IEEJ: March 2012 All Right Reserved
Special Bulletin
A Japanese Perspective on the International Energy Landscape (77)

February 23, 2012

Strategic Importance and Challenges of Middle East Energy Problems
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
I had an opportunity to visit Qatar’s Doha on February 19-22 to participate in aninternational energy conference and exchange views with energy players in the country. As the ArabSpring destabilization, the tense Iranian situation and other geopolitical risks have led energy players
in the world to pay attention to the importance of the Middle East, I would like to summarize keypoints that impressed me through the exchange of views in Doha.
First, I strongly felt the firm existence of a common view that the center of gravity
regarding energy problems in the world has been shifting. Even at present, the United States,
European countries and other industrial nations belonging to the Organization for Economic
Cooperation and Development are clearly important when energy problems are considered. Over along run, however, non-OECD countries including China, India and other Asian emerging
economies will inevitably grow more important in the international energy market, as indicated bytheir economic and population growth. Long-term energy outlooks of the International Energy
Agency and the Organization of Petroleum Exporting Countries as well as our institute havecommonly projected that Asian energy demand growth will be the largest factor that moves
international energy problems. The exchange of views in the Middle East gave me an opportunity tofeel anew that how to respond to the growing importance of Asia is the biggest issue for energy
players in the Middle East.
The Middle East’s energy demand problems have also surfaced not only as an urgent
challenge but also as a medium to long-term challenge. Energy policy makers in the Middle East
now cannot ignore the seriousness of local energy demand problems which are accelerated byeconomic and population growth and policy-controlled low energy prices. While the Middle East isgrowingly expected to play a key role as the world’s energy supply base, how to respond to
substantial energy demand growth in this region can affect the region’s export capacity and become aproblem that cannot be ignored in the context of the world energy situation.
As Asian and Middle Eastern energy demand growth drives the global demand expansion,
the relative importance of U.S. and European demand will decline. Particularly, the United States
may take advantage of expanding supply of unconventional energy resources to substantially reducedemand for oil and gas imports and depend on neighbors in the Americas for energy imports. Fromthe viewpoint of international energy trade, the strategic interdependence between Asia and theMiddle East will deepen further. In this sense as well, the center of gravity may shift.
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The second problem is that both the supply and demand sides must make huge investments
in response to growing demand amid the shift of the gravity center. According to our institute’s
analysis, $31 trillion in cumulative global investment, including $12 trillion in Asia and $2 trillion inthe Middle East, will be required for the 2009-2035 period in the Reference Scenario where present
supply and demand trends will continue. Asia and the Middle East thus account for nearly a half ofthe global investment. Investment targets in Asia and the Middle East are very different. This is apoint of interest. While the electricity sector (including electricity generation, transmission anddistribution) will account for three quarters of total investment in Asia, the oil sector will capture thelargest share ($835 billion) of total investment in the Middle East, followed by the gas sector ($638billion) and the electricity sector ($600 billion). Large-scale investment will thus be required inresponse to demand growth in Asia and the Middle East. The problem is that there is no guaranteethat timely and appropriate investment will be made.
Rather, the exchange of views has led me to find that it could be difficult to secure
appropriate investment due to a mountain of uncertainties regarding growing geopolitical risks,
relations between investment host countries and investors such as international oil companies, theroles of national oil companies in China, India and other countries, the destabilization ofinternational crude oil prices, domestic energy price problems and other matters. Uncertainties overinvestment can also apply to the case for investment in energy conservation responding to growing
demand, as well as in supply of oil, gas and other energy sources. While great energy conservation
potentials can be expected, no optimism can be warranted about smooth energy conservation.
Third, I strongly recognized the importance of the abovementioned geopolitical risk
problem anew through the exchange of views. Regarding the Iranian situation that has been growing
tense, discussions focused on the impact of the oil embargo, and China’s and India’s responses. I
recognized energy players’ strong interests in safe passage through the Strait of Hormuz. I felt thatwhile many energy players see Iran’s Hormuz blockade as unlikely, they have serious concerns about
the tense regional situation including the possibility of Israel’s preemptive attacks on Iran. Based onthese concerns, they are interested in the impact of some contingency situations. In this sense, we arehighly required to collect and analyze relevant information.
I also became conscious that the Arab Spring destabilization and its impact on the energysituation, though having reduced their media exposure behind the dominant Iranian crisis in Japan
particularly, still exist as important problems in the Middle East. The Arab Spring destabilization has
not fully spilled over to major oil producing countries belonging to the Gulf Cooperation Council.
Given their abundant deep-rooted and structural problems, however, we must closely watch theMiddle East and North Africa situation in the future. Regarding the Arab Spring destabilization,energy players may pay attention first to oil supply disruptions such as those seen in Libya. But there
may be other relevant problems. For example, major oil producing countries may now prefer higher
crude oil prices to accommodate increased spending on domestic stabilization measures while
sustaining balanced budgets. They may also be forced to maintain domestic energy prices at low
levels for the social stabilization, failing to hold down domestic energy demand growth. The ArabSpring destabilization has thus exerted various and massive effects on the energy situation in theregion.
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As the importance of oil and gas in the electricity generation sector has increased in Japan
since the March 2011 Fukushima Daiichi Nuclear Power Plant accident, the stabilization ofinternational oil and gas markets has been very significant for Japan’s energy security. Given thispoint, Japan may have to keep close watch on the Middle East situation, analyze the situation
appropriately and implement resources diplomacy and other measures for securing stable energy
supply.

Contact: report@tky.ieej.or.jp
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