 300 million tons by 2020.  In other words, China’s dependence on imported oil will increase from 30 percent in 2002 to 50 percent in 2007, 60 percent in 2010, and 85 percent in 2030.[16]

  2- Gas

Although at the present time, gas provides only 3 percent of China’s energy needs, the country’s gas consumption is expected to double by 2010.  This is because demand for natural gas consumption in China will reach 120 billion cubic meters by 2010 and 200 billion cubic meters by 2020.  In the most optimistic case, China will have to import between 40 and 80 billion cubic meters of gas a year by 2020.

This is an insignificant amount compared to global and Asian standards.  (The average gas consumption in the world’s energy markets is 28 percent, and among Asian countries, it is 8.8 percent has a great potential. For this reason, the Commission of Development and Reform in China declared that the share of gas in the country’s energy consumption markets should increase to 12 percent by 2020. China’s growing energy needs boosts its potential, especially in the gas sector, for its cooperation with Persian Gulf countries such as Iran.

Given the implementation of large LNG projects between the two countries in Iran’s South Pars gas fields and bilateral negotiations, the export of Iran’s LNG to China could meet some of the country’s needs in the future.

While China’s demand for energy is increasing at a high rate because of the country’s rapid economic growth, it is also becoming more dependent on international energy resources. The intensity of China’s dependency on foreign resources becomes more apparent when we note that although China has enjoyed a high rate of economic growth in recent years, its share of the world GDP is only 4 percent, while the country has 20 percent of the world’s population. Therefore China still has a great potential for increasing its GDP, which would lead to a further rise in the country’s energy consumption.  China will be forced to meet its future energy needs by relying upon foreign resources.  Even though China is currently considered Asia’s biggest energy consumer, it has the lowest per capita energy consumption among regional countries.  In fact, its energy consumption amounts to a half of the average world consumption.

In general, China’s increasing need for energy, combined with its extensive potential for development and insufficient domestic resources, have made energy security a basic element needed for the country’s national security. This element can be secured through international energy resources, particularly those situated in the Persian Gulf.

Building Security

Asia, which is the most dynamic economic region in the world, is considered extremely vulnerable to any disruption in energy supply.  The Persian Gulf region is the most important center for transferring the world’s energy.  These factors have created both competition and conflict in international politics during the post-Cold War era. The occurrence of three destructive wars during the first decade in this region after the end of the Cold War confirms this assertion.  This indicates that the process in the providing security at the regional level could not address the issue of “energy security” as the basic preoccupation of the major energy consumers, which are mostly the main actors in the international scene. On the one hand, this has contributed to the insecurity of regional countries.  On the other hand, it has linked their energy security and hence national security to an “unpredictable” region. This difficult situation has emerged largely because of efforts of the United States and of some of the main actors of the international system to impose a hegemonic security structure on this region. The main goal of this structure is to impose the will of certain actors on others in regional security arrangements.  For example, efforts have been made to eliminate or scale down Iran’s role in regional security arrangements.  A good solution to overcome the challenges to of regional security is to apply the model of “Participatory Security” on regional security arrangements. This model is based on the consultation among all interested actors as well as on their participation.  In other words, according to this model, regional security order is a collective order that result from interaction, cooperation and consultation among all actors. By taking into account the interests of all parties, this model would create necessary stability, consolidation and viability.  Using the potentials of both countries to realize the model of Participatory Security is in fact an effort to make one of the most critical regions -- the Persian Gulf – more predictable in international politics as an important element in securing the national interests of both countries.[17]

Conclusion

The foreign policies of Persian Gulf and East Asian states toward one another can be summarized as follows:

1. Great opportunities based on energy have come about in relations between East and West Asia.  Using these opportunities to improve economic relations requires a mutual willingness.  This new capacity could be used as complimentary economics.

2   The existing opportunities should not be seen only in terms of cooperation in the field of energy,  Rather, their implications for “security” and “Asian solidarity” should be envisaged.   In other words, we should move beyond technical and economic matters and build upon political economy, which entails cooperation.

3. Despite being the center of the world’s oil resources, the Persian Gulf region is one of the most unstable regions of the world.  Because of the important role that energy security plays in developing Asian states and because of the need to prevent mutual vulnerabilities, the establishment of security in this region is essential.

4. Reducing these vulnerabilities requires the cooperation among of East Asian states—this is especially true for major powers in this region. Without the effective participation of East Asian states, providing effective energy security—a public good for all—for these states is problematic.

5. The need for energy and development has created a mutual interdependence between these two regions of the Asian continent.  The management of this situation requires a dialogue among the scholars, elite, and government officials of these regions.    

6. The first step is to design a framework to establish a regular dialogue between the Persian Gulf states and the major energy consumers of Asia in order to study the existing situation, as well as to explore ways to address common interests and to reduce mutual vulnerabilities, which are the two faces of mutual interdependency.